[Graphic]
[Graphic]Federated Investors
Federated International Equity Fund
13TH SEMI-ANNUAL REPORT
MAY 31, 1998
ESTABLISHED 1984
PRESIDENT'S MESSAGE
[Graphic]
Dear Shareholder:
Federated International Equity Fund was created in 1984, and I am pleased to
present its 13th Semi-Annual Report. This report covers the first half of the
fund's fiscal year which is the six-month period from December 1, 1997 through
May 31, 1998. The fund offers ownership in large capitalized corporations
outside the U.S. Investments are made in various countries in developed and
emerging markets. As the world's economies expand, large international companies
are becoming more easily recognized. International mergers and acquisitions are
increasing, and here in the U.S., we have taken note that many U.S. corporations
are becoming international targets.
The report begins with a discussion with the fund's portfolio manager, Drew
Collins, Senior Vice President of Federated Global Research Corp. Following his
discussion are three additional items of shareholder interest. First is a series
of graphs showing the fund's long-term investment performance. Second is a
complete listing of the fund's diversified international stock holdings, and
third is the publication of the fund's financial statements.
This international stock fund is designed to pursue capital appreciation by
investing in large, successful corporations around the world.* As of May 31,
1998, the fund's $233 million diversified portfolio was invested in 19
countries, across 4 continents, in 118 securities.
The first half of the fund's fiscal year was a very strong period for Federated
International Equity Fund, as good security selection and a strong presence in
Europe (82% of portfolio assets) produced a six-month total return of over 31%
for each class of shares. As Drew relates in his discussion, the fund far and
away outperformed the average international equity fund. Individual share class
total return performance for the six-month period, as well as capital gains
distribution, and net asset value changes follows.**
NET ASSET
TOTAL CAPITAL VALUE
RETURN GAINS INCREASE
Class A Shares 32.05% $1.35 $17.93 to $21.93 = 22%
Class B Shares 31.53% $1.35 $17.48 to $21.26 = 22%
Class C Shares 31.61% $1.35 $17.28 to $21.00 = 22%
* International investing involves special risks including currency risk,
increased volatility of foreign securities, and differences in auditing and
other financial standards.
** Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal
value will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns for the period
based on offering price for Class A, B and C Shares were 24.81%, 25.58%, and
30.54%, respectively.
Thank you for joining the growing number of Federated International Equity Fund
shareholders who have broadened their equity assets internationally.
Adding to your account on a regular basis and reinvesting your annual dividends
in additional shares is a convenient, painless way to "pay yourself first" and
enjoy the benefit of compounding.+
As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
Glen R. Johnson
President
July 15, 1998
+ Systematic investing does not ensure a profit or protect against loss in
declining markets.
INVESTMENT REVIEW
[Graphic]
Drew Collins
Senior Vice President
Federated Global
Research Corp.
[Graphic]
WHAT IS YOUR ANALYSIS OF THE FIRST HALF OF THE FUND'S FISCAL YEAR, WHICH SAW
INTERNATIONAL EQUITIES FINALLY OUTPACE THE U.S. EQUITY MARKET?
The economic climate in Europe remained strong during the first half of the
fiscal year and the fund benefited from its overweighted position in continental
Europe relative to the Morgan Stanley Capital International Europe, Australia,
and Far East Index (the "EAFE Index").* Sustained earnings growth and interest
rate convergence were the key drivers of the European market's outperformance.
The southern European economies (i.e., Spain and Italy) were the prime
benefactors in this scenario as their rates had the farthest to converge, and
domestic consumption was relatively strong. Overall, the European outlook is for
continued growth without inflation. This may occur via a two-pronged effect:
deflationary pricing pressure from Asia, and increased trade and lowering rates
via the European Monetary Union.
[Graphic]
HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD COMPARED TO ITS
BENCHMARKS?
The fund produced an extremely strong six-month total return of 32.05% for Class
A Shares, based on net asset value. The total returns for Class B and C Shares,
based on net asset value, were 31.53% and 31.61%, respectively.** These returns
were nearly double the 16.06% return of the EAFE Index for the same period.
Additionally, the returns for Class A, B, and C Shares also significantly
outpaced the 17.29% average total return of all international equity funds
tracked by Lipper Analytical Services, Inc.+
* The Morgan Stanley Capital International Europe, Australia, and Far East Index
is a market capitalization-weighted foreign securities index widely used to
measure the performance of European, Australian, New Zealand, and Far Eastern
stock markets. The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities daily in both
U.S. dollars and local currency and calculates total returns monthly. This
index is unmanaged and investments cannot be made in an index.
** Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal
value will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Total returns for the period
based on offering price for Class A, B and C Shares were 24.81%, 25.58%, and
30.54%, respectively.
+ Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category indicated. These figures do not reflect sales charges.
[Graphic]
WHAT ACCOUNTED FOR THE FUND'S SIGNIFICANT OUTPERFORMANCE?
The fund's outperformance can be mainly attributed to security selection, but
looking at the overall makeup of the fund, a few characteristics should be
noted. First, the fund was heavily overweighted in Europe versus its benchmark,
the EAFE Index, especially in the southern European markets of Italy, Spain, and
Portugal. Second, the fund had substantial investments in the financial services
and telecommunications sectors, both having experienced strong earnings and
revenue growth along with a re-rating by the markets.
[Graphic]
WHAT INDIVIDUAL STOCKS MADE A SIGNIFICANT IMPACT?
Individual stocks that contributed to the semi-annual performance include
SINGULUS TECHNOLOGIES AG (Germany, 0.41% of net assets) and TOOLEX INTERNATIONAL
NV (Netherlands, 0.75% of net assets), both key providers of the machinery
necessary in making optical disks for data, audio and video. This is a
fast-growing market that is likely to accelerate as optical disks take an
increasing share of the data storage market, and as digital video disk (DVD)
technology begins to replace VHS video cassettes in the film reproduction and
distribution market.
Other strong contributors to the fund's performance include ENERGIS PLC (United
Kingdom, 1.94% of net assets) and CABLE & WIRELESS COMMUNICATIONS PLC (United
Kingdom, 2.52% of net assets), both major beneficiaries of the deregulation of
the British telecommunications market.
[Graphic]
WHAT ARE SOME OF YOUR NOTABLE PURCHASES FOR THE FUND DURING THE REPORTING
PERIOD?
KPN (1.52% of net assets): KPN is a Netherlands-based company in the
telecommunications and mail delivery business. The two divisions of this company
will be de-merged in June, and this represents the only opportunity to own
shares in a postal system-- not to mention one with 15% earnings growth.
TF1 (1.06% of net assets): One of four free-to-air television companies in
France, Tf1 will benefit from increased advertising spending. Also, TPS, 25%
owned by each of Tf1, France Television, M6, and Suez Lyonnaise des Eaux,
provides subscription-based, digital, direct-to-home satellite service.
MERKANTILDATA ASA (1.4% of net assets): Merkantildata is a leading Nordic
provider of information technology services and computer hardware. This company
is a major beneficiary of the explosion in corporate information technology
spending and the subsequent outsourcing of these responsibilities by
corporations world-wide.
[Graphic]
HOW WERE THE FUND'S ASSETS DIVERSIFIED?
The fund's country and regional weightings along with the fund's top ten
holdings as of May 31, 1998, were as follows:
PERCENTAGE OF
COUNTRY NET ASSETS
United Kingdom 14.2%
Canada 10.6%
Italy 10.1%
France 8.6%
Switzerland 7.3%
Netherlands 6.7%
Sweden 6.7%
Spain 5.1%
Portugal 4.9%
Greece 4.4%
Norway 4.4%
Germany 3.7%
Finland 2.8%
Japan 1.8%
Ireland 1.4%
Austria 1.1%
Hungary 0.6%
Israel 0.4%
Belgium 0.2%
PERCENTAGE OF
REGION NET ASSETS
Europe 82.2%
Canada 10.6%
Asia Pacific 1.8%
Mid-East/Africa 0.4%
TOP 10 HOLDINGS
PERCENTAGE
OF
NAME COUNTRY NET ASSETS
Cable & Wireless
Communications PLC United Kingdom 2.52%
Kinnevik AB, Class B Sweden 2.27%
Energis PLC United Kingdom 1.94%
Telefonica SA Spain 1.90%
Benckiser NV Netherlands 1.85%
Credit Suisse Group Switzerland 1.77%
Banca Popolare Milano Italy 1.61%
Union Bank of
Switzerland Switzerland 1.56%
Mannesmann AG Germany 1.55%
Dalgety United Kingdom 1.53%
TOTAL
PERCENTAGE OF
NET ASSETS 18.50%
[Graphic]
AS WE PASS THE MID-POINT OF 1998, WHAT IS YOUR OUTLOOK FOR INTERNATIONAL
EQUITIES?
We are still very positive on the outlook for the European markets going
forward. However, we must admit that the strength of these markets in the
opening months of the year surprised even us. We would not be surprised,
however, to see some slowdown in the gains or even partial retracement before
these markets head higher on a longer term view. The pieces are in place for
much stronger returns from equities in Europe than have historically been
recorded due to the creation of the common currency and the rationalization of
industries and enterprises.
With regard to Japan, while we retain some exposure to this market through
selected stocks such as Sony Music Entertainment, which owns 50% of the Sony
Playstation business as well as the rights to the soundtrack for the blockbuster
movie "Titanic," we remain skeptical as to the government's ability and/or
willingness to engineer a turnaround in that economy and the securities markets.
We still continue to look for opportunities to take advantage of the economic
carnage in Southeast Asia and are looking to add positions in Latin America.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED INTERNATIONAL EQUITY FUND
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $14,000 IN THE CLASS A SHARES OF
FEDERATED INTERNATIONAL EQUITY FUND ON 8/17/84, REINVESTED DIVIDENDS AND CAPITAL
GAINS, AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH $83,968
ON 5/31/98. YOU WOULD HAVE EARNED A 13.87%* AVERAGE ANNUAL TOTAL RETURN FOR THE
INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 6/30/98, the Class A Shares' 1-year, 5-year and 10-year average annual
total returns were 20.79%, 12.34%, and 8.50%, respectively. Class B Shares'
1-year and since inception (9/28/94) average annual total returns were 20.85%
and 9.16%, respectively. Class C Shares' 1-year, 5-year, and since inception
(4/1/93) average annual total returns were 25.78%, 12.62%, and 12.58%,
respectively.**
[Graphic A1. omitted. See Appendix.]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 5.50%
sales charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
** The total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, and
the 1.00% contingent deferred sales charge for Class C Shares.
FEDERATED INTERNATIONAL EQUITY FUND
INVESTING ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR 13
YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $32,375.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of Federated
International Equity Fund on 8/17/84, reinvested your dividends and capital
gains, and did not redeem any shares, you would have invested only $14,000, but
your account would have reached a total value of $32,375* by 5/31/98. You would
have earned an average annual total return of 10.93%.
A practical investment plan helps you pursue long-term capital growth through a
diversified portfolio primarily invested in equity securities of non-U.S.
issuers. Through systematic investing, you buy shares on a regular basis and
reinvest all earnings. An investment plan works for you when you invest only
$1,000 annually. You can take it one step at a time. Put time, money, and
compounding to work.
[Graphic A2. omitted. See Appendix.]
* This chart assumes that the subsequent annual investments are made on the last
day of each anniversary month. No method of investing can guarantee a profit
or protect against loss in down markets. However, by investing regularly over
time and buying shares at various prices, investors can purchase more shares
at lower prices. All accumulated shares have the ability to pay income to the
investor.
Because such a plan involves continuous investment, regardless of changing
price levels, the investor should consider whether or not to continue
purchases through periods of low price levels.
FEDERATED INTERNATIONAL EQUITY FUND
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR LONG-TERM GROWTH
Dan and Gigi Hardwick are a two-income suburban couple who, like many others,
want to be able to afford their present lifestyle after they retire.
They decided an international stock fund, though possibly volatile in the
short-term, offered excellent opportunities for long-term growth. They invested
$10,000 in Federated International Equity Fund on August 17, 1984, and--to take
advantage of dollar cost averaging--have invested $5,000 every August since.
By May 31, 1998, they were pleased to see that their $75,000 investment had
grown to $192,333 for an average annual total return of 11.53%. Gigi is already
picturing a long Mediterranean cruise to celebrate their retirement.
The couple is fictional, but the figures are real.
[Graphic A3. omitted. See Appendix.]
This hypothetical scenario is provided for illustrative purposes only and
does not represent the result obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED INTERNATIONAL EQUITY FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
COMMON STOCKS--93.3%
<C> <S> <C>
BELGIUM--0.2%
14,000 (a)Global TeleSystems Group, Inc., ADR $ 536,375
CANADA--10.6%
190,200 (a)Atlantis Communications, Inc 1,958,267
110,000 (a)BioChem Pharma, Inc. 2,887,500
109,600 (a)(b)Boardwalk Equities, Inc. 1,655,021
170,000 (a)CGI Group, Inc. 3,512,252
180,000 (a)Informisssion Group 1,915,025
27,600 Investors Group, Inc. 1,005,944
147,000 Mackenzie Financial Corp. 2,108,793
50,400 Newcourt Credit Group, Inc. 2,473,471
121,050 (a)QLT Phototherapeutics 2,334,755
84,100 TELUS Corp. 2,205,107
152,000 (a)The Laser Center Inc. 2,503,947
8,000 (a)The Laser Center Inc., ADR 132,000
Total 24,692,082
FINLAND--2.8%
20,500 Finnlines OY 1,232,276
24,100 Helsingin Puhelin Oyj 977,634
37,800 Nokia Oyj 2,488,264
23,900 (a)Sponda Oyj 154,242
8,000 TT Tieto OY, Class B 1,755,389
Total 6,607,805
FRANCE--8.6%
12,000 AXA 1,365,870
10,400 Alcatel Alsthom 2,224,971
160,000 Bull 2,786,562
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
COMMON STOCKS--CONTINUED
<C> <S> <C>
FRANCE--CONTINUED
20,044 Cap Gemini Sogeti $ 2,991,692
12,000 DEX 1,630,620
24,800 Sanofi SA 2,905,699
40,000 Scor SA 2,520,475
17,500 Tf1 - Tv Francaise 2,468,661
11,677 (a)Transiciel SA 1,171,018
Total 20,065,568
GERMANY--3.6%
30,000 Bhf-Bank Ag 1,230,769
3,690 Mannesmann AG 3,608,827
9,000 (a)Singulus Technologies AG 958,386
64,000 Tarkett Sommer AG 2,510,859
Total 8,308,841
GREECE--4.4%
29,000 Alpha Credit Bank 3,025,611
78,000 Hellenic Telecommunications Organization 2,290,730
87,800 Heracles General Cement SA 2,273,148
37,000 Natl Mortgage Bk 2,647,974
Total 10,237,463
HUNGARY--0.6%
27,000 OTP Bank RT, GDR 1,124,550
IRELAND--1.4%
477,000 Anglo Irish Bank Corp. PLC 1,308,862
20,000 (a)Elan Corp. PLC, ADR 1,223,750
20,000 (a)Saville Systems Ireland PLC, ADR 798,750
Total 3,331,362
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
COMMON STOCKS--CONTINUED
<C> <S> <C>
ISRAEL--0.4%
58,500 (a)Forsoft Ltd., ADR $ 914,063
ITALY--10.1%
37,900 (a)Aeroporti di Roma SPA 571,303
1,340,000 Banca Di Roma 2,763,083
50,700 Banca Popolare Bergamo-Cv 1,192,517
416,000 Banca Popolare Di Milano 3,743,527
490,000 Calcemento SPA 891,923
351,000 Credito Emiliano SPA 1,156,024
443,000 Credito Italiano 2,470,770
300,000 Gruppo Editoriale L Espresso 2,730,375
105,000 Istituto Mobiliare Italiano SPA 1,797,782
365,000 Mediaset SPA 2,340,941
270,000 Telecom Italia SPA 1,455,973
328,000 Telecom Italia SPA 2,478,657
Total 23,592,875
JAPAN--1.8%
108,000 Kirin Brewery Co., Ltd. 1,005,213
78,000 Sony Music Entertainment, Inc. 3,137,122
Total 4,142,335
NETHERLANDS--6.7%
76,000 (a)Benckiser NV 4,315,755
20,000 ING Groep, NV 1,373,412
18,310 Kempen & Co. NV 1,294,712
63,200 Koninklijke PTT Nederland NV 3,532,324
63,000 Nutreco Holding NV 2,224,211
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
COMMON STOCKS--CONTINUED
<C> <S> <C>
NETHERLANDS--CONTINUED
20,000 (a)Qiagen NV $ 1,233,011
95,600 (a)Toolex International NV 1,739,867
Total 15,713,292
NORWAY--4.4%
230,000 Merkantildata ASA 3,220,348
46,200 (a)NetCom ASA 1,164,979
54,000 (a)ProSafe ASA 1,103,664
47,500 Sparebanken 1,418,400
213,000 (a)Tandberg Television 2,190,805
40,000 Tomra Systems ASA 1,242,220
Total 10,340,416
PORTUGAL--4.5%
30,000 Banco Commercial Portugues, Class R 993,375
3,125 Banco Espirito Santo e Comercial de Lisboa 109,995
25,000 Banco Espirito Santo e Comercial de Lisboa 879,962
25,000 Banco Espirito Santo e Comercial de Lisboa, Rights 173,145
90,000 Banco Pinto & Sotto Mayor 2,189,762
21,000 (a)Brisa Auto Estradas de Portugal 954,284
41,000 Cimpor Cimentos de Portugal 1,570,189
33,100 Compania de Seguros Tranquilidade 1,105,448
46,500 Portugal Telecom SA 2,444,019
Total 10,420,179
SPAIN--5.1%
41,000 Banco Santander 2,064,203
130,000 Corp Fin Reunida 1,878,588
140,000 Inmobiliaria Urbis 1,967,667
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
VALUE IN
SHARES U.S. DOLLARS
COMMON STOCKS--CONTINUED
<C> <S> <C>
SPAIN--CONTINUED
99,272 Telefonica SA $ 4,434,651
44,000 Zardoya-Otis SA 1,567,799
Total 11,912,908
SWEDEN--6.7%
180,000 (a)Castellum AB 2,181,874
48,500 Celsius Industries Corp., Class B 1,256,236
44,350 (a)Europolitan Holdings AB 2,755,853
144,600 Kinnevik AB, Class B 5,285,991
118,000 (a)Modern Times Group, Class B 1,347,530
30,000 (a)NetCom Systems AB, Class B 1,148,355
48,000 WM-Data AB 1,681,191
Total 15,657,030
SWITZERLAND--7.3%
18,700 Credit Suisse Group 4,114,884
47 Lindt & Spruengli AG 1,256,294
47 Lindt & Spruengli AG, Class B 1,243,604
52,600 (a)Mettler Toledo International, Inc., ADR 999,400
800 Nestle SA 1,713,399
1,423 Stratec Holding AG 2,017,077
2,160 UBS - Union Bank of Switzerland 3,630,375
3,200 Zurich Versicherungsgesellschaft 1,997,975
Total 16,973,008
UNITED KINGDOM--14.1%
4,070 (a)ARM Holdings PLC, ADR 144,485
290,000 Airtours PLC 2,178,823
120,000 Bank of Scotland, Edinburgh 1,388,632
766,000 (a)Cable & Wireless Communications PLC 5,880,222
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
PAR AMOUNT VALUE IN
OR SHARES U.S. DOLLARS
COMMON STOCKS--CONTINUED
<C> <S> <C>
UNITED KINGDOM--CONTINUED
34,090 Computacenter $ 403,674
540,000 Dalgety 3,572,029
63,100 (a)Dr. Solomon's Group PLC, ADR 1,861,450
95,000 (a)Ecsoft Group PLC, ADR 2,660,000
325,800 (a)Energis PLC 4,523,100
158,000 Filtronic PLC 1,107,084
6,600 (a)ICON plc, ADR 168,300
348,500 National Grid Co. PLC 2,145,904
400,000 (a)Orange PLC 3,010,174
71,500 Pearson 1,311,451
220,000 Racal Electronic PLC 1,354,660
125,000 Regent Inns PLC 786,026
113,750 (a)Thomson Travel Group PLC 334,418
Total 32,830,432
TOTAL COMMON STOCKS (IDENTIFIED COST $168,985,423) 217,400,584
CORPORATE BONDS--0.1%
UNITED KINGDOM--0.1%
95,000 (a)National Grid Group PLC, 4.25%, 2/17/2008
(IDENTIFIED COST $154,175) 168,934
PREFERRED STOCKS--1.6%
AUSTRIA--1.1%
28,200 (a)Bank Austria AG, Pfd. 2,520,244
GERMANY--0.1%
5,748 (a)Pro Sieben Media AG, Preference 286,715
PORTUGAL--0.4%
62,000 Lusomundo Sociedade Gestora de Participacoes Sociais 882,562
SA, Pfd.
TOTAL PREFERRED STOCKS (IDENTIFIED COST $2,043,380) 3,689,521
</TABLE>
FEDERATED INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
PRINCIPAL VALUE IN
AMOUNT U.S. DOLLARS
(C)REPURCHASE AGREEMENT--2.4%
<C> <S> <C>
UNITED STATES--2.4%
$ 5,665,000 BT Securities Corp., 5.57%, dated 5/29/1998, due
6/1/1998 (AT AMORTIZED COST) $ 5,665,000
TOTAL INVESTMENTS (IDENTIFIED COST $176,847,978)(D) $226,924,039
</TABLE>
(a) Non-income producing security.
(b) Denotes a private placement security. At May 31, 1998, these securities
amounted to $1,655,021 which represents 0.7% of total net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to $176,847,978.
The net unrealized appreciation of investments on a federal tax basis
amounts to $50,076,061 which is comprised of $52,143,774 appreciation and
$2,067,713 depreciation at May 31, 1998.
Note: The categories of investments are shown as a percentage of net assets
($233,087,078) at May 31, 1998.
The following acronyms are used throughout this portfolio:
ADR --American Depositary Receipt
GDR --Global Depositary Receipt
PLC --Public Limited Company
SA --Support Agreement
SPA --Standby Purchase Agreement
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $226,924,039
$176,847,978)
Cash 4,816
Cash denominated in foreign currencies (at identified cost $945,715) 944,131
Income receivable 454,200
Receivable for investments sold 12,261,064
Receivable for shares sold 556,449
Total assets 241,144,699
LIABILITIES:
Payable for investments purchased $ 7,707,411
Payable for shares redeemed 100,398
Payable for taxes withheld 27,300
Accrued expenses 222,512
Total liabilities 8,057,621
NET ASSETS for 10,703,153 shares outstanding $233,087,078
NET ASSET CONSIST OF:
Paid in capital $160,273,608
Net unrealized appreciation of investments and translation of assets and
liabilities in foreign currency 50,088,812
Accumulated net realized gain on investments and foreign currency 24,433,049
transactions
Distributions in excess of net investment income (1,708,391)
Total Net Assets $233,087,078
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($186,740,885 / 8,515,147 shares outstanding) $21.93
Offering Price Per Share (100/94.50 of $21.93)* $23.21
Redemption Proceeds Per Share (100.00/100 of $21.93)** $21.93
CLASS B SHARES:
Net Asset Value Per Share ($33,280,453 / 1,565,740 shares outstanding) $21.26
Offering Price Per Share (100/100.00 of $21.26)* $21.26
Redemption Proceeds Per Share (94.50/100.00 of $21.26)** $20.09
CLASS C SHARES:
Net Asset Value Per Share ($13,065,740 / 622,266 shares outstanding) $21.00
Offering Price Per Share (100/100.00 of $21.00)* $21.00
Redemption Proceeds Per Share (99.00/100 of $21.00)** $20.79
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $305,840) $ 1,893,598
Interest 42,442
Total income 1,936,040
EXPENSES:
Investment advisory fee $ 996,864
Administrative personnel and services fee 92,247
Custodian fees 52,733
Transfer and dividend disbursing agent fees and expenses 167,864
Directors'/Trustees' fees 3,640
Auditing fees 12,672
Legal fees 1,759
Portfolio accounting fees 50,051
Distribution services fee--Class B Shares 103,385
Distribution services fee--Class C Shares 43,748
Shareholder services fee--Class A Shares 200,172
Shareholder services fee--Class B Shares 34,462
Shareholder services fee--Class C Shares 14,583
Share registration costs 17,411
Printing and postage 37,371
Insurance premiums 2,123
Taxes 50
Miscellaneous 3,403
Total expenses 1,834,538
Net investment income 101,502
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investments and foreign currency transactions 24,485,651
Net change in unrealized appreciation of investments and
translation of assets and liabilities in foreign currency 30,603,559
Net realized and unrealized gain on investments and foreign currency 55,089,210
Change in net assets resulting from operations $ 55,190,712
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
MAY 31, NOVEMBER 30,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 101,502 $ 167,546
Net realized gain (loss) on investments and foreign
currency transactions ($24,485,651 and $12,740,309,
respectively, as computed for federal tax purposes) 24,485,651 10,781,853
Net change in unrealized appreciation of investments and
translation of assets and liabilities in foreign currency 30,603,559 1,272,361
Change in net assets resulting from operations 55,190,712 12,221,760
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares -- --
Class B Shares -- --
Class C Shares -- --
Distributions from net realized gains on investments and
foreign currency transactions
Class A Shares (10,030,621) (3,655,308)
Class B Shares (1,891,979) (386,187)
Class C Shares (810,275) (169,128)
Change in net assets resulting from distributions to (12,732,875) (4,210,623)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 192,108,796 226,245,226
Net asset value of shares issued to shareholders in
payment of distributions declared 10,456,486 2,860,246
Cost of shares redeemed (179,264,235) (267,012,751)
Change in net assets resulting from share transactions 23,301,047 (37,907,279)
Change in net assets 65,758,884 (29,896,142)
NET ASSETS:
Beginning of period 167,328,194 197,224,336
End of period (including distributions in excess of net
investment income of $(1,708,391) and $(1,809,893),
respectively) $ 233,087,078 $ 167,328,194
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.93 $17.32 $17.89 $18.53 $16.49 $14.09
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.02(e) 0.04(e) 0.03 0.09 0.15 0.06
Net realized and unrealized gain
(loss) on investments and foreign 5.33 0.95 1.38 0.17 1.96 2.53
currency
Total from investment operations 5.35 0.99 1.41 0.26 2.11 2.59
LESS DISTRIBUTIONS
Distributions from net investment -- -- (0.09) (0.003) (0.07) (0.06)
income
Distributions in excess of net -- -- -- -- -- (0.13)
investment income(a)
Total distributions from net -- -- (0.09) (0.003) (0.07) (0.19)
investment income
Distributions from net realized
gain on investments
and foreign currency transactions (1.35) (0.38) (1.89) (0.90) -- --
Total distributions (1.35) (0.38) (1.98) (0.90) (0.07) (0.19)
NET ASSET VALUE, END OF PERIOD $21.93 $17.93 $17.32 $17.89 $18.53 $16.49
TOTAL RETURN(B) 32.05% 5.89% 8.63% 1.60% 12.82% 18.52%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.69%* 1.71% 1.68% 1.57% 1.61% 1.60%
Net investment income 0.25%* 0.23% 0.15% 0.42% -- 0.13%
Expense waiver/reimbursement(c) -- 0.10% 0.15% 0.18% -- 0.01%
SUPPLEMENTAL DATA
Net assets, end of period (000 $186,741 $134,858 $172,938 $191,911 $261,178 $192,860
omitted)
Average commission rate paid(d) $0.0295 $0.0032 $0.0018 -- -- --
Portfolio turnover 110% 210% 119% 166% 73% 74%
</TABLE>
* Computed on an annualized basis.
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(e) Amount based on average outstanding shares.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.48 $17.04 $17.70 $18.50 $19.61
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.05)(e) (0.10)(e) (0.03) (0.08) (0.01)
Net realized and unrealized gain
(loss) on investments and foreign
currency 5.18 0.92 1.26 0.18 (1.10)
Total from investment operations 5.13 0.82 1.23 0.10 (1.11)
LESS DISTRIBUTIONS
Distributions from net investment -- -- (0.00)(b) -- --
income
Distributions from net realized gain
on investments and foreign currency (1.35) (0.38) (1.89) (0.90) --
transactions
Total distributions (1.35) (0.38) (1.89) (0.90) --
NET ASSET VALUE, END OF PERIOD $21.26 $17.48 $17.04 $17.70 $18.50
TOTAL RETURN(C) 31.53% 4.97% 7.59% 0.68% (5.27%)
RATIOS TO AVERAGE NET ASSETS
Expenses 2.44%* 2.56% 2.58% 2.52% 2.59%*
Net investment income/loss (0.49%)* (0.59%) (0.74%) (0.52%) (0.88%)*
SUPPLEMENTAL DATA
Net assets, end of period (000 $33,280 $23,629 $16,707 $6,370 $1,214
omitted)
Average commission rate paid(d) $0.0295 $0.0032 $0.0018 -- --
Portfolio turnover 110% 210% 119% 166% 73%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from September 19, 1994 (date of initial
public investment) to November 30, 1994.
(b) Distributions from net investment income is less than $0.01 per share.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(e) Amount based on average outstanding shares.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.28 $16.85 $17.50 $18.30 $16.41 $14.88
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.05)(g) (0.11)(g) (0.10) (0.12) (0.05) (0.04)
Net realized and unrealized gain
(loss) on investments and foreign
currency 5.12 0.92 1.34 0.22 1.98 1.57
Total from investment operations 5.07 0.81 1.24 0.10 1.93 1.53
LESS DISTRIBUTIONS
Distributions from net investment -- -- 0.00(b) (0.00)(b) -- --
income
Distributions in excess of net -- -- -- -- (0.04) --
investment income(c)
Total distributions from net -- -- 0.00 (0.00) (0.04) --
investment income
Distributions from net realized gain
on investments and foreign currency
transactions (1.35) (0.38) (1.89) (0.90) 0.00 --
Total distributions (1.35) (0.38) (1.89) (0.90) (0.04) --
NET ASSET VALUE, END OF PERIOD $21.00 $17.28 $16.85 $17.50 $18.30 $16.41
TOTAL RETURN(D) 31.61% 4.96% 7.75% 0.69% 11.75% 10.28%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.45%* 2.56% 2.57% 2.46% 2.55% 2.57%*
Net investment income/loss (0.50%)* (0.67%) (0.72%) (0.47%) (0.91%) (1.10%)*
Expense waiver/reimbursement(e) -- 0.00 0.01% 0.04% 0.00 0.01%*
SUPPLEMENTAL DATA
Net assets, end of period (000 $13,066 $8,841 $7,580 $7,146 $8,836 $2,852
omitted)
Average commission rate paid(f) $0.0295 $0.0032 $0.0018 -- -- --
Portfolio turnover 110% 210% 119% 166% 73% 74%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 31, 1993 (date of initial
public investment) to November 30, 1993.
(b) Distributions from net investment income is less than $0.01 per share.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(d) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(e) This voluntary expense decrease is reflected in both the expense and net
investment income/operating loss ratios shown above.
(f) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(g) Amount based on average outstanding shares.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998 (UNAUDITED)
1. ORGANIZATION
International Series Inc. (the "Corporation") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Corporation consists of two portfolios. The financial
statements included herein are only those of Federated International Equity Fund
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolio are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held.
The Fund offers three classes of shares: Class A Shares, Class B Shares, and
Class C Shares. The Fund's objective is to obtain a total return on its assets.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS -- Listed corporate bonds, unlisted securities, and
private placement securities are generally valued at the mean of the last
closing bid and asked price as furnished by an independent pricing service.
Foreign equity securities are valued at the last sale price reported in the
market in which they are primarily traded. If no sale on the recognized exchange
is reported or the security is traded over the counter, the foreign securities
are valued at the mean between the last closing bid and asked prices. Short-term
securities are valued at the prices provided by an independent pricing service.
However, short-term foreign and domestic securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined by the Fund's pricing
committee.
REPURCHASE AGREEMENTS -- It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS -- Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Dividend income
and distributions to shareholders are recorded on the ex-dividend date. Certain
dividends from foreign securities may be recorded after the ex-dividend date
based upon when the Fund is reasonably able to obtain information.
FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
However, federal taxes may be imposed on the Fund upon the disposition of
certain investments in passive foreign investment companies. Withholding taxes
on foreign interest and dividends have been provided for in accordance with the
Fund's understanding of the applicable country's tax rules and rates.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FOREIGN EXCHANGE CONTRACTS -- The Fund may enter into foreign currency
commitments for the delayed delivery of securities or foreign currency exchange
transactions. Purchased contracts are used to acquire exposure to foreign
currencies; whereas, contracts to sell are used to hedge the Fund's securities
against currency fluctuations. Risks may arise upon entering these transactions
from the potential inability of counterparts to meet the terms of their
commitments and from unanticipated movements in security prices or foreign
exchange rates. The foreign currency transactions are adjusted by the daily
exchange rate of the underlying currency and any gains or losses are recorded
for financial statement purpose as unrealized until the settlement date.
FOREIGN CURRENCY TRANSLATION -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of exchange
of such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank. The Fund does not isolate that portion of
the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.
RESTRICTED SECURITIES -- Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense either
upon demand by the Fund or in connection with another registered offering of the
securities. Many restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may be
determined to be liquid under criteria established by the Board of Directors.
The Fund will not incur any registration costs upon such resales.
Additional information on each restricted security held at May 31, 1998 is as
follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Boardwalk Equities, Inc. 4/27/1998 - 5/15/1998 $1,689,477
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At May 31, 1998, par value shares ($0.0001 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
SHARE CLASS NAME AUTHORIZED
Class A Shares 500,000,000
Class B Shares 500,000,000
Class C Shares 500,000,000
Total 1,500,000,000
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 8,672,980 $170,087,464 11,656,518 $ 203,925,963
Shares issued to shareholders
in payment of distributions 470,361 7,972,626 138,301 2,327,602
declared
Shares redeemed (8,149,681) (160,759,387) (14,255,933) (251,791,018)
Net change resulting from
Class A Share transactions 993,660 $ 17,300,703 (2,461,114) $ (45,537,453)
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 665,760 $ 12,980,051 788,772 $ 13,786,500
Shares issued to shareholders in
payment of distributions declared 107,578 1,772,922 22,438 371,580
Shares redeemed (559,309) (10,573,169) (440,071) (7,739,343)
Net change resulting from
Class B Share transactions 214,029 $ 4,179,804 371,139 $ 6,418,737
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 484,621 $ 9,041,281 482,587 $ 8,532,763
Shares issued to shareholders in
payment of distributions declared 43,647 710,938 9,851 161,064
Shares redeemed (417,626) (7,931,679) (430,628) (7,482,390)
Net change resulting from
Class C Share transactions 110,642 $ 1,820,540 61,810 $ 1,211,437
Net change resulting from
share transactions 1,318,331 $ 23,301,047 (2,028,165) $ (37,907,279)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Federated Global Research Corp., the Fund's
investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee equal to 1.00% of the Fund's average daily net assets.
ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE -- The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended to
result in the sale of the Fund's Class B and Class C Shares. The Plan provides
that the Fund may incur distribution expenses according to the following
schedule annually, to compensate FSC.
PERCENTAGE OF
AVERAGE DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
Class B Shares 0.75%
Class C Shares 0.75%
SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund shares for the period. The fee paid to
FSS is used to finance certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL-- Certain Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.
5. YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended May 31, 1998, were as follows:
PURCHASES $217,141,946
SALES $212,396,586
7. CONCENTRATION OF CREDIT RISK
The Fund invests in securities of non-U.S. issuers. Although the Fund maintains
a diversified portfolio, the political or economic developments within a
particular country or region may have an adverse effect on the ability of
domiciled issuers to meet their obligations. Additionally, political or economic
developments may have an effect on the liquidity and volatility of portfolio
securities and currency holdings.
At May 31, 1998, the diversification of industries was as follows:
PERCENTAGE
INDUSTRY OF NET ASSETS
Aerospace & Military Technology 0.5%
Banking 18.8%
Beverage & Tobacco 0.4%
Broadcasting & Publishing 4.8%
Building Materials & Components 2.0%
Business & Public Services 5.9%
Chemicals 0.5%
Construction & Housing 1.5%
Data Processing & Reproduction 2.9%
Electrical & Electronics 1.7%
Electronic Components, Instruments 2.3%
Financial Services 3.4%
Food & Household Products 2.6%
Food Processing 1.1%
Health & Personal Care 2.5%
Insurance 3.0%
Leisure & Tourism 1.4%
Machinery & Engineering 2.2%
Manufacturing 1.9%
Media 0.6%
Mining 0.5%
Multi-Industry 2.6%
Pharmaceuticals 3.6%
Real Estate 2.6%
Recreation, Other Consumer Goods 1.3%
Telecommunications 19.5%
Transportation - Shipping 0.5%
Unassigned 3.4%
Utilities - Electrical & Gas 1.0%
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President,
Treasurer, and Secretary
Richard B. Fisher
Vice President
Karen M. Brownlee
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not 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. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
the fund's objective and policies, management fees, expenses, and other
information.
[Graphic]Federated Investors
Federated Securities Corp., Distributor
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 46031P308
Cusip 46031P407
Cusip 46031P605
8070112 (7/98)
[Graphic]
Federated International Income Fund
7TH SEMI-ANNUAL REPORT
MAY 31, 1998
ESTABLISHED 1991
President's Message
[Graphic]
Dear Shareholder:
Federated International Income Fund was established in 1991, and I am pleased to
present its seventh Semi-Annual Report. This bond fund is designed for income
investors willing to invest a portion of their wealth outside of the U.S. The
bonds selected have generous yields, but are subject to price volatility and
currency fluctuations.
This report covers the first half of the fund's fiscal year, which is the
six-month period from December 1, 1997 through May 31, 1998. It begins with a
discussion with Robert Kowit, Vice President, Federated Global Research Corp.
who co-manages the fund with Micheal Casey, Vice President, Federated Global
Research Corp. Following their discussion are three additional items of
shareholder interest. First is a series of graphs showing the fund's long-term
investment performance. Second is a complete listing of the fund's diversified
international bond holdings, and third is the publication of the fund's
financial statements.
The fund's assets of over $173 million were broadly diversified in 35
high-quality bond issues of more than 13 countries to pursue generous quarterly
income.*
During the six-month reporting period, international bond investors experienced
slightly negative returns due to a strong U.S. dollar. More recently, returns to
U.S. investors in international bonds -- and in Federated International Income
Fund -- turned positive. The fund continued to produce a generous income stream.
Individual share class total return performance, including income dividends
follows.**
TOTAL
RETURN INCOME NET ASSET VALUE CHANGE
Class A Shares 1.12% $0.26 $10.65 to $10.51 = (1.31%)
Class B Shares 0.85% $0.22 $10.62 to $10.49 = (1.22%)
Class C Shares 0.75% $0.22 $10.63 to $10.49 = (1.32%)
* International investing involves special risks including currency risk,
increased volatility of foreign securities, and differences in auditing and
other financial standards.
** Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns for the period based on offering
price for Class A, B, and C Shares were (3.42%), (4.73%), and (0.22%),
respectively.
Thank you for joining the growing number of Federated International Income Fund
shareholders who have diversified their fixed-income assets internationally.
Remember, adding to your account and reinvesting your quarterly dividends in
additional shares is a convenient, painless way to "pay yourself first" and
enjoy the benefit of compounding.+
As always, we welcome your comments and suggestions.
Sincerely,
[Graphic]
Glen R. Johnson
President
July 15, 1998
+ Systematic investing does not ensure a profit or protect against loss in
declining markets.
Investment Review
[Graphic]
Robert Kowit
Vice President
Federated Global Research Corp.
[Graphic]
Micheal Casey, Ph.D.
Vice President
Federated Global Research Corp.
[Graphic]
HOW DID FEDERATED INTERNATIONAL INCOME FUND PERFORM OVER THE FIRST HALF OF ITS
FISCAL YEAR?
Total returns for the fund based on net asset value for the six-month reporting
period ended May 31, 1998 were 1.12%, 0.85%, and 0.75% for Class A, B, and C
Shares, respectively.* These returns were slightly less than the 2.96% total
return of the international bond market as measured by the J.P. Morgan
Non-Dollar Bond Index,** and the 2.83% total return of the average international
income fund as tracked by Lipper Analytical Services, Inc.+
The fund's slight underperformance was primarily due to the depressed currencies
of Canada, Australia, and New Zealand.
[Graphic]
IN 1997, THE INTERNATIONAL BOND MARKET PERFORMED WELL IN LOCAL CURRENCY
TERMS, BUT SUFFERED IN TERMS OF U.S. DOLLAR RETURNS WITH VERY MODEST RETURNS
TO U.S. INVESTORS. HAS THIS TREND CONTINUED INTO 1998?
Through May of 1998, that trend has halted. After a prior fiscal year (December
1, 1996 to November 30, 1997) of slightly negative performance, total returns
for the international bond market have been positive. The return for
international bonds as measured by the J.P. Morgan Non-Dollar Bond Index was
2.96%.
[Graphic]
INCOME, OF COURSE, IS A PRIMARY CONSIDERATION FOR SHAREHOLDERS. WHAT WAS THE
TOTAL INCOME PAID PER SHARE DURING THE SIX-MONTH REPORTING PERIOD ENDED MAY
31, 1998?
The fund's two quarterly income dividends totaled $0.26/share for Class A
Shares, $0.22/share for Class B Shares, and $0.22/share for Class C Shares.
* Performance quoted is based on net asset value, represents past performance,
and is not indicative of future results. Investment return and principal value
will fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost. Total returns for the period based on offering
price for Class A, B, and C Shares were (3.42%), (4.73%), and (0.22%),
respectively.
** The J.P. Morgan Non-Dollar Bond Index is a total return, unmanaged
trade-weighted index of over 360 government and high-grade bonds in 12 developed
countries. Investments cannot be made in an index.
+ Lipper figures represent the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category indicated. These figures do not reflect sales charges.
[Graphic]
HOW WERE THE FUND'S HIGH-QUALITY BOND HOLDINGS DIVERSIFIED AMONG COUNTRIES AS OF
MAY 31, 1998?
More than half of the fund's holdings were concentrated among Germany, Japan,
the European Currency Unit ("ECU"), and Italy. The balance was spread across ten
other countries as indicated below:
PERCENTAGE OF
COUNTRY NET ASSETS
Germany 24.3%
Japan 12.4%
ECU 9.5%
Italy 8.4%
Canada 6.9%
United Kingdom 6.3%
Spain 5.0%
Australia 4.8%
Sweden 4.0%
Greece 3.3%
Denmark 3.3%
Norway 2.8%
Portugal 1.9%
New Zealand 1.1%
[Graphic]
WHAT WERE SOME OF THE FUND'S RECENT NOTABLE PURCHASES?
The fund continued to beef up its German mark denominated portion of the
portfolio, since yield spreads between bonds from many of the European countries
and bonds from Germany had become too tight. Among these were a German
government note, the 4.75% OBOL due November 2001.
[Graphic]
WHAT WERE THE FUND'S TOP FIVE HOLDINGS AS OF MAY 31, 1998?
PERCENTAGE
COUPON AND OF NET
ISSUER COUNTRY MATURITY ASSETS
Sovereign Japan 5.00% due 9/21/1998 8.33%
Sovereign France 7.50% due 4/25/2005 5.54%
KFW Int'l. Germany 6.75% due 6/20/2005 5.39%
Finance
Sovereign Spain 10.30% due 6/15/2002 4.97%
Sovereign Germany 6.00% due 6/20/2016 4.94%
TOTAL PERCENTAGE OF NET ASSETS 29.17%
[Graphic]
AS WE REACH THE MID-POINT OF 1998, WHAT DO YOU SEE AHEAD FOR INTERNATIONAL
BONDS?
International bonds in general still feature yield curves that are steeper than
the domestic market, which means international bonds with longer maturities
offer higher yields than U.S. bonds. The U.S. yield curve is essentially flat
from two to ten years, while most European markets still have a 70-90 basis
point yield pick-up between two-year and ten-year bonds.
There is still some potential for outperformance in the various international
bond markets. For example, the interest rate difference between 2-year and
10-year bond yields is 75 basis points, and the difference between 2-year and
30-year bond yields is 136 basis points. In addition, the United Kingdom's
economy, which led the European economies in their return to growth by about
three years, is finally starting to slow down. This should allow the United
Kingdom's rates to fall and bond prices to rise in the medium term.
Most of the performance potential, however, will most likely come from currency
exposure. The U.S. dollar has been quite strong for over three years against
every currency in the world, which has diminished returns to U.S. investors. For
quite some time, the conventional wisdom was that the new European currency, the
Euro, would be a weak currency. That perception has started to change, as it
appears that European growth rates are accelerating, and unemployment is
declining. There is still ample excess capacity and no sign of inflation. With
over 60% of the fund's holdings in Europe, any appreciation of the European
currencies would be very positive.
We expect modest outperformance from the international bond markets from these
levels and some reasonable contribution from a gradually weakening dollar.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED INTERNATIONAL INCOME FUND
INITIAL INVESTMENT:
IF YOU HAD MADE AN INITIAL INVESTMENT OF $7,000 IN THE CLASS A SHARES OF
FEDERATED INTERNATIONAL INCOME FUND IN JUNE OF 1991, REINVESTED DIVIDENDS AND
CAPITAL GAINS AND DID NOT REDEEM ANY SHARES, YOUR ACCOUNT WOULD HAVE BEEN WORTH
$11,638 ON 5/31/98. YOU WOULD HAVE EARNED A 7.57%* AVERAGE ANNUAL TOTAL RETURN
FOR THE INVESTMENT LIFE SPAN.
One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.
As of 6/30/98, the Class A Shares' 1-year, 5-year, and since inception (6/4/91)
average annual total returns were (3.39%), 5.80%, and 7.79%, respectively. Class
B Shares' 1-year and since inception (9/28/94) average annual total returns were
(5.07%) and 5.82%, respectively. Class C Shares' 1-year, 5-year, and since
inception (4/1/93) average annual total returns were (0.57%), 6.00%, and 7.53%,
respectively.**
[Graphic A1. omitted. See Appendix.]
* Total return represents the change in the value of an investment after
reinvesting all income and capital gains, and takes into account the 4.50% sales
charge applicable to an initial investment in Class A Shares.
Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
** The total return stated takes into account the 4.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, and the
1.00% contingent deferred sales charge for Class C Shares.
FEDERATED INTERNATIONAL INCOME FUND
INVESTING ONE STEP AT A TIME:
$1,000 INITIAL INVESTMENT AND SUBSEQUENT INVESTMENTS OF $1,000 EACH YEAR FOR
SEVEN YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO $10,472.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the Class A Shares of Federated
International Income Fund in June of 1991, reinvested your dividends and capital
gains and did not redeem any shares, you would have invested only $8,000, but
your account would have reached a total value of $10,472* by 5/31/98. You would
have earned an average annual total return of 6.26%.
A practical investment plan helps you pursue a high level of income by investing
in high-quality debt securities denominated primarily in foreign currencies.
Through systematic investing, you buy shares on a regular basis and reinvest all
earnings. An investment plan works for you when you invest only $1,000 annually.
You can take it one step at a time. Put time, money, and compounding to work.
[Graphic A2. omitted. See Appendix ]
* This chart assumes that the subsequent annual investments are made on the last
day of each calendar year. No method of investing can guarantee a profit or
protect against loss in down markets. However, by investing regularly over time
and buying shares at various prices, investors can purchase more shares at lower
prices. All accumulated shares have the ability to pay income to the investor.
Because such a plan involves continuous investment, regardless of changing price
levels, the investor should consider whether or not to continued purchases
through periods of low price levels.
FEDERATED INTERNATIONAL INCOME FUND
HYPOTHETICAL INVESTOR PROFILE: INVESTING FOR INCOME FROM ABROAD
Bob and Nancy Griffin--a single-income suburban couple--are building a nest egg
for their son Cal's private school education.
Bob and Nancy made an initial $10,000 investment in Federated International
Income Fund in June of 1991. At the end of each December, Bob and Nancy have
added $2,000 to their investment. As of May 31, 1998, their account totaled
$34,244, giving them an annual total return of 6.89%.
Now they can feel confident about giving Cal a quality education, and Bob
figures his son will get to college even if he never does learn to catch a
football.
The couple is fictional, but the figures are real.
[Graphic A3. omitted. See Appendix.]
This hypothetical scenario is provided for illustrative purposes only and
does not represent the results obtained by any particular shareholder. Past
performance does not guarantee future results.
FEDERATED INTERNATIONAL INCOME FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY CREDIT VALUE IN
PAR AMOUNT RATING* U.S. DOLLARS
<C> <S> <S> <C>
BONDS--94.0%
AUSTRALIAN DOLLAR--4.8%
AGENCY--2.6%
7,000,000 Federal National Mortgage Association, Series EMTN,
6.50%, 7/10/2002 AAA $ 4,564,581
STATE/PROVINCIAL--2.2%
5,500,000 New South Wales Treasury, Local Gov't. Guarantee,
6.50%, 5/1/2006 AAA/NR 3,651,038
TOTAL AUSTRALIAN DOLLARS 8,215,619
BRITISH POUND--6.3%
FINANCIAL INTERMEDIARIES--1.5%
1,500,000 Dresdner Bank Ag, Frankfurt, 7.625%, 12/31/2003 AA/Aa1 2,591,387
RETAILERS--3.6%
3,500,000 Kingfisher PLC, 8.125%, 2/14/2007 A-/A3 6,268,601
SOVEREIGN--1.2%
1,000,000 United Kingdom Treasury, Foreign Gov't. Guarantee,
11.75%, 1/22/2007 Aaa 2,006,919
Total 4,598,306
TOTAL BRITISH POUND 10,866,907
CANADIAN DOLLAR--6.9%
AGENCY--3.1%
5,500,000 Quebec, Province of, Deb., 9.375%, 1/16/2023 A+/A2 5,337,103
SOVEREIGN--3.4%
6,500,000 Canada, Government of, Deb., 8.00%, 6/1/2023 AAA/Aa1 5,898,140
STATE/PROVINCIAL--0.4%
1,000,000 Metro Toronto, Deb., 7.40%, 9/27/2006 AA+ 770,252
TOTAL CANADIAN DOLLAR 12,005,495
</TABLE>
FEDERATED INTERNATIONAL INCOME FUND
<TABLE>
<CAPTION>
FOREIGN
CURRENCY CREDIT VALUE IN
PAR AMOUNT RATING* U.S. DOLLARS
<C> <S> <S> <C>
BONDS--CONTINUED
DANISH KRONE--3.3%
FINANCIAL INTERMEDIARIES--3.3%
37,863,000 Nykredit, Mtg. Bond, 8.00%, 10/1/2026 AA-/NR $ 5,725,763
TOTAL DANISH KRONE 5,725,763
DEUTSCHE MARK--24.3%
AGENCY--12.2%
13,000,000 Export-Import Bank Japan, Foreign Gov't. Guarantee,
6.50%, 5/19/2000 AAA/Aaa 7,588,343
15,000,000 KFW International Finance, Bank Guarantee, 6.75%,
6/20/2005 AAA/Aaa 9,336,906
7,000,000 Kredit Wiederauf, Bond, 6.00%, 2/9/2006 AAA/Aaa 4,194,704
Total 21,119,953
FINANCIAL INTERMEDIARIES--2.7%
7,500,000 Baden Wurt L-Finance NV, Bank Guarantee, 6.75%,
6/22/2005 AAA/Aaa 4,655,317
SOVEREIGN--9.4%
5,100,000 Bundesobligation, Bond, 4.75%, 11/20/2001 Aaa 2,895,216
14,000,000 Deutschland Republic, Bond, 6.00%, 6/20/2016 AAA 8,562,814
8,000,000 Germany(Fed Republic), 6.50%, 7/15/2003 AAA/Aaa 4,877,792
Total 16,335,822
TOTAL DEUTSCHE MARK 42,111,092
EUROPEAN CURRENCY UNIT (ECU)--9.5%
SOVEREIGN--9.5%
5,400,000 France (Gov't. of), Bond, 7.00%, 4/25/2006 AAA 6,777,595
7,500,000 France O.A.T., Bond, 7.50%, 4/25/2005 AAA/Aaa 9,589,276
TOTAL EUROPEAN CURRENCY UNIT 16,366,871
</TABLE>
FEDERATED INTERNATIONAL INCOME FUND
<TABLE>
<CAPTION>
FOREIGN
CURRENCY CREDIT VALUE IN
PAR AMOUNT RATING* U.S. DOLLARS
<C> <S> <S> <C>
BONDS--CONTINUED
GREEK DRACHMA--3.3%
SOVEREIGN--3.3%
1,000,000,000 Hellenic Republic, 9.20%, 10/31/2002 A2 $ 3,263,331
750,000,000 (c)Hellenic Republic, Bond, 11.00%, 10/23/2003 A2 2,489,335
TOTAL GREEK DRACHMA 5,752,666
ITALIAN LIRA--8.4%
SOVEREIGN--8.4%
8,000,000,000 Buoni Poliennali Del Tes, Bond, 10.50%, 11/1/2000 AAA/Aa3 5,156,769
5,965,000,000 Buoni Poliennali Del Tes, Deb., 10.50%, 7/15/1998 AAA/Aa3 3,406,633
1,500,000,000 Buoni Poliennali Del Tes, Deb., 8.50%, 1/1/2004 AAA/Aa3 1,003,328
8,750,000,000 (c)Cert Di Credito Del Tes, Note, 5.20%, 1/1/2004 AAA/NR 5,009,599
TOTAL ITALIAN LIRA 14,576,329
JAPANESE YEN--12.4%
FINANCIAL INTERMEDIARIES--0.3%
60,000,000 Eksportfinans, Sr. Note, 2.65%, 7/10/2002 AAA/Aaa 460,322
SOVEREIGN--12.1%
1,970,000,000 Japan, 5.00%, 9/21/1998 Aaa 14,422,580
840,000,000 Japan, 5.30%, 12/20/1999 Aaa 6,525,179
Total 20,947,759
TOTAL JAPANESE YEN 21,408,081
NEW ZEALAND DOLLAR--1.1%
SOVEREIGN--1.1%
3,749,000 New Zealand, 6.86%, 9/16/1998 AAA/Aaa 1,961,143
TOTAL NEW ZEALAND DOLLAR 1,961,143
NORWEGIAN KRONE--2.8%
SOVEREIGN--2.8%
36,000,000 Norwegian Government, Foreign Gov't. Guarantee,
5.75%, 11/30/2004 AAA/Aaa 4,857,078
TOTAL NORWEGIAN KRONE 4,857,078
</TABLE>
FEDERATED INTERNATIONAL INCOME FUND
<TABLE>
<CAPTION>
FOREIGN
CURRENCY PAR
OR PRINCIPAL CREDIT VALUE IN
AMOUNT RATING* U.S. DOLLARS
<C> <S> <S> <C>
BONDS--CONTINUED
PORTUGUESE ESCUDO--1.9%
SOVEREIGN--1.9%
405,000,000 Portuguese Government, Bond, 11.875%, 2/23/2000 AAA/Aa2 $ 2,492,308
130,000,000 Portuguese Government, Deb., 8.875%, 1/23/2004 AAA/Aa2 849,822
TOTAL PORTUGUESE ESCUDO 3,342,130
SPANISH PESETA--5.0%
SOVEREIGN--5.0%
1,080,000,000 Spain (Government), Foreign Gov't. Guarantee,
10.30%, 6/15/2002 AA/Aa2 8,606,506
TOTAL SPANISH PESETA 8,606,506
SWEDISH KRONA--4.0%
FINANCIAL INTERMEDIARIES--1.8%
24,000,000 Statens Bostads, Deb., 11.00%, 1/21/1999 AA-/NR 3,179,472
SOVEREIGN--2.2%
28,000,000 Sweden (Kingdom of), 6.00%, 2/9/2005 AAA/Aa1 3,793,092
TOTAL SWEDISH KRONA 6,972,564
TOTAL BONDS (IDENTIFIED COST $175,618,149) 162,768,244
(A)REPURCHASE AGREEMENTS--2.8%
$ 4,795,000 BT Securities Corp., 5.57%, dated 5/29/1998,
due 6/1/1998 (AT AMORTIZED COST) 4,795,000
TOTAL INVESTMENTS (IDENTIFIED COST $180,413,149)(B) $ 167,563,244
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information for an
explanation of the credit ratings. Current credit ratings are unaudited.
(a) The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio. The investment
in the repurchase agreement is through participation in a joint account with
other Federated funds.
(b) The cost of investments for federal tax purposes amounts to $180,413,149.
The net unrealized depreciation of investments on a federal tax basis amounts to
$12,849,905 which is comprised of $2,504,553 appreciation and $15,354,458
depreciation at May 31, 1998.
(c) Denotes variable rate obligations for which current rate is shown.
Note: The categories of investments are shown as a percentage of net assets
($173,225,707) at May 31, 1998.
The following acronym is used throughout this portfolio:
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $180,413,149) $ 167,563,244
Cash 2,247
Cash denominated in foreign currencies (at identified cost $848,973) 843,631
Income receivable 4,756,334
Receivable for shares sold 171,158
Total assets 173,336,614
LIABILITIES:
Payable for shares redeemed $ 2,040
Payable for taxes withheld 43,859
Accrued expenses 65,008
Total liabilities 110,907
NET ASSETS for 16,484,148 shares outstanding $ 173,225,707
NET ASSETS CONSIST OF:
Paid in capital $ 196,495,293
Net unrealized depreciation of investments and translation of assets and
liabilities
in foreign currency (12,885,238)
Accumulated net realized loss on investments and foreign currency transactions (12,483,547)
Undistributed net investment income 2,099,199
Total Net Assets $ 173,225,707
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
CLASS A SHARES:
Net Asset Value Per Share ($153,863,143 / 14,638,469 shares outstanding) $10.51
Offering Price Per Share (100/95.50 of $10.51)* $11.01
Redemption Proceeds Per Share (100.00/100 of $10.51)** $10.51
CLASS B SHARES:
Net Asset Value Per Share ($12,114,312 / 1,154,994 shares outstanding) $10.49
Offering Price Per Share (100/100.00 of $10.49)* $10.49
Redemption Proceeds Per Share (94.50/100 of $10.49)** $ 9.91
CLASS C SHARES:
Net Asset Value Per Share ($7,248,252 / 690,685 shares outstanding) $10.49
Offering Price Per Share (100/100.00 of $10.49)* $10.49
Redemption Proceeds Per Share (99.00/100 of $10.49)** $10.39
</TABLE>
* See "What Shares Cost" in the Prospectus.
** See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign taxes withheld of $66,778) $ 6,052,681
EXPENSES:
Investment advisory fee $ 685,611
Administrative personnel and services fee 92,247
Custodian fees 39,957
Transfer and dividend disbursing agent fees and expenses 46,130
Directors'/Trustees' fees 3,760
Auditing fees 11,526
Legal fees 1,821
Portfolio accounting fees 43,458
Distribution services fee--Class A Shares 203,510
Distribution services fee--Class B Shares 46,161
Distribution services fee--Class C Shares 28,920
Shareholder services fee--Class A Shares 203,510
Shareholder services fee--Class B Shares 15,387
Shareholder services fee--Class C Shares 9,640
Share registration costs 18,261
Printing and postage 14,849
Insurance premiums 2,184
Taxes 50
Total expenses 1,466,982
Waivers--
Waiver of distribution services fee--Class A Shares $ (122,106)
Waiver of shareholder services fee--Class A Shares (56,983)
Total waivers (179,089)
Net expenses 1,287,893
Net investment income 4,764,788
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY:
Net realized gain on investments and foreign currency 12,729
transactions
Net change in unrealized depreciation of investments and
translation of assets and
liabilities in foreign currency (2,941,580)
Net realized and unrealized loss on investments and (2,928,851)
foreign currency
Change in net assets resulting from operations $ 1,835,937
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
MAY 31, NOVEMBER 30,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 4,764,788 $ 12,374,664
Net realized gain (loss) on investments and foreign currency
transactions
($12,729 and $2,459,905, respectively, as computed for federal tax 12,729 2,723,605
purposes)
Net change in unrealized appreciation/depreciation of investments
and translation of assets and liabilities in foreign currency (2,941,580) (23,621,509)
Change in net assets resulting from operations 1,835,937 (8,523,240)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Class A Shares (4,123,808) (14,451,238)
Class B Shares (257,444) (678,030)
Class C Shares (163,493) (917,505)
Change in net assets resulting from distributions to shareholders (4,544,745) (16,046,773)
SHARE TRANSACTIONS--
Proceeds from sale of shares 34,589,688 113,690,620
Net asset value of shares issued to shareholders in payment of
distributions declared 1,466,484 6,459,682
Cost of shares redeemed (61,342,150) (118,734,614)
Change in net assets resulting from share transactions (25,285,978) 1,415,688
Change in net assets (27,994,786) (23,154,325)
NET ASSETS:
Beginning of period 201,220,493 224,374,818
End of period (including undistributed net investment income of
$2,099,199 and $1,879,156, respectively) $ 173,225,707 $ 201,220,493
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.65 $11.92 $11.38 $10.52 $11.86 $10.47
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.28** 0.63** 0.74** 0.79 0.70 0.88
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.16) (1.07) 0.67 0.84 (0.76) 1.40
Total from investment operations 0.12 (0.44) 1.41 1.63 (0.06) 2.28
LESS DISTRIBUTIONS
Distributions from net investment
income (0.26) (0.83) (0.87) (0.77) (0.63) (0.75)
Distributions from net realized
gain on investments and foreign
currency transactions -- -- -- -- (0.65) (0.14)
Total distributions (0.26) (0.83) (0.87) (0.77) (1.28) (0.89)
NET ASSET VALUE, END OF PERIOD $10.51 $10.65 $11.92 $11.38 $10.52 $11.86
TOTAL RETURN(A) 1.12% (3.70%) 13.27% 16.12% (0.84%) 22.95%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.33%* 1.30% 1.30% 1.30% 1.30% 1.25%
Net investment income 5.29%* 5.83% 6.58% 6.79% 6.67% 7.71%
Expense waiver/reimbursement(b) 0.22%* 0.26% 0.34% 0.40% 0.20% 0.27%
SUPPLEMENTAL DATA
Net assets, end of period (000 $153,863 $180,415 $200,758 $173,905 $209,008 $220,602
omitted)
Portfolio turnover 8% 67% 92% 41% 136% 189%
</TABLE>
* Computed on an annualized basis.
** Per share information presented is based upon the monthly average number of
shares outstanding.
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) 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)
FEDERATED INTERNATIONAL INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.62 $11.89 $11.36 $10.51 $10.21
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.24** 0.56** 0.84** 0.77 0.08
Net realized and unrealized gain (loss)
on investments and foreign currency (0.15) (1.08) 0.48 0.78 0.22
Total from investment operations 0.09 (0.52) 1.32 1.55 0.30
LESS DISTRIBUTIONS
Distributions from net investment
income (0.22) (0.75) (0.79) (0.70) --
NET ASSET VALUE, END OF PERIOD $10.49 $10.62 $11.89 $11.36 $10.51
TOTAL RETURN(B) 0.85% (4.43%) 12.41% 15.28% 2.44%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.05%* 2.06% 2.11% 2.10% 2.11%*
Net investment income 4.58%* 5.06% 5.76% 5.76% 7.07%*
Expense waiver/reimbursement(c) -- -- 0.02% 0.10% 0.10%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $12,114 $12,521 $8,641 $1,123 $101
Portfolio turnover 8% 67% 92% 41% 136%
</TABLE>
* Computed on an annualized basis.
** Per share information presented is based upon the monthly average numbers of
shares outstanding.
(a) Reflects operations for the period from September 19, 1994 (date of initial
public investment) to November 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
FINANCIAL HIGHLIGHTS--CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MAY 31, YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.63 $11.89 $11.36 $10.48 $11.84 $10.23
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.24** 0.56** 0.67** 0.60 0.58 0.41
Net realized and unrealized gain
(loss) on investments and foreign
currency (0.16) (1.08) 0.64 0.95 (0.72) 1.58
Total from investment operations 0.08 (0.52) 1.31 1.55 (0.14) 1.99
LESS DISTRIBUTIONS
Distributions from net investment
income (0.22) (0.74) (0.78) (0.67) (0.57) (0.38)
Distributions from net realized gain
on investments and foreign currency
transactions -- -- -- -- (0.65) --
Total distributions (0.22) (0.74) (0.78) (0.67) (1.22) (0.38)
NET ASSET VALUE, END OF PERIOD $10.49 $10.63 $11.89 $11.36 $10.48 $11.84
TOTAL RETURN(B) 0.75% (4.42%) 12.31% 15.32% (1.54%) 19.67%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.05%* 2.06% 2.09% 2.06% 2.05% 2.05%*
Net investment income 4.57%* 5.10% 5.80% 5.96% 6.00% 5.39%*
Expense waiver/reimbursement(c) -- -- 0.04% 0.14% 0.10% 0.21%*
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $7,248 $8,285 $14,976 $12,015 $8,098 $4,767
Portfolio turnover 8% 67% 92% 41% 136% 189%
</TABLE>
* Computed on an annualized basis.
** Per share information presented is based upon the monthly average number of
shares outstanding.
(a) Reflects operations for the period from March 31, 1993 (date of initial
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
FEDERATED INTERNATIONAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998 (UNAUDITED)
1. ORGANIZATION
International Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consist of two portfolios. The
financial statements included herein are only those of Federated International
Income Fund ("the Fund"), a non-diversified portfolio. The financial statements
of the other portfolio are presented separately. The assets of each portfolio
are segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers three classes of shares: Class A Shares, Class
B Shares, and Class C Shares. The Fund's objective is to seek a high level of
current income in U.S. dollars consistent with prudent investment risk. The Fund
has a secondary investment objective of capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS-- Foreign government securities, and listed foreign
corporate bonds, are valued according to the last reported sale price on a
recognized securities exchange, if available. If no sale on a recognized
exchange is reported or if the security is traded over-the-counter, a security
is valued according to the last reported bid price. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturity of sixty days or less at the time
of purchase may be valued at amortized cost, which approximates fair market
value. With respect to valuation of foreign securities, trading in foreign
cities may be completed at times which vary from the closing of the New York
Stock Exchange. Therefore, foreign securities are valued at the latest closing
price on the exchange on which they are traded prior to the closing of the New
York Stock Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. Dollars at the foreign exchange rate in effect at noon,
eastern time, on the day the value of the foreign security is determined.
REPURCHASE AGREEMENTS-- It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault, all
securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the "Directors").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES, AND DISTRIBUTIONS-- Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions to
shareholders are recorded on the ex-dividend date.
FEDERAL TAXES-- It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
At May 31, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $12,496,276, which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent permitted by
the code, and thus will reduce the amount of the distributions to shareholders
which would otherwise be necessary to relieve the Fund of any liability for
federal tax. Pursuant to the Code, such capital loss carryforward will expire as
follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2002 $7,730,124
2003 4,766,152
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS-- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
FOREIGN EXCHANGE CONTRACTS-- The Fund may enter into foreign currency
commitments for the delayed delivery of securities or foreign currency exchange
transactions. The Fund enters into foreign currency contract transactions to
protect assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Purchased contracts are used to acquire exposure
to foreign currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon entering these
transactions from the potential inability of counterparts to meet the terms of
their commitments and from unanticipated movements in security prices or foreign
exchange rates. The foreign currency transactions are adjusted by the daily
exchange rate of the underlying currency and any gains or losses are recorded
for financial statement purpose as unrealized until the settlement date. At May
31, 1998, the Fund had no outstanding foreign currency commitments.
FOREIGN CURRENCY TRANSLATION-- The accounting records of the Fund are maintained
in U.S. dollars. All assets and liabilities denominated in foreign currencies
("FC") are translated into U.S. dollars based on the rate of exchange of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income, and expenses are translated at the rate of exchange quoted
on the respective date that such transactions are recorded. Differences between
income and expense amounts recorded and collected or paid are adjusted when
reported by the custodian bank. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
FCs, currency gains or losses realized between the trade and settlement dates on
securities transactions, the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at fiscal year end, resulting
from changes in the exchange rate.
USE OF ESTIMATES-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses, and
revenues reported in the financial statements. Actual results could differ from
those estimated.
OTHER-- Investment transactions are accounted for on the trade date.
3. CAPITAL STOCK
At May 31, 1998, par value shares ($0.001 per share) authorized were as follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
SHARE CLASS NAME AUTHORIZED
Class A Shares 500,000,000
Class B Shares 500,000,000
Class C Shares 500,000,000
Total 1,500,000,000
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS A SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 3,067,650 $ 32,146,305 9,374,565 $ 102,068,473
Shares issued to shareholders in payment
of distributions declared 111,592 1,170,531 477,630 5,236,339
Shares redeemed (5,484,190) (57,433,830) (9,757,111) (105,992,259)
Net change resulting from Class A
Share transactions (2,304,948) $ (24,116,994) 95,084 $ 1,312,553
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS B SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 122,592 $ 1,284,113 652,967 $ 7,092,111
Shares issued to shareholders in payment
of distributions declared 17,163 179,840 41,746 455,100
Shares redeemed (163,243) (1,709,731) (242,871) (2,612,799)
Net change resulting from Class B
Share transactions (23,488) $ (245,778) 451,842 $ 4,934,412
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, 1998 NOVEMBER 30, 1997
CLASS C SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 110,637 $ 1,159,270 417,391 $ 4,530,036
Shares issued to shareholders in payment
of distributions declared 11,077 116,113 69,887 768,243
Shares redeemed (210,469) (2,198,589) (967,042) (10,129,556)
Net change resulting from Class C
Share transactions (88,755) $ (923,206) (479,764) $ (4,831,277)
Net change resulting from share
transactions (2,417,191) $ (25,285,978) 67,162 $ 1,415,688
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE-- Federated Global Research Corp., the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment advisory
fee equal to 0.75% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee. The Adviser can modify or
terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE-- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of average
aggregate daily net assets of all funds advised by subsidiaries of Federated
Investors, Inc. for the period. The administrative fee received during the
period of the Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICE FEE-- The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Class A Shares, Class B Shares, and Class C Shares. The Plan
provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate FSC.
PERCENTAGE OF
AVERAGE DAILY NET
SHARE CLASS NAME ASSETS OF CLASS
Class A Shares 0.25%
Class B Shares 0.75%
Class C Shares 0.75%
The distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time at its
sole discretion.
SHAREHOLDER SERVICES FEE-- Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to 0.25%
of average daily net assets of the Fund for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES-- FServ, through its
subsidiary, Federated Shareholder Services Company ("FSSC") serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the
size, type, and number of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES-- FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.
GENERAL-- Certain of the Officers and Directors of the Corporation are Officers
and Directors or Trustees of the above companies.
5. YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended May 31, 1998, were as follows:
PURCHASES $13,851,612
SALES $39,292,442
7. CONCENTRATION OF CREDIT RISK
The Fund invests in securities of non-U.S. issuers. The political or economic
developments within a particular country or region may have an adverse effect on
the ability of domiciled issuers to meet their obligations. Additionally,
political or economic developments may have an effect on the liquidity and
volatility of portfolio securities and currency holdings.
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd, Esq.
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr., Esq.
Peter E. Madden
John E. Murray, Jr., J.D., S.J.D.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Glen R. Johnson
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
Richard B. Fisher
Vice President
Karen M. Brownlee
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not 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. Investment in mutual funds involves risk, including possible
loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
[Graphic]
Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 46031P100
Cusip 46031P209
Cusip 46031P506
2061602 (7/98)
[Graphic]
APPENDIX
Federated International Equity Fund,
A1. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 8/17/84
to 5/31/98. The "y" axis is measured in increments of $25,000 ranging from $0 to
$100,000 and indicates that the ending value of hypothetical initial investment
of $14,000 in Federated International Equity Fund, Class A Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $83,968 on
5/31/98.
A2. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 8/17/84
to 5/31/98. The "y" axis is measured in increments of $7,000 ranging from $0 to
$35,000 and indicates that the ending value of fourteen hypothetical yearly
investments of $1,000 in Federated International Equity Fund, Class A Shares,
assuming the reinvestment of capital gains and dividends, would have grown to
$32,375 on 5/31/98.
A3. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 8/17/84
to 5/31/98. The "y" axis is measured in increments of $30,000 ranging from $0 to
$210,000 and indicates that the ending value of a hypothetical initial
investment of $10,000 and subsequent yearly investments of $5,000 over 14 years
in Federated International Equity Fund, Class A Shares, would have grown to
$192,333 on 5/31/98.
APPENDIX
Federated International Income Fund,
A1. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 6/91 to
5/31/98. The "y" axis is measured in increments of $3,000 ranging from $0 to
$15,000 and indicates that the ending value of hypothetical initial investment
of $7,000 in Federated International Income Fund, Class A Shares, assuming the
reinvestment of capital gains and dividends, would have grown to $11,638 on
5/31/98.
A2. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 6/91 to
5/31/98. The "y" axis is measured in increments of $2,000 ranging from $0 to
$12,000 and indicates that the ending value of eight hypothetical yearly
investments of $1,000 in Federated International Income Fund, Class A Shares,
assuming the reinvestment of capital gains and dividends, would have grown to
$10,472 on 5/31/98.
A3. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 6/91 to
5/31/98. The "y" axis is measured in increments of $8,000 ranging from $0 to
$40,000 and indicates that the ending value of a hypothetical initial investment
of $10,000 and subsequent yearly investments of $2,000 over 7 years in Federated
International Income Fund, Class A Shares, would have grown to $34,244 on
5/31/98.
