INSURANCE MANAGEMENT SERIES, 497, 1995-10-13

INSURANCE MANAGEMENT SERIES
497, 1995-10-13

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INSURANCE MANAGEMENT SERIES
PROSPECTUS

This prospectus offers shares of seven portfolios (individually referred to as a
"Fund" or collectively as the "Funds") of Insurance Management Series (the
"Trust"), which is an open-end, management investment company. Shares of the
Funds may be sold only to separate accounts of insurance companies to serve as
the investment medium for variable life insurance policies and variable annuity
contracts issued by the insurance companies. The Trust offers interests in the
following seven separate investment portfolios, each having distinct investment
objectives and policies:

Equity Growth and Income Fund;

Growth Stock Fund;

Utility Fund;
Prime Money Fund;
U.S. Government Bond Fund;
Corporate Bond Fund; and
International Stock Fund.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

The separate accounts invest in one or more of the Funds in accordance with
allocation instructions received from owners of life insurance policies and
annuity contracts. Such allocation rights are described further in the
prospectus for the separate account. This prospectus contains the information
you should read and know before you invest in any of the Funds through the
variable annuity contracts and variable life insurance policies offered by
insurance companies which provide for investment in the Trust. Keep this
prospectus for future reference.

SPECIAL RISKS

The Corporate Bond Fund's portfolio consists primarily of lower-rated corporate
debt obligations, which are commonly referred to as "junk bonds." These
lower-rated bonds may be more susceptible to real or perceived adverse economic
conditions than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading market
for lower-rated bonds may be less liquid than the market for investment grade
bonds. The Corporate Bond Fund's investment adviser will endeavor to limit these
risks through diversifying the portfolio and through careful credit analysis of
individual issuers. Purchasers should carefully assess the risks associated with
an investment in this Fund. (See the sections in this prospectus entitled
"Investment Risks" and "Reducing Risks of Lower-Rated Securities.")

An investment in the Prime Money Fund is neither insured nor guaranteed by the
U.S government. The Prime Money Fund attempts to maintain a stable net asset
value of $1.00 per share; there can be no assurance that the Prime Money Fund
will be able to do so.

The Trust has also filed a combined Statement of Additional Information dated
October 12, 1995 with the Securities and Exchange Commission. The information
contained in the combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the combined Statement
of Additional Information, which is in paper form only, or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling 1-800-235-4669. To obtain other information or to make inquiries
about a Fund, contact the Trust at the address listed in the back of this
prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

FUND SHARES ARE AVAILABLE EXCLUSIVELY AS A POOLED FUNDING VEHICLE FOR LIFE
INSURANCE COMPANIES WRITING VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES. THIS PROSPECTUS SHOULD BE ACCOMPANIED BY THE PROSPECTUS FOR
SUCH CONTRACTS.

Prospectus dated October 12, 1995

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS 1
- ------------------------------------------------------

GENERAL INFORMATION ON
INSURANCE MANAGEMENT SERIES 6
- ------------------------------------------------------

EQUITY GROWTH AND INCOME FUND
INVESTMENT INFORMATION 6
- ------------------------------------------------------

Investment Objective 6
Investment Policies 6
Investment Limitations 8

GROWTH STOCK FUND 8
- ------------------------------------------------------

Investment Objective 8
Investment Policies 8
Investment Limitation 11

UTILITY FUND INVESTMENT INFORMATION 11
- ------------------------------------------------------

Investment Objective 11
Investment Policies 11
Investment Limitation 13

PRIME MONEY FUND INVESTMENT
INFORMATION 13
- ------------------------------------------------------

Investment Objective 13
Investment Policies 13
Investment Risks 15
Investment Limitation 15
Regulatory Compliance 15

U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION 16
- ------------------------------------------------------

Investment Objective 16
Investment Policies 16
Investment Limitations 17

CORPORATE BOND FUND INVESTMENT
INFORMATION 17
- ------------------------------------------------------

Investment Objective 17
Investment Policies 17
Investment Risks 18
Investment Limitations 19

INTERNATIONAL STOCK FUND
INVESTMENT INFORMATION 20
- ------------------------------------------------------

Investment Objective 20
Investment Policies 20
Investment Limitations 24

INVESTMENT PRACTICES 25
- ------------------------------------------------------

Repurchase Agreements 25
Restricted and Illiquid Securities 25
When-Issued and Delayed Delivery
Transactions 26
Lending of Portfolio Securities 26
Variable Asset Regulations 26
State Insurance Regulations 26

NET ASSET VALUE 27
- ------------------------------------------------------

INVESTING IN THE FUNDS 27
- ------------------------------------------------------

Purchases and Redemptions 27
What Shares Cost 27
Dividends 28

INSURANCE MANAGEMENT SERIES INFORMATION 28
- ------------------------------------------------------

Management of Insurance
Management Series 28
Fund Managers 29
Distribution of Fund Shares 30
Administration of the Trust 30
Brokerage Transactions 30
Expenses of Each Fund 31

SHAREHOLDER INFORMATION 31
- ------------------------------------------------------

Voting Rights 31

TAX INFORMATION 32
- ------------------------------------------------------

Federal Taxes 32
State and Local Taxes 32

PERFORMANCE INFORMATION 32
- ------------------------------------------------------

APPENDIX 33
- ------------------------------------------------------

ADDRESSES 36
- ------------------------------------------------------

EQUITY GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.19
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.26)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations (0.07)
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.19)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.74
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** (0.70%)
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.54%(a)
- -----------------------------------------------------------------------------------------
Net investment income 2.58%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 25.42%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,400
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 32%
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from February 1, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 9, 1993 (start of business)
to January 31, 1994, the Fund had no investment activity.

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

(a) Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.

UTILITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.48
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.34
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.19)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.15
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.34)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.29
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 1.12%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.60%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.77%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 54.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 974
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 73%
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from April 14, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to April 13, 1994, the net investment income was
distributed to the Fund's adviser.

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

(a) Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.

PRIME MONEY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.01
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 0.50%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.80%(a)
- -----------------------------------------------------------------------------------------
Net investment income 4.26%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 71.84%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 552
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from November 18, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 10, 1993 (start of business)
to November 17, 1994, the Fund had no public investment.

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

(a) Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.

U.S. GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report, dated February 10, 1995, on the Fund's
financial statements for the year ended December 31, 1994, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.27
- ----------------------------------------------------------------------------------------- -------
Total from investment operations 0.27
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.27)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 9.99
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** 2.62%
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.48%(a)
- -----------------------------------------------------------------------------------------
Net investment income 3.99%(a)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 32.83%(a)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,244
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 0%
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from March 29, 1994 (date of initial
public investment) to
December 31, 1994. For the period from December 8, 1993 (start of business)
to March 28, 1994, net investment income was distributed to the Fund's
adviser.

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

(a) Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated
December 31, 1994, which can be obtained free of charge.

CORPORATE BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

THE FOLLOWING TABLE HAS BEEN AUDITED BY DELOITTE & TOUCHE LLP, THE FUND'S
INDEPENDENT AUDITORS. THEIR REPORT, DATED FEBRUARY 10, 1995, ON THE FUND'S
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, AND ON THE FOLLOWING
TABLE FOR THE PERIOD PRESENTED, IS INCLUDED IN THE ANNUAL REPORT, WHICH IS
INCORPORATED BY REFERENCE. THIS TABLE SHOULD BE READ IN CONJUNCTION WITH THE
FUND'S FINANCIAL STATEMENTS AND NOTES THERETO, WHICH MAY BE OBTAINED FROM THE
FUND.

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1994*
------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------
Net investment income 0.75
- -----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (1.12)
- ----------------------------------------------------------------------------------------- -------
Total from investment operations (0.37)
- -----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.75)
- -----------------------------------------------------------------------------------------
Distributions in excess of net investment income (0.01)(a)
- ----------------------------------------------------------------------------------------- -------
Total distributions (0.76)
- ----------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 8.87
- ----------------------------------------------------------------------------------------- -------
TOTAL RETURN** (3.73%)
- -----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------
Expenses 0.41%(c)
- -----------------------------------------------------------------------------------------
Net investment income 9.11%(c)
- -----------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 10.01%(c)
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,457
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 18%
- -----------------------------------------------------------------------------------------
</TABLE>

* Reflects operations for the period from February 2, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to February 1, 1994, the Fund had no public
investment.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1994, which can be obtained free of charge.

GENERAL INFORMATION ON
INSURANCE MANAGEMENT SERIES
- --------------------------------------------------------------------------------

Insurance Management Series was established as a Massachusetts business trust
under a Declaration of Trust dated September 15, 1993. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial interest in
separate portfolios of securities.
Shares of each Fund are sold only to insurance companies as funding vehicles for
variable annuity contracts and variable life insurance policies issued by the
insurance companies. Shares of each Fund are sold at net asset value as
described in the section entitled "What Shares Cost." Shares of the Funds are
redeemed at net asset value.

The Trust, which is designed to meet a variety of investment objectives, offers
shares of beneficial interest in the following seven separate portfolios:

Equity Growth and Income Fund--a portfolio seeking long-term growth of
capital and income by investing in the securities of "blue-chip"
companies;

Growth Stock Fund--a portfolio seeking capital appreciation by investing
in equity securities of companies with prospects for above-average growth
in earnings and dividends or companies where significant fundamental
changes are taking place;

Utility Fund--a portfolio seeking high current income and moderate
capital appreciation by investing primarily in a professionally managed
and diversified portfolio of equity and debt securities of utility
companies;

Prime Money Fund--a portfolio seeking current income consistent with
stability of principal and liquidity by investing in high quality money
market instruments;

U.S. Government Bond Fund--a portfolio seeking current income by
investing in U.S. government securities;

Corporate Bond Fund--a portfolio seeking high current income by investing
in lower-rated fixed income securities, including preferred stocks,
bonds, debentures and notes; and

International Stock Fund--a portfolio seeking a total return on its
assets by investing in the equity securities of issuers located in at
least three different countries outside of the United States.

Each of the Funds may also invest in certain other types of securities as
further described in this prospectus.

Since the Funds use a single prospectus, it is possible that one Fund might
become liable for a misstatement in the prospectus regarding another Fund. The
Board of Trustees ("Trustees") of the Trust considered this when approving the
use of a single prospectus.

EQUITY GROWTH AND INCOME FUND
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The primary investment objective of the Fund is to achieve long-term growth of
capital. The Fund's secondary objective is to provide income. The investment
objectives cannot be changed without the approval of the Fund's shareholders.
While there is no assurance that the Fund will achieve its investment
objectives, it endeavors to do so by following the investment policies described
in this prospectus.

INVESTMENT POLICIES

The Fund pursues its investment objectives by investing, under normal
circumstances, at least 65% of its total assets in common stock of "blue-chip"
companies. "Blue-chip" companies generally are top-quality, established growth
companies which, in the opinion of the investment adviser, meet one or more of
the following criteria:

industry leader with proven management capabilities;

historical and future earnings growth rate of approximately 10%
compounded annually;

strong balance sheet with pension liabilities funded;

products with brand recognition and consumer acceptance;

growing consumer-based demand with limited government sales;

ability to meet social, political, and environmental problems;

vigorous research effort with continuing new product flow;

low external capital requirements; and

not an import competitive company but possessing international
capabilities.

Unless indicated otherwise, the investment policies of the Fund may be changed
by the Trustees without the approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of blue-chip companies. Given these long-term investment
horizons, the Fund will attempt to hold its portfolio securities throughout
market cycles.

COMMON STOCKS. The Fund invests primarily in common stocks of blue-chip
companies selected by the Fund's investment adviser based on the criteria
set forth above and traditional research techniques and technical factors,
including assessment of earnings and dividend growth prospects and of the
risk and volatility of the company's industry. Other factors, such as
product position or market share, will also be considered by the Fund's
investment adviser.

CONVERTIBLE SECURITIES. The Fund may invest in convertible securities and
warrants of the blue-chip companies. Convertible securities are
fixed-income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option
of the holder during a specified time period. Convertible securities may
take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The Fund
invests in convertible bonds rated "B" or higher by Standard & Poor's
Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") at the
time of investment or, if unrated, of comparable quality. If a convertible
bond is rated below "B" according to the characteristics set forth
hereafter after the Fund has purchased it, the Fund is not required to drop
the convertible bond from the portfolio but will consider appropriate
action. The investment characteristics of each convertible security vary
widely, which allows convertible securities to be employed for different
investment objectives.

Convertible bonds and convertible preferred stocks are fixed-income
securities that generally retain the investment characteristics of
fixed-income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed-income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which are options to buy the common stock, they function as convertible
bonds, except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders
of common stock in the case of liquidation. However, convertible securities
are generally subordinated to similar nonconvertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally higher
yields than common stocks, but lower than nonconvertible securities of
similar quality. The Fund will exchange or convert the convertible
securities held in its portfolio into shares of the underlying common stock
in instances in which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objective. Otherwise, the Fund will hold or trade
the convertible securities. In selecting convertible securities for the
Fund, the Fund's adviser evaluates the investment

characteristics of the convertible security as a fixed-income instrument
and the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Fund's adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of
the issuer's profits, and the issuer's management capability and practices.

BANK INSTRUMENTS AND SECURITIES OF OTHER INVESTMENT COMPANIES. Primarily
to manage short-term cash, the Fund may also invest in certificates of
deposit, demand and time deposits, bankers' acceptances, deposit notes, and
other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments") and securities of other investment
companies.

TEMPORARY INVESTMENTS. For defensive purposes only, the Fund may also invest
temporarily in cash and cash items during times of unusual market conditions and
to maintain liquidity. Cash items may include short-term obligations such as:

commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch Investors Service, Inc. ("Fitch");

securities issued and/or guaranteed as to the payment of principal and
interest by the U.S. government or its agencies and instrumentalities;
and

repurchase agreements.

INVESTMENT LIMITATIONS

The Fund will not:

The above investment limitation cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.

The Fund will not:

invest more than 10% of its total assets in securities of other
investment companies.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

GROWTH STOCK FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is capital appreciation. The investment
objective cannot be changed without the approval of the Fund's shareholders.
While there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the investment policies described in this
prospectus.

INVESTMENT POLICIES

The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies with prospects for above-average growth
in earnings and dividends or companies where significant fundamental changes are
taking place. Equity securities include common stocks, preferred stocks, and
securities (including debt securities) that are convertible into common stocks.

Unless indicated otherwise, the investment policies of the Fund may be changed
by the Trustees without the approval of shareholders. Shareholders will be

notified before any material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund's investment adviser selects equity securities
on the basis of traditional research techniques, including assessment of
earnings and dividend growth prospects and of the risk and volatility of each
company's business. The Fund generally invests in companies with market
capitalization of $100,000,000 or more. The fundamental changes which the
investment adviser will seek to identify in companies include, for example,
restructuring of basic businesses or reallocations of assets which present
opportunities for significant share price appreciation. At times, the Fund will
invest in securities of companies which are deemed by the investment adviser to
be candidates for acquisition by other entities as indicated by changes in
ownership, changes in standard price-to-value ratios, and an examination of
other standard analytical indices.

The securities in which the Fund invests include, but are not limited to common
stocks, preferred stocks, convertible securities, securities of foreign issuers,
securities of other investment companies, and corporate obligations, including
bonds, debentures, notes, and warrants. In addition, the Fund may invest in put
and call options, futures, and options on futures.

CONVERTIBLE SECURITIES. Convertible securities are fixed-income securities which
may be exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified time
period. Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and warrants
or a combination of the features of several of these securities. The Fund
invests in convertible bonds rated "B" or higher by S&P or Moody's at the time
of investment or, if unrated, of comparable quality. If a convertible bond is
rated below "B" according to the characteristics set forth hereafter after the
Fund has purchased it, the Fund is not required to drop the convertible bond
from the portfolio but will consider appropriate action. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for different investment objectives.

Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality. The Fund
will exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed-income instrument and the
investment potential of the underlying equity security for capital appreciation.
In evaluating these matters with respect to a particular convertible security,
the Fund's investment adviser considers numerous factors, including the economic
and political outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.

SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depositary receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions.

As a matter of practice, the Fund will not invest in the securities of a foreign
issuer if any such risk appears to the investment adviser to be substantial.

CORPORATE OBLIGATIONS. The Fund may invest up to 35% of its total assets in
bonds, debentures, notes and warrants of corporate issuers. These securities
will generally be rated "BBB" or better by S&P or "Baa" or better by Moody's at
the time of investment, or if unrated, of comparable quality. Securities which
are rated BBB by S&P or Baa by Moody's have speculative characteristics. Changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than higher-rated
bonds. The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates. Downgrades will be evaluated on a case by case
basis by the investment adviser. The investment adviser will determine whether
or not the security continues to be an acceptable investment. If not, the
security will be sold. A description of the ratings categories is contained in
the Appendix to this combined prospectus.

In addition, with respect to the 35% limit, the Fund may invest up to 5% of its
assets in debt obligations rated "B" or better by S&P or Moody's.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
the securities of other open-end investment companies and in the securities of
closed-end investment companies, but it will not own more than 3% of the total
outstanding voting stock of any investment company, invest more than 5% of its
total assets in any one investment company, or invest more than 10% of its total
assets in investment companies in general. The Fund will invest in other
investment companies primarily for the purpose of investing its short-term cash
which has not yet been invested in other portfolio instruments. Shareholders
should realize that, when the Fund invests in other investment companies,
certain fund expenses, such as custodian fees and administrative fees, may be
duplicated. The investment adviser will waive its investment advisory fee on
assets invested in securities of other investment companies.

commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch Investors Service, Inc.;

securities issued and/or guaranteed as to the payment of principal and
interest by the U.S. government or its agencies and instrumentalities;

certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes, and other instruments of domestic and foreign banks and
other deposit institutions; and

repurchase agreements.

PUT AND CALL OPTIONS. The Fund may purchase put options on stocks. These options
will be used only as a hedge to attempt to protect securities which the Fund
holds against decreases in value. The Fund may purchase these put options as
long as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio. The Fund may also write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Writing of
calls by the Fund is intended to generate income for the Fund and, thereby,
protect against price movements in particular securities in the Fund's
portfolio.

Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a secondary
market on an exchange which may or may not exist for any particular call or put
option at any specific time. The absence of a liquid secondary market also may
limit the Fund's ability to dispose of the securities underlying an option. The
inability to close options also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio.

The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.

Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third-party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market, while over-the-counter options may not.

FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell financial
futures and stock index futures contracts to hedge all or a portion of its
portfolio against changes in the price of its portfolio securities, but will not
engage in futures transactions for speculative purposes.

The Fund may also write call options and purchase put options on financial
futures and stock index futures contacts as a hedge to attempt to protect
securities in its portfolio against decreases in value.

INVESTMENT LIMITATION

The Fund will not:

The above investment limitation cannot be changed without shareholder approval.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

UTILITY FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to achieve high current income and
moderate capital appreciation. The investment objective cannot be changed
without approval of shareholders. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
policies described in this prospectus.
INVESTMENT POLICIES

The Fund endeavors to achieve its objective by investing primarily in a
professionally managed, diversified portfolio of equity and debt securities of
utility companies. Unless indicated otherwise, the investment policies may be
changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund's investment approach is based on the
conviction that over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of utility companies. The Fund intends to achieve its
investment objective by investing in equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in securities of utility companies.

COMMON STOCKS. The Fund invests primarily in common stocks of utility
companies selected by the Fund's investment adviser on the basis of
traditional research techniques, including assessment of earnings and
dividend growth prospects and of the risk and volatility of the company's
industry. However, other factors, such as product position, market share,
or profitability will also be considered by the Fund's investment adviser.

SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers which are freely traded on United States securities
exchanges or in the over-the-counter market in the form of depositary
receipts, as well as securities of foreign issuers that trade on foreign
stock exchanges. Securities of a foreign issuer may present greater risks
in the form of

nationalization, confiscation, domestic marketability, or other national or
international restrictions. As a matter of practice, the Fund will not
invest in the securities of a foreign issuer if any such risk appears to
the investment adviser to be substantial.

OTHER SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, and warrants of these companies and in cash, U.S. government
securities, and money market instruments in proportions determined by its
investment adviser.

PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund will only
purchase puts on portfolio securities which are traded on a recognized exchange.

The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. The Fund will write call options on securities
either held in its portfolio or for which it has the right to obtain without
payment of further consideration or for which it has segregated cash in the
amount of any additional consideration. The call options which the Fund writes
must be listed on a recognized options exchange. Although the Fund reserves the
right to write covered call options on its entire portfolio, it will not write
such options on more than 25% of its total assets unless a higher limit is
authorized by its Trustees.

FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio of
long-term debt securities against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities of
the U.S. government at a certain time in the future. The seller of the contract
agrees to make delivery of the type of instrument called for in the contract and
the buyer agrees to take delivery of the instrument at the specified future
time.

The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.

RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contract or option.

It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into futures and options
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.

TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash, cash items,
and short-term instruments, including notes and commercial paper, for liquidity
and during times of unusual market conditions for defensive purposes. Cash items
may include obligations such as:

certificates of deposit (including those issued by domestic and foreign
branches of FDIC insured banks);

obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and

repurchase agreements.

INVESTMENT LIMITATION

The Fund will not:

borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow money and engage in reverse repurchase agreements in amounts
up to one-third of the value of its total assets and pledge up to 15% of
its total assets to secure such borrowings.
The above investment limitation cannot be changed without shareholder approval.
In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

PRIME MONEY FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide current income consistent
with stability of principal and liquidity. The investment objective cannot be
changed without approval of shareholders. While there is no assurance that the
Fund will achieve its investment objective, it endeavors to do so by following
the investment policies described in this prospectus.

INVESTMENT POLICIES

The Fund pursues its investment objective by investing exclusively in a
portfolio of money market instruments maturing in 397 days or less. The average
maturity of the money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. Unless indicated otherwise, the
investment policies of the Fund may be changed by the Trustees without the
approval of shareholders. Shareholders will be notified before any material
change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund invests in high-quality money market
instruments that are either rated in one of the two highest short-term rating
categories by one or more nationally recognized statistical rating organizations
("NRSROs") or of comparable quality to securities having such ratings. Examples
of these instruments include, but are not limited to:

domestic issues of corporate debt obligations, including variable rate
demand notes;

commercial paper (including Canadian Commercial Paper ("CCP") and
Europaper);

certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");

short-term credit facilities, such as demand notes;

asset-backed securities;

obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities");

repurchase agreements; and

other money market instruments.

The Fund invests only in instruments denominated and payable in U.S. dollars.

VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest rates
and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities
to trade at par. The interest rate may float or be adjusted at regular
intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Most variable rate demand
notes allow the Fund to demand the repurchase of the security on not more
than seven days prior notice. Other notes only permit the Fund to tender
the security at the time of each interest rate adjustment or at other fixed
intervals. See "Demand Features." The Fund treats variable rate demand
notes as maturing on the later of the date of the next interest adjustment
or the date on which the Fund may next tender the security for repurchase.

BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). The Fund will treat
securities credit enhanced with a bank's letter of credit as Bank
Instruments.

SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.

ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.

RATINGS. An NRSRO's two highest rating categories are determined without regard
for sub-categories and gradations. For example, securities rated A-1+, A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 (+ or -) or F-2 (+ or -) by
Fitch are all considered rated in one of the two highest short-term rating
categories. The Fund will limit its investments in securities rated in the
second highest short-term rating category (e.g., A-2 by S&P, Prime-2 by Moody's
or F-2 (+ or -) by Fitch) to not more than 5% of its total assets, with not more
than 1% invested in the securities of any one issuer. The Fund will follow
applicable regulations in determining whether a security rated by more than one
NRSRO can be treated as being in one of the two highest short-term rating
categories; currently, such securities must be rated by two NRSROs in one of
their two highest rating categories. See "Regulatory Compliance."

CREDIT ENHANCEMENT. Certain of the Fund's acceptable investments may have been
credit enhanced by a guaranty, letter of credit or insurance. The Fund typically
evaluates the credit quality and ratings of credit-enhanced securities based
upon the financial condition and ratings of the party providing the credit
enhancement (the "credit enhancer"), rather than the issuer. Generally, the Fund
will not treat credit-enhanced securities as having been issued by the credit
enhancer for diversification purposes. However, under certain circumstances,
applicable regulations may require the Fund to treat the securities as having
been issued by both the issuer and the credit enhancer. The bankruptcy,
receivership or default of the credit enhancer will adversely affect the quality
and marketability of the underlying security.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities

or by another third party, and may not be transferred separately from the
underlying security. The Fund uses these arrangements to provide the Fund with
liquidity and not to protect against changes in the market value of the
underlying securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable even
after a payment default on the underlying security may be treated as a form of
credit enhancement.

CONCENTRATION OF INVESTMENTS. The Fund will invest 25% or more of its total
assets in commercial paper issued by finance companies. The finance companies in
which the Fund intends to invest can be divided into two categories, commercial
finance companies and consumer finance companies. Commercial finance companies
are principally engaged in lending to corporations or other businesses. Consumer
finance companies are primarily engaged in lending to individuals. Captive
finance companies or finance subsidiaries which exist to facilitate the
marketing and financial activities of their parent will, for purposes of
industry concentration, be classified by the Fund in the industry of its parent
corporation.

In addition, the Fund may invest more than 25% of the value of its total assets
in cash or cash items, securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.

INVESTMENT RISKS

ECDs, ETDs, Yankee CDs, CCP, and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks. Examples of these risks
include international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing bank, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan limitations, examinations, accounting, auditing,
and recordkeeping, and the public availability of information. These factors
will be carefully considered by the Fund's adviser in selecting investments for
the Fund.

INVESTMENT LIMITATION

The Fund will not:

The above investment limitation cannot be changed without shareholder
approval.

REGULATORY COMPLIANCE

The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
combined prospectus and its combined Statement of Additional Information, in
order to comply with applicable laws and regulations, including the provisions
of and regulations under the Investment Company Act of 1940, as amended. In
particular, the Fund will comply with the various requirements of Rule 2a-7
which regulates money market mutual funds. For example, with limited exceptions,
Rule 2a-7 prohibits the investment of more than 5% of the Fund's total assets in
the securities of any one issuer, although the Fund's investment limitations
only requires such 5% diversification with respect to 75% of its assets. The
Fund will invest more than 5% of its assets in any one issuer only under the
circumstances permitted by Rule 2a-7. The Fund will also determine the effective
maturity of its investments, as well as its ability to consider a security as
having received the requisite short-term

ratings by NRSROs, according to Rule 2a-7. The Fund may change these operational
policies to reflect changes in the laws and regulations without the approval of
its shareholders.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

U.S. GOVERNMENT BOND FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide current income. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.

INVESTMENT POLICIES

Under normal circumstances, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in securities issued or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities. For purposes of this 65% statement, the Fund will
consider collateralized mortgage obligations issued by U.S. government agencies
or instrumentalities to be U.S. government securities. Unless indicated
otherwise, the investment policies of the Fund may be changed by the Trustees
without the approval of shareholders. Shareholders will be notified before any
material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS. The Fund invests in securities which are primary or
direct obligations of the U.S. government or its agencies or instrumentalities,
or which are guaranteed by the U.S. government, its agencies or
instrumentalities, and in certain collateralized mortgage obligations ("CMOs"),
described below, and repurchase agreements.

The U.S. government securities in which the Fund invests include:

note, bonds and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives; Federal Home
Loan Banks; Federal Home Loan Mortgage Corporation; Federal Natonal
Mortgage Association; Government National Mortgage Association;
Export-Import Bank of the United States; Commodity Credit Corporation;
Federal Financing Bank; The Student Loan Marketing Association; National
Credit Union Adminstration; and Tennessee Valley Authority.

Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government, such as Government National Mortgage Association participation
certificates, are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is not obligated to do so.
These instrumentalities are supported by:

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

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

the credit of the agency or instrumentality.

The Fund may also invest in CMOs which are rated AAA by an NRSO and which are
issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) privately issued securities which are collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest are guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; and (iii) other
privately issued securities in which the proceeds of the issuance are invested
in mortgage-backed securities and payment of the principal and interest are
supported by the credit of

an agency or instrumentality of the U.S. government. The mortgage-related
securities provide for a periodic payment consisting of both interest and
principal. The interest portion of these payments will be distributed by the
Fund as income, and the capital portion will be reinvested.

Mortgage-backed securities may be subject to certain prepayment risks because
the underlying mortgage loans may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining interest rates because many borrowers refinance their mortgages to
take advantage of favorable rates. At the time the Fund reinvests the proceeds,
it may receive a rate of interest which is actually lower than the rate of
interest paid on those securities.

INVESTMENT LIMITATIONS

The Fund will not:

invest more than 10% of its total assets in securities of other
investment companies.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

CORPORATE BOND FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The investment objective of the Fund is to seek high current income. The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.

INVESTMENT POLICIES

Unless stated otherwise, the Trustees can change the investment policies without
the approval of shareholders. Shareholders will be notified before any material
change becomes effective. The Fund endeavors to achieve its objective by
investing primarily in a professionally managed, diversified portfolio of fixed
income securities. The fixed income securities in which the Fund intends to
invest are lower-rated corporate debt obligations, which are commonly referred
to as "junk bonds." Some of these fixed income securities may involve equity
features. Capital growth will be considered, but only when consistent with the
investment objective of high current income.

ACCEPTABLE INVESTMENTS. The Fund invests at least 65% of its assets in
lower-rated fixed income bonds. Under normal circumstances, the Fund will not
invest more than 10% of the value of its total assets in equity securities. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates. The fixed income securities in which the Fund invests include,
but are not limited to:

preferred stocks;

bonds;

debentures;

notes;

equipment lease certificates; and

equipment trust certificates.

The securities in which the Fund may invest are generally rated BBB or lower by
S&P or Fitch or Baa or lower by Moody's, or are not rated but are determined by
the Fund's investment adviser to be of comparable quality. Securities which are
rated BBB or lower by S&P or Fitch or Baa or lower by Moody's have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
highly rated bonds. A description of the rating categories is contained in the
Appendix to this combined prospectus. There is no lower limit with respect to
rating categories for securities in which the Fund may invest. See "Investment
Risks" below.

TEMPORARY INVESTMENTS. The Fund may invest temporarily in cash and short-term
obligations for defensive purposes during times of unusual market conditions.
Short-term obligations may include:

certificates of deposit;

commercial paper rated A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's,
or F-1 or F-2 by Fitch and variable rate demand master notes;

short-term notes;

obligations issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities; and

repurchase agreements.

INVESTMENT RISKS

The corporate debt obligations in which the Fund invests are usually not in the
three highest rating categories of the nationally recognized statistical rating
organizations (AAA, AA, or A for S&P or Fitch and Aaa, Aa or A for Moody's) but
are in the lower rating categories or are unrated but are of comparable quality
and have speculative characteristics. Lower-rated or unrated bonds are commonly
referred to as "junk bonds." There is no minimal acceptable rating for a
security to be purchased or held in the Fund's portfolio, and the Fund may, from
to time, purchase or hold securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to this
combined prospectus.

Lower-rated securities will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities which react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the prices or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers in lower-rated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell the
securities at an optimum time. As a result of these factors, lower-rated
securities tend to have more price volatility and carry more risk to principal
and income than higher-rated securities.

An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligation to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of the securities they have issued. As a
result of these restructurings, holders of lower-rated securities may receive
less principal and interest than they had bargained for at the time such bonds
were purchased.

In the event of a restructuring, the Fund may bear additional legal or
administrative expenses in order to maximize recovery from an issuer.

The secondary trading market for lower-rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. In 1989, legislation was
enacted that requires federally insured savings and loan associations to divest
their holdings of lower-rated bonds by 1994. The

reduction of the number of institutions empowered to purchase and hold
lower-rated bonds could have an adverse impact on the overall liquidity of the
market. Adverse publicity and the perception of investors relating to issuers,
underwriters, dealers or underlying business conditions, whether or not
warranted by fundamental analysis, may also affect the price or liquidity of
lower-rated bonds. On occasion, therefore, it may become difficult to price or
dispose of a particular security in the portfolio.

The Fund may, from time to time, own zero coupon bonds or pay-in-kind
securities. A zero coupon bond makes no periodic interest payments and the
entire obligation becomes due only upon maturity. Pay-in-kind securities make
periodic payments in the form of additional securities (as opposed to cash). The
price of zero coupon bonds and pay-in-kind securities are generally more
sensitive to fluctuations in interest rates than are conventional bonds.
Additionally, federal tax law requires that interest on zero coupon bonds and
pay-in-kind securities be reported as income to the Fund even though the Fund
received no cash interest until the maturity or payment date of such securities.

Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.

REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's investment adviser believes
that the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:

CREDIT RESEARCH. The Fund's investment adviser will perform its own credit
analysis in addition to using recognized rating agencies and other sources,
including discussions with the issuer's management, the judgment of other
investment analysts, and its own informed judgment. The adviser's credit
analysis will consider the issuer's financial soundness, its responsiveness
to changes in interest rates and business conditions, and its anticipated
cash flow, interest, or dividend coverage and earnings. In evaluating an
issuer, the adviser places special emphasis on the estimated current value
of the issuer's assets rather than historical cost.

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

ECONOMIC ANALYSIS. The Fund's adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.

INVESTMENT LIMITATIONS

The Fund will not:

The above investment limitation cannot be changed without shareholder approval.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

INTERNATIONAL STOCK FUND INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVE

The Fund's investment objective is to obtain a total return on its assets. The
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it attempts to do so by following the investment policies
described in this prospectus.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund will attempt to achieve its objective by
investing at least 65% of its assets (and under normal market conditions
substantially all of its assets) in equity securities of issuers located in at
least three different countries outside of the United States. The Fund's
investment approach is based on the premise that investing in such non-U.S.
securities provides three potential benefits over investing solely in U.S.
securities: (1) the opportunity to invest in foreign issuers believed to have
superior growth potential; (2) the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the U.S.; and
(3) the opportunity to reduce portfolio volatility to the extent that securities
markets inside and outside the U.S. do not move in harmony. The Fund may
purchase sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs");
corporate and government fixed income securities of issuers outside of the U.S.;
convertible securities; and options and financial futures contracts. In
addition, the Fund may enter into forward commitments and foreign currency
transactions; and maintain reserves in foreign or U.S. money market instruments.

Unless otherwise indicated, the investment policies may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change to these policies becomes effective.

DEPOSITARY RECEIPTS. The Fund may purchase sponsored or unsponsored ADRs,
GDRs, and EDRs (collectively, "Depositary Receipts"). ADRs are Depositary
Receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs
and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Ownership of
unsponsored Depositary Receipts may not entitle the Fund to financial or
other reports from the issuer of the underlying security, to which it would
be entitled as the owner of sponsored Depositary Receipts.

FIXED INCOME SECURITIES. At the date of this prospectus, the Fund has
committed its assets primarily to dividend-paying equity securities of
established companies that appear to have growth potential. However, as a
temporary defensive position, the Fund may shift its emphasis to fixed
income securities, warrants, or other obligations of foreign companies or
governments, if they appear to offer potential higher return. Fixed income
securities include preferred stock, bonds, notes, or other debt securities
which are investment grade or higher, as described below. The prices of
fixed income securities fluctuate inversely to the direction of interest
rates.

The debt securities in which the Fund will invest will possess a minimum
credit rating of BBB as assigned by S&P or Baa by Moody's, or, if unrated,
will be judged by the Fund's adviser to be of comparable quality. Because
the average quality of the Fund's portfolio investments should remain
constantly between AAA and BBB, the Fund may avoid the adverse consequences
that may arise for some debt securities in difficult economic
circumstances. Downgraded securities will be evaluated on a case by case
basis by the adviser. The adviser will determine whether or not the
security continues to be an acceptable investment. If not, the

security will be sold. A description of the ratings categories is contained
in the Appendix to the Statement of Additional Information.

CONVERTIBLE SECURITIES. The Fund may invest in convertible securities that
are rated, at the time of purchase, investment grade by an NRSRO or, if
unrated, of comparable quality as determined by the adviser. Convertible
securities are fixed income securities which may be exchanged or converted
into a predetermined number of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The investment
characteristics of each convertible security vary widely, which allows
convertible securities to be employed for different investment objectives.

Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or in
part, customarily at full fact value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which entitle the holder to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bonds' maturity. Convertible securities are senior to equity securities
and, therefore, have a claim to assets of the corporation prior to the
holders of common stock in the case of liquidation. However, convertible
securities are generally subordinated to similar nonconvertible securities
of the same company. The interest income and dividends from convertible
bonds and preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities
of similar quality. A Fund will exchange or convert the convertible
securities held in its portfolio into shares of the underlying common
stocks when, in the adviser's opinion, the investment characteristics of
the underlying common shares will assist the Fund in achieving its
investment objective. Otherwise, the Fund will hold or trade the
convertible securities. In selecting convertible securities for the Fund,
the adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of the
underlying equity security for capital appreciation. In evaluating these
matters with respect to a particular convertible security, the adviser
considers numerous factors, including the economic and political outlook,
the value of the security relative to other investment alternatives, trends
in the determinants of the issuer's profits, and the issuer's management
capability and practices.

OPTIONS AND FINANCIAL FUTURES CONTRACTS. The Fund may purchase put and
call options, financial futures contracts, and options on financial futures
contracts. In addition, the Fund may write (sell) put and call options with
respect to securities in the Fund's portfolio.

FORWARD COMMITMENTS. Forward commitments are contracts to purchase
securities for a fixed price at a date beyond customary settlement time.
The Fund may enter into these contracts if liquid securities in amounts
sufficient to meet the purchase price are segregated on the Fund's records
at the trade date and maintained until the transaction has been settled.
Risk is involved if the value of the security declines before settlement.
Although the Fund enters into forward commitments with the intention of
acquiring the security, it may dispose of the commitment prior to
settlement and realize a short-term profit or loss.

MONEY MARKET INSTRUMENTS. The Fund may invest in foreign and U.S. money market
instruments, including interest-bearing call deposits with banks, government
obligations, certificates of deposit, banker's acceptances, commercial paper,
short-term corporate debt securities, and repurchase agreements. The commercial
paper in which the Fund invests will be rated A-1 by S&P or P-1 by Moody's.
These investments may be used to temporarily invest cash received from the sale
of Fund shares, to establish and maintain reserves for temporary defensive
purposes, or to take advantage of market opportunities. Investments in the World
Bank, Asian Development Bank, or Inter-American Development Bank are not
anticipated.

FOREIGN CURRENCY TRANSACTIONS. The Fund will enter into foreign currency
transactions to obtain the necessary currencies to settle securities
transactions. Currency transactions may be conducted either on a spot or cash
basis at prevailing rates or through forward foreign currency exchange
contracts.

The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by the Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund. Further,
the Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations.
Cross-hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability that
is the subject of the hedge.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. A
forward foreign currency exchange contract ("forward contract") is an obligation
to purchase or sell an amount of a particular currency at a specific price and
on a future date agreed upon by the parties.

Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs ("trade date"). The
period between the trade date and settlement date will vary between 24 hours and
30 days, depending upon local custom.

The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward contracts when it believes the interests of the Fund will be
served. The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency. No more than 30% of the Fund's assets will be committed to
forward contracts for hedging purposes at any time. (This restriction does not
include forward contracts entered into to settle securities transactions.)

The Fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the U.S. dollar value of foreign
currency-denominated portfolio securities and against increases in the U.S.
dollar cost of such securities to be acquired. As in the case of other kinds of
options, however, the writing of an option on a foreign currency constitutes
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
it may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by the Fund are traded
on U.S. and foreign exchanges or over-the-counter.

RISKS ASSOCIATED WITH FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FINANCIAL
FUTURES CONTRACTS. When the Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to

react differently than the portfolio securities to market changes. In addition,
the Fund's adviser could be incorrect in its expectations about the direction or
extent of market factors such as interest or currency exchange rate movements.
In these events, the Fund may lose money on the futures contract or option.
Also, it is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Fund's adviser
will consider liquidity before entering into such transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on this
secondary market.

RISKS ASSOCIATED WITH NON-U.S. SECURITIES. Investing in non-U.S. securities
carries substantial risks in addition to those associated with domestic
investments. In an attempt to reduce some of these risks, the Fund diversifies
its investments broadly among foreign countries, including both developed and
developing countries. At least three different countries will always be
represented.

The Fund occasionally takes advantage of the unusual opportunities for higher
returns available from investing in developing countries. These investments,
however, carry considerably more volatility and risk because they are associated
with less mature economies and less stable political systems.

CURRENCY RISKS. Because the Fund may purchase securities denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates could affect the Fund's net asset value; the value of interest
earned; gains and losses realized on the sale of securities; and net
investment income and capital gain, if any, to be distributed to
shareholders by the Fund. If the value of a foreign currency rises against
the U.S. dollar, the value of the Fund assets denominated in that currency
will increase; correspondingly, if the value of a foreign currency declines
against the U.S. dollar, the value of Fund assets denominated in that
currency will decrease.

The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental interpretation,
speculation and other economic and political conditions. Although the Fund
values its assets daily in U.S. dollars, the Fund will not convert its
holdings of foreign currencies to U.S. dollars daily. When the Fund
converts its holdings to another currency, it may incur conversion costs.
Foreign exchange dealers may realize a profit on the difference between the
price at which they buy and sell currencies.

FOREIGN COMPANIES. Other differences between investing in non-U.S. and
U.S. securities include:

less publicly available information about foreign companies;

the lack of uniform financial accounting standards applicable to
foreign companies;

less readily available market quotations on foreign companies;

differences in government regulation and supervision of foreign
stock exchanges, brokers, listed companies, and banks;

differences in legal systems which may affect the ability to
enforce contractual obligations or obtain court judgements;
generally lower foreign stock market volume;

the likelihood that foreign securities may be less liquid or more
volatile;

foreign brokerage commissions may be higher;

unreliable mail service between countries; and

political or financial changes which adversely affect investments
in some countries.

U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors such as
the Fund. Investors are advised that when such policies are instituted, the
Fund will abide by them.

SHORT SALES. The Fund intends to sell securities short from time to time,
subject to certain restrictions. A short sale occurs when a borrowed
security is sold in anticipation of a decline in its price. If the decline
occurs, shares equal in number to those sold short can be purchased at

the lower price. If the price increases, the higher price must be paid. The
purchased shares are then returned to the original lender. Risk arises
because no loss limit can be placed on the transaction. When the Fund
enters into a short sale, assets equal to the market price of the
securities sold short or any lesser price at which the Fund can obtain such
securities, are segregated on the Fund's records and maintained until the
Fund meets its obligations under the short sale.

DEVELOPING/EMERGING MARKETS. The economics of individual emerging
countries may differ favorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Further, the economics of developing countries generally are
heavily dependent on international trade and, accordingly, have been, and
may continue to be, adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been, and may continue to be,
adversely affected by economic conditions in the countries with which they
trade.

Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may be subject
to limitation in other emerging countries. Foreign ownership limitations
also may be imposed by the charters of individual companies in emerging
countries to prevent, among other concerns, violation of foreign investment
limitations.

Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in
some emerging countries. The Fund could be adversely affected by delays in,
or a refusal to grant, any required governmental registration or approval
for such repatriation. Any investment subject to such repatriation controls
will be considered illiquid if it appears reasonably likely that this
process will take more than seven days.

With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such
countries or the value of the Fund's investments in those countries. In
addition, it may be difficult to obtain and enforce a judgment in a court
outside of the U.S.

INVESTMENT LIMITATIONS

The Fund will not:

with respect to 75% of the value of its total assets, invest more than 5%
of the value of its total assets in the securities (other than securities
issued or guaranteed by the government of the U.S. or its agencies or
instrumentalities) of any one issuer, or acquire more than 10% of the
outstanding voting securities of any one issuer;

sell securities short except under strict limitations;

borrow money or pledge securities except, under certain circumstances,
the Fund may borrow up to one-third of the value of its total assets and
pledge its assets to secure such borrowings; or

permit margin deposits for financial futures contracts held by the Fund,
plus premiums paid by it for open options on financial futures contracts,
to exceed 5% of the fair market value of the Fund's total assets, after
taking into account the unrealized profits and losses on the contracts.

The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.

The Fund will not:

invest more than 5% of its assets in warrants;

own securities of other investment companies, except under certain
circumstances and subject to certain limitations not exceeding 10% of its
total assets (the Fund will indirectly bear its proportionate share of
any fees and expenses paid by other investment companies, in addition to
the fees and expenses payable directly by the Fund);

invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations;

invest more than 15% of the value of its net assets in illiquid
securities, including securities not determined by the Trustees to be
liquid, repurchase agreements with maturities longer than seven days
after notice, and certain over-the-counter options; or

purchase put options on securities unless the securities or an offsetting
call option is held in the Fund's portfolio.

In addition, the Fund may purchase the investments and engage in the investment
techniques described below under "Investment Practices."

PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 200%. A portfolio turnover rate of 100% would occur, for
example, if all the securities in the Fund's portfolio were replaced once in a
period of one year. The Fund's rate of portfolio turnover may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater brokerage commissions and
other expenses which must be borne directly by the Fund and, thus, indirectly by
its shareholders. In addition, a high rate of portfolio turnover may result in
the realization of larger amounts of capital gains which, when distributed to
the Fund's shareholders, are taxable to them. Nevertheless, transactions for the
Fund's portfolio will be based only upon investment considerations and will not
be limited by any other considerations when the Fund's investment adviser deems
it appropriate to make changes in the Fund's portfolio.

INVESTMENT PRACTICES
- --------------------------------------------------------------------------------

The following investment practices are common to two or more of the Funds and,
unless indicated otherwise, may be changed without approval of shareholders.

REPURCHASE AGREEMENTS

All of the Funds will engage in repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to a Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. Such Fund or its custodian will take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, such Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Funds believe that, under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by each Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.

RESTRICTED AND ILLIQUID SECURITIES
Each Fund may invest up to 15% of its total assets in restricted securities.
This restriction is not applicable to commercial paper issued under Section 4(2)
of the Securities Act of 1933. Restricted securities are any securities in which
these Funds may otherwise invest pursuant to their respective investment
objectives and policies but which are subject to restriction on resale under
federal securities law. To the extent restricted securities are deemed to be
illiquid, these Funds will limit

their purchase, including non-negotiable time deposits, repurchase agreements
providing for settlement in more than seven days after notice, over-the-counter
options, and certain restricted securities determined by the Trustees not to be
liquid, to 15% of the net assets of each Fund (10% with respect to the Prime
Money Fund).

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, a Fund may pay more/less than the market
value of the securities on the settlement date.

The Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The funds may realize short-term profits or losses upon the sale of such
commitments.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, each Fund may lend its portfolio
securities on a short-term or long-term basis, or both, up to one-third of the
value of its total assets, to broker/dealers, banks, or other institutional
borrowers of securities. (The International Stock Fund is not subject to this
one-third limitation). This policy is a fundamental policy of each Fund and may
not be changed without shareholder approval. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the adviser
has determined are creditworthy under guidelines established by the Trustees and
will receive collateral in the form of cash or U.S. government securities equal
to at least 100% of the value of the securities loaned at all times. There is
the risk that when lending portfolio securities, the securities may not be
available to a Fund on a timely basis and a Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

VARIABLE ASSET REGULATIONS

The Funds are also subject to variable contract asset regulations prescribed by
the U.S. Treasury Department under Section 817(h) of the Internal Revenue Code.
After a one year start-up period, the regulations generally require that, as of
the end of each calendar quarter or within 30 days thereafter, no more than 55%
of the total assets of a Fund may be represented by any one investment, no more
than 70% of the total assets of a Fund may be represented by any two
investments, no more than 80% of the total assets of a Fund may be represented
by any three investments, and no more than 90% of the total assets of a Fund may
be represented by any four investments. In applying these diversification rules,
all securities of the same issuer, all interests in the same real property
project, and all interests in the same commodity are each treated as a single
investment. In the case of government securities, each government agency or
instrumentality shall be treated as a separate issuer. If a Fund fails to
achieve the diversification required by the regulations, unless relief is
obtained from the Internal Revenue Service, the contracts invested in the Fund
will not be treated as annuity, endowment, or life insurance contracts.

The Funds will be operated at all times so as to comply with the foregoing
diversification requirements.

STATE INSURANCE REGULATIONS

The Funds are intended to be funding vehicles for variable annuity contracts and
variable life insurance policies offered by certain insurance companies. The
contracts will seek to be offered in as many jurisdictions as possible. Certain
states have regulations concerning, among other things, the concentration of
investments, sales and purchases of futures contracts, and short sales of

securities. If applied to the Trust, each Fund may be limited in its ability to
engage in such investments and to manage its portfolio with desired flexibility.
The Trust intends that each Fund will operate in material compliance with the
applicable insurance laws and regulations of each jurisdiction in which
contracts will be offered by the insurance companies which invest in the Funds.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset values per share of the Equity Growth and Income Fund, Growth
Stock Fund, Utility Fund, U.S. Government Bond Fund, Corporate Bond Fund and
International Stock Fund fluctuate. They are determined by dividing the sum of
the market value of all securities and other assets of the particular Fund, less
liabilities, by the number of shares outstanding.

Prime Money Fund attempts to stabilize the net asset value of its shares at
$1.00 by valuing the portfolio securities using the amortized cost method. The
net asset value per share of Prime Money Fund is determined by subtracting total
liabilities from total assets and dividing by the number of shares outstanding.
Prime Money Fund cannot guarantee that its net asset value will always remain at
$1.00 per share.

INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------

PURCHASES AND REDEMPTIONS

Shares of the Funds are not sold directly to the general public. The Funds'
shares are used solely as the investment vehicle for separate accounts of
insurance companies offering variable annuity contracts and variable life
insurance policies. The use of Fund shares as investments for both variable
annuity contracts and variable life insurance policies is referred to as "mixed
funding." The use of Fund shares as investments by separate accounts of
unaffiliated life insurance companies is referred to as "shared funding."

The Funds intend to engage in mixed funding and shared funding in the future.
Although the Funds do not currently foresee any disadvantage to contract owners
due to differences in redemption rates, tax treatment, or other considerations
resulting from mixed funding or shared funding, the Trustees would closely
monitor the operation of mixed funding and shared funding and will consider
appropriate action to avoid material conflicts and take appropriate action in
response to any material conflicts which occur. Such action could result in one
or more participating insurance companies withdrawing their investment in the
Trust.

Shares of the Funds are purchased or redeemed on behalf of participating
insurance companies at the next computed net asset value after an order is
received on days on which the New York Stock Exchange is open.

WHAT SHARES COST

Shares of the Funds are sold and redeemed at the net asset value determined as
of the close of trading (normally 4:00 p.m. Eastern time) on the New York Stock
Exchange each day the New York Stock Exchange is open. The Trust reserves the
right to reject any purchase request.

Net asset value of shares of a Funds will not be calculated on: (i) days on
which there are not sufficient changes in the value of a Fund's portfolio
securities that its net asset value might be materially affected; (ii) days on
which no shares are tendered for redemption and no orders to purchase shares are
received; or (iii) the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

Purchase orders from separate accounts investing in the Funds which are received
by the insurance companies by 4:00 p.m. (Eastern time), will be computed at the
net asset value of the applicable Funds determined on that day, as long as such
purchase orders are received by the applicable Fund in proper form and in
accordance with applicable procedures by 8:00 a.m. (Eastern time) on the next
business day and as long as federal funds in the amount of such orders are
received by the respective Funds on the next business day. It is the
responsibility of each insurance company which

invests in the Funds to properly transmit purchase orders and federal funds in
accordance with the procedures described above.

DIVIDENDS

Dividends on shares of International Stock Fund are declared and paid annually.
Dividends on shares of the Equity Growth and Income Fund and Growth Stock Fund
are declared and paid quarterly. Dividends on shares of the Prime Money Fund are
declared daily and paid monthly. Dividends on shares of the Utility Fund, the
U.S. Government Bond Fund, and the Corporate Bond Fund are declared and paid
monthly.

Shares of the Prime Money Fund begin earning dividends on the day that the Fund
receives federal funds. Shares of the Equity Growth and Income Fund, Growth
Stock Fund, Utility Fund, U.S. Government Bond Fund, Corporate Bond Fund, and
International Stock Fund will begin earning dividends if owned on the applicable
record date. Dividends of each Fund are automatically reinvested in additional
shares of such Fund on payment dates at the ex-dividend date net asset value.

INSURANCE MANAGEMENT SERIES INFORMATION
- --------------------------------------------------------------------------------

MANAGEMENT OF INSURANCE MANAGEMENT SERIES

BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. An Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by Federated Advisers, the Funds'
investment adviser, subject to direction by the Trustees. The adviser
continually conducts investment research and supervision for the Funds and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from each Fund.

Both the Trust and the adviser have adopted strict codes of ethics governing the
conduct of all employees who manage the Fund and its portfolio securities. These
codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interest. Among other things, the codes: require preclearance and
periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than sixty
days. Violations of the codes are subject to review by the Board of Trustees,
and could result in severe penalties.

ADVISORY FEES. The Funds' adviser receives an annual investment advisory
fee equal to 1% of the average daily net assets for the International Stock
Fund, .75 of 1% of the average daily net assets for the Equity Growth and
Income Fund, Growth Stock Fund, and the Utility Fund, .60 of 1% of the
average daily net assets for the U.S. Government Bond Fund and the
Corporate Bond Fund, and .50 of 1% of the average daily net assets for the
Prime Money Fund. The adviser may voluntarily choose to waive a portion of
its fees or reimburse a Fund for certain operating expenses. The adviser
can terminate this voluntary waiver and reimbursement of expenses at any
time at its sole discretion.

ADVISER'S BACKGROUND. Federated Advisers, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) shares of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.

Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also

provide administrative services to a number of investment companies. With
over $72 billion invested across more than 260 funds under management
and/or administration by its subsidiaries, as of December 31, 1994,
Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues
to be led by the management who founded the company in 1955. Federated
funds are presently at work in and through 4,000 financial institutions
nationwide. More than 100,000 investment professionals have selected
Federated funds for their clients.

FUND MANAGERS

EQUITY GROWTH AND INCOME FUND. Peter R. Anderson has been the Fund's
co-portfolio manager since the Fund commenced operations. Mr. Anderson joined
Federated Investors in 1972 as, and is presently, a Senior Vice President of the
Fund's investment adviser. Mr. Anderson is a Chartered Financial Analyst and
received his M.B.A. in Finance from the University of Wisconsin.

Michael P. Donnelly has been the Fund's co-portfolio manager since the Fund
commenced operations. Mr. Donnelly joined Federated Investors in 1989 and has
been an Assistant Vice President of the Fund's investment adviser since 1992.
From 1989 until 1991, Mr. Donnelly acted as an investment analyst for the
investment adviser. Mr. Donnelly was a Fixed Income Associate at Donaldson,
Lufkin & Jenrette from 1987 until 1989. Mr. Donnelly is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of Virginia.

Frederick L. Plautz has been the Fund's co-portfolio manager since April 1,
1995. Mr. Plautz joined Federated Investors in 1990 and has been a Vice
President of the Fund's investment adviser since October 1994. Prior to this,
Mr. Plautz served as an Assistant Vice President of the investment adviser. Mr.
Plautz was a portfolio manager at Banc One Asset Management Corp. from 1986
until 1990. Mr. Plautz received his M.S. in Finance from the University of
Wisconsin.

GROWTH STOCK FUND. James E. Grefenstette has been the Fund's portfolio manager
since the Fund's inception. Mr. Grefenstette joined Federated Investors in 1992
and has been an Assistant Vice President of the Fund's investment adviser since
1994. From 1992 until 1994, Mr. Grefenstette acted as an investment analyst. Mr.
Grefenstette was a credit analyst at Westinghouse Credit Corp. from 1990 until
1992, and an investment officer at Pittsburgh National Bank from 1987 until
1990. Mr. Grefenstette received his M.B.A. in Finance from Carnegie Mellon
University.

UTILITY FUND. Christopher H. Wiles has been the Fund's portfolio manager since
the Fund commenced operations. Mr. Wiles joined Federated Investors in 1990 and
has been a Vice President of the Fund's investment adviser since 1992. Mr. Wiles
served as Assistant Vice President of the Fund's investment adviser from 1990
until 1992. Mr. Wiles was a portfolio manager at Mellon Bank from 1986 until
1990. Mr. Wiles is a Chartered Financial Analyst and received his M.B.A. from
Cleveland State University.

Linda A. Duessel has been the Fund's portfolio manager since April 1995. Ms.
Duessel joined Federated Investors in 1991 as an Assistant Vice President of the
Fund's investment adviser. Ms. Duessel was employed at Westinghouse Credit
Corporation from 1983 to 1991, serving in a variety of positions which
culminated in her being named Vice President/Portfolio Manager in the Merchant
Banking Group in 1990. Ms. Duessel served as a Senior Staff Accountant at Arthur
Young & Company from 1979 to 1982. Ms. Duessel received her M.S.I.A. from
Carnegie Mellon University. Ms. Duessel is a Certified Public Accountant and a
Chartered Financial Analyst.

U.S. GOVERNMENT BOND FUND. Kathleen M. Foody-Malus has been the Fund's portfolio
manager since the Fund commenced operations. Ms. Foody-Malus joined Federated
Investors in 1983 and has been a Vice President of the Fund's investment adviser
since 1993. Ms. Foody-Malus served as an Assistant Vice President of the
investment adviser from 1990 until 1992, and from 1986 until 1989 she acted as
investment analyst. Ms. Foody-Malus received her M.B.A. in Accounting/Finance
from the University of Pittsburgh.

James D. Roberge has been the Fund's portfolio manager since March 1, 1995. Mr.
Roberge joined Federated Investors in 1990 and has been a Vice President of the
Fund's investment adviser since October 1994. Prior to this, Mr. Roberge served
as an Assistant Vice President of the Fund's investment adviser. From 1990 until
1992, Mr. Roberge acted as an investment analyst. Mr. Roberge

is a Chartered Financial Analyst and received his M.B.A. in Finance from Wharton
Business School in 1990.

CORPORATE BOND FUND. Mark E. Durbiano has been the Fund's portfolio manager
since the Fund commenced operations. Mr. Durbiano joined Federated Investors in
1982 and has been a Vice President of the Fund's investment adviser since 1988.
Mr. Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance
from the University of Pittsburgh.

INTERNATIONAL STOCK FUND. Randall S. Bauer has been the Fund's portfolio manager
since the Fund commenced operations. Mr. Bauer joined Federated Investors in
1989 and has been a Vice President of the Fund's investment adviser since
January 1994. Prior to this, Mr. Bauer served as an Assistant Vice President of
the Fund's investment adviser. Mr. Bauer was an Assistant Vice President of the
International Banking Division at Pittsburgh National Bank from 1982 until 1989.
Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance
from Pennsylvania State University.

DISTRIBUTION OF FUND SHARES

Federated Securities Corp. is the principal distributor for shares of the Funds.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

ADMINISTRATION OF THE TRUST

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Trust.
Federated Administrative Services provides these at an annual rate which relates
to the average aggregate daily net assets of all funds advised by subsidiaries
of Federated Investors ("Federated Funds") as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET ASSETS
MAXIMUM FEE OF THE FEDERATED FUNDS
----------- ----------------------
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Administrative Services may choose voluntarily to waive a portion of
its fee.

CUSTODIAN. State Street Bank and Trust Company, Boston, Massachusetts, is
custodian for the securities and cash of the Funds.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Boston, Massachusetts, a subsidiary of Federated Investors, is the transfer
agent for shares of the Funds and dividend disbursing agent for the Funds.

INDEPENDENT AUDITORS. The independent auditors for the Funds are Deloitte &
Touche LLP, Boston, Massachusetts.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the adviser may give consideration to those
firms which have sold or are selling shares of other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to review by the Trustees.

EXPENSES OF EACH FUND

Each Fund pays all of its own expenses and its allocable portion of Trust
expenses. These expenses may include, but are not limited to, the cost of:
organizing the Trust and continuing its existence; Trustees' fees; investment
advisory and administrative services; printing prospectuses and other documents
for contract holders; registering the Trust, the Funds, and shares of the Funds;
taxes and commissions; issuing, purchasing, repurchasing, and redeeming shares;
custodians, transfer agents, dividend disbursing agents, contract holders
servicing agents, and registrars; printing, mailing, auditing, accounting, and
legal expenses; reports to contract holders and governmental agencies; meetings
of Trustees and contract holders and proxy solicitations therefor; insurance;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the investment adviser may voluntarily reimburse some
expenses.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

The insurance company separate accounts, as shareholders of each Fund, will vote
the Fund shares held in their separate accounts at meetings of shareholders.
Voting will be in accordance prospectus of each such separate account.

Each share of each of the Funds gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each Fund have equal voting rights, except that only shares of a particular Fund
are entitled to vote on matters affecting that Fund. As a Massachusetts business
trust, the Trust is not required to hold annual shareholder meetings.
Shareholder approval will be sought only for certain changes in the Trust's
operation and for the election of Trustees under certain circumstances.

Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the outstanding shares of
all series of the Trust.

As of September 27, 1995, Aetna Life Insurance and Annuity, Hartford,
Connecticut,
owned approximately 60.63%, and Aetna Insurance Company of America, Hartford,
Connecticut, owned approximately 28.18%, of the voting securities of Equity
Growth and Income Fund, and, therefore, may, for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders. As of September 27, 1995, Aetna Life Insurance and
Annuity, Hartford, Connecticut, owned approximately 33.66%, and Life of
Virginia, Richmond, Virginia, owned approximately 40.26%, of the voting
securities of Utility Fund, and therefore, may, for certain purposes be deemed
to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders. As of September 27, 1995, Aetna Life
Insurance and Annuity, Hartford, Connecticut, owned approximately 51.51%, and
Aetna Insurance Company of America, Hartford, Connecticut, owned approximately
28.26%, of the voting securities of Prime Money Fund, and, therefore, may, for
certain purposes be deemed to control the Fund and be able to affect the outcome
of certain matters presented for a vote of shareholders. As of September 27,
1995, Aetna Life Insurance and Annuity, Hartford, Connecticut, owned
approximately
29.50%, and TransAmerica Occidental Life Insurance Company, Los Angeles,
California, owned approximately 30.60%, of the voting securities of U.S.
Government Bond Fund, and, therefore, may, for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders. As of September 27, 1995, Aetna Life Insurance and
Annuity, Hartford, Connecticut, owned approximately 60.12% of the voting
securities of Corporate Bond Fund, and, therefore, may, for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders. As of September 27, 1995, Aetna Insurance
Company of America, Hartford, Connecticut, owned approximately 59.93%, and Aetna
Life Insurance and Annuity Company, Hartford, Connecticut, owned approximately
39.05%, of the voting securities of International Stock Fund, and, therefore,
may, for certain purposes be deemed to control the Fund and be able to affect

the outcome of certain matters presented for a vote of shareholders.

TAX INFORMATION
- --------------------------------------------------------------------------------

FEDERAL TAXES

The Funds will pay no federal income tax because the Funds expect to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by each of
the Funds in the Trust will not be combined for tax purposes with those realized
by any other Fund.

Each Fund intends to comply with the variable asset diversification regulations
which are described earlier in this prospectus. If a Fund fails to comply with
these regulations, contracts invested in that Fund shall not be treated as
annuity, endowment, or life insurance contracts under the Internal Revenue Code.

Contract owners should review the applicable contract prospectus for information
concerning the federal income tax treatment of their contracts and distributions
from each Fund to the separate accounts.

STATE AND LOCAL TAXES

Contract owners are urged to consult their own tax advisers regarding the status
of their contracts under state and local tax laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Equity Growth and Income Fund, Growth Stock Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund, and International Stock
Fund advertise total return and yield and the Prime Money Fund will advertise
yield and effective yield.

Total return represents the change, over a specific period of time, in the value
of an investment in a Fund after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yields of the Equity Growth and Income Fund, Growth Stock Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund, and International Stock
Fund are calculated by dividing the net investment income per share (as defined
by the Securities and Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per share of the Fund on the last day of the
period. This number is then annualized using semi-annual compounding. The yield
does not necessarily reflect income actually earned by the Fund and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.

The yield of Prime Money Fund represents the annualized rate of income earned on
an investment in the Fund over a seven-day period. It is the annualized
dividends earned during the period on the investment, shown as a percentage of
the investment. The effective yield of the Fund is calculated similarly to the
yield, but, when annualized, the income earned on an investment in the Fund is
assumed to be reinvested daily. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.

Performance information for each Fund will not reflect the charges and expenses
of a variable annuity or variable life insurance contract. Because shares of
each Fund can only be purchased by a separate account of an insurance company
offering such a contract, you should review the performance figures of the
contract in which you are invested, which performance figures will accompany any
advertisement of a Fund's performance.

From time to time, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications and/or compare a Fund's
performance to certain indices.

APPENDIX
- --------------------------------------------------------------------------------

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

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

B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.

CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.

The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.

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

C--The rating C is reserved for income bonds on which no interest is being paid.

D--Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS

AAA--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

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

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

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

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

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS

AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

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

BB--Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.

B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C--Bonds are in imminent default in payment of interest or principal.

DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.

NR--NR indicates that Fitch does not rate the specific issue. Plus + or Minus :
Plus or minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category.

STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS

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

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

MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS

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

Leading market positions inwell established industries.

High rates of return on funds employed.

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

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

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

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

FITCH INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS

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

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

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Insurance Management Series

Equity Growth and Income Fund Federated Investors Tower
Growth Stock Fund Pittsburgh, Pennsylvania 15222-3779
Utility Fund
Prime Money Fund
U.S. Government Bond Fund
Corporate Bond Fund
International Stock Fund
- -----------------------------------------------------------------------------------------------------------------------

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

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

Custodian
State Street Bank and P.O. Box 8604
Trust Company Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------------------------------

Transfer Agent and Dividend Disbursing Agent
Federated Services Company P.O. Box 8604
Boston, Massachusetts 02266-8604
- -----------------------------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 125 Summer Street
Boston, Massachusetts 02110-8604
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

36
INSURANCE
MANAGEMENT
SERIES
PROSPECTUS

An Open-End, Management
Investment Company

Equity Growth and Income Fund

Growth Stock Fund

Utility Fund

Prime Money Fund

U.S. Government Bond Fund

Corporate Bond Fund

International Stock Fund

October 12, 1995

[logo] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS

FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

Cusip 458043502 Cusip 458043304
Cusip 458043205 Cusip 458043403
Cusip 458043106 Cusip 458043601
Cusip 458043700

4011006A (10/95)

INSURANCE MANAGEMENT SERIES

consisting of seven portfolios:
oEquity Growth and Income Fund;
oGrowth Stock Fund;

oUtility Fund;
oPrime Money Fund;
oU.S. Government Bond Fund;
oCorporate Bond Fund; and
oInternational Stock Fund.
COMBINED STATEMENT OF ADDITIONAL INFORMATION

This Combined Statement of Additional Information should be read with the
combined prospectus of Insurance Management Series (the "Trust") dated
October 12, 1995. This Statement is not a prospectus itself. To receive a
copy of the combined prospectus, write or call the Trust.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated October 12, 1995

FEDERATED SECURITIES
CORP.

Distributor
A subsidiary of FEDERATED
INVESTORS

GENERAL INFORMATION ABOUT THE TRUST CALL OPTIONS ON FINANCIAL AND
1 STOCK INDEX FUTURES CONTRACTS5
PURCHASING PUT OPTIONS ON
INVESTMENT INFORMATION 1
PORTFOLIO SECURITIES AND STOCK
INVESTMENT OBJECTIVES 1 INDICES 6
EQUITY GROWTH AND INCOME FUND 1 WRITING COVERED CALL OPTIONS ON
GROWTH STOCK FUND PORTFOLIO SECURITIES AND STOCK
UTILITY FUND 1 INDICIES 6
PRIME MONEY FUND 1
U.S. GOVERNMENT BOND FUND 1 UTILITY FUND 6
CORPORATE BOND FUND 1 PRIME MONEY FUND 6
INTERNATIONAL STOCK FUND 1 BANK INSTRUMENTS 6
TYPES OF INVESTMENTS 1 U.S. GOVERNMENT BOND FUND 6
EQUITY GROWTH AND INCOME FUND 1 COLLATERALIZED MORTGAGE OBLIGATIONS
CONVERTIBLE SECURITIES 1 (CMOS) 7
WARRANTS 2 STRIPPED MORTGAGE-RELATED
BANK INSTRUMENTS 2 SECURITIES 7
U.S. GOVERNMENT OBLIGATIONS 2 CORPORATE BOND FUND 7
CORPORATE DEBT SECURITIES 7
GROWTH STOCK FUND 3 EQUITY SECURITIES 7
CORPORATE DEBT SECURITIES 3 TEMPORARY INVESTMENTS 7
CONVERTIBLE SECURITIES 3 CERTIFICATES OF DEPOSIT 7
FUTURES AND OPTIONS TRANSACTIONS 3 INTERNATIONAL STOCK FUND 8
FUTURES CONTRACTS 4 FUTURES AND OPTIONS TRANSACTIONS8
"MARGIN" IN FUTURES TRANSACTIONS FOREIGN CURRENCY HEDGING
4 TRANSACTIONS 8
PUT OPTIONS ON FINANCIAL AND RISKS 9
STOCK INDEX FUTURES CONTRACTS5 PORTFOLIO TURNOVER 9

INVESTMENT LIMITATIONS 10 INVESTING IN ISSUERS WHOSE
SELLING SHORT AND BUYING ON MARGIN SECURITIES ARE OWNED BY OFFICERS
10 AND TRUSTEES OF THE TRUST 13
ISSUING SENIOR SECURITIES AND ARBITRAGE TRANSACTIONS 13
BORROWING MONEY 10 INVESTMENT PRACTICES OF THE FUNDS13
PLEDGING ASSETS 10
REPURCHASE AGREEMENTS 13
CONCENTRATION OF INVESTMENTS 10
REVERSE REPURCHASE AGREEMENTS 13
INVESTING IN COMMODITIES 11
RESTRICTED AND ILLIQUID SECURITIES
INVESTING IN REAL ESTATE 11
14
LENDING CASH OR SECURITIES 11
WHEN-ISSUED AND DELAYED DELIVERY
UNDERWRITING 11
TRANSACTIONS 14
DIVERSIFICATION OF INVESTMENTS11
LENDING OF PORTFOLIO SECURITIES14
INVESTING IN RESTRICTED SECURITIES
INSURANCE MANAGEMENT SERIES
12
MANAGEMENT 14
INVESTING IN ILLIQUID SECURITIES 12
INVESTING IN PUT OPTIONS 12 FUND OWNERSHIP 19
WRITING COVERED CALL OPTIONS 12 TRUSTEES' COMPENSATION 19
PURCHASING SECURITIES TO EXERCISE TRUSTEE LIABILITY 19
CONTROL 12 INVESTMENT ADVISORY SERVICES 19
INVESTING IN WARRANTS 12
ADVISER TO THE FUNDS 19
INVESTING IN SECURITIES OF OTHER
ADVISORY FEES 20
INVESTMENT COMPANIES 12
ADMINISTRATIVE SERVICES 20
INVESTING IN NEW ISSUERS 12
INVESTING IN MINERALS 13 BROKERAGE TRANSACTIONS 20
INVESTING IN RESTRICTED SECURITIES
PURCHASING SHARES 21
13
INVESTING IN ILLIQUID SECURITIES 13 DETERMINING NET ASSET VALUE 21
DEALING IN PUTS AND CALLS 13

DETERMINING VALUE OF SECURITIES21
TRADING IN FOREIGN SECURITIES 21
USE OF THE AMORTIZED COST METHOD22
MONITORING PROCEDURES 22
INVESTMENT RESTRICTIONS 22
MASSACHUSETTS PARTNERSHIP LAW 22

TAX STATUS 23

THE FUNDS' TAX STATUS 23
SHAREHOLDER'S TAX STATUS 23
FOREIGN TAXES 23
TOTAL RETURN 23

YIELD 24

EFFECTIVE YIELD 24

PERFORMANCE COMPARISONS 24

ABOUT FEDERATED INVESTORS 26

GENERAL INFORMATION ABOUT THE TRUST

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated September 15, 1993. It consists of seven portfolios (individually
referred to as a "Fund" and collectively as the "Funds"):
o Equity Growth and Income Fund;
o Growth Stock Fund;
o Utility Fund;
o Prime Money Fund;
o U.S. Government Bond Fund;
o Corporate Bond Fund; and
o International Stock Fund.

Shares of the Fund are sold only to insurance companies as funding vehicles for
variable annuity and variable life insurance contracts issued by the insurance
companies.
INVESTMENT INFORMATION

INVESTMENT OBJECTIVES
EQUITY GROWTH AND INCOME FUND
The Equity Growth and Income Fund's primary investment objective is to
achieve long-term growth of capital. The Fund's secondary objective is to
provide income.

GROWTH STOCK FUND
The Growth Stock Fund's investment objective is capital appreciation.

UTILITY FUND
The Utility Fund's investment objective is to achieve high current income
and moderate capital appreciation.
PRIME MONEY FUND
The Prime Money Fund's investment objective is to provide current income
consistent with stability of principal and liquidity.

U.S. GOVERNMENT BOND FUND
The U.S. Government Bond Fund's investment objective is to provide current
income.

CORPORATE BOND FUND
The Corporate Bond Fund's investment objective is to seek high current
income.
INTERNATIONAL STOCK FUND
The International Stock Fund's investment objective is to obtain a total
return on its assets.
The investment objectives of the Funds cannot be changed without the approval of
shareholders.
TYPES OF INVESTMENTS
EQUITY GROWTH AND INCOME FUND

The Equity Growth and Income Fund invests, under normal circumstances, at least
65% of its total assets in common stock of "blue-chip" companies, as defined in
the prospectus. The Fund may also invest in other securities of these companies,
U.S. government securities, and bank instruments. The following supplements the
discussion of acceptable investments in the prospectus.

CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the
market value of convertible securities, including changes in the level of
interest rates. As interest rates increase, the market value of convertible
securities may decline and, conversely, as interest rates decline, the
market value of convertible securities may increase. The unique investment
characteristics of convertible securities, the right to be exchanged for
the issuer's common stock, causes the market value of convertible
securities to increase when the underlying common stock increases. However,
since securities prices fluctuate, there can be no assurance of capital
appreciation, and most convertible securities will not reflect quite as
much capital appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value of the
convertible security tends to decline to a level approximating the yield-
to-maturity basis of straight nonconvertible debt of similar quality, often
called "investment value," and may not experience the same decline as the
underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege. If this appreciation
potential is not realized, the premium may not be recovered.
WARRANTS
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock

at issuance) valid for a specific period of time. Warrants may have a life
ranging from less than a year to twenty years or may be perpetual. However,
most warrants have expiration dates after which they are worthless. In
addition, if the market price of the common stock does not exceed the
warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them.
The percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the market
price of the optioned common stock.
BANK INSTRUMENTS
The Fund only invests in Bank Instruments (as defined in the prospectus)
either issued by an institution having capital, surplus, and undivided
profits over $100 million or insured by the Bank Insurance Fund ("BIF") or
the Savings Association Insurance Fund ("SAIF"), both of which are
administered by the Federal Deposit Insurance Corporation. Bank Instruments
may include Eurodollar Certificates of Deposit, Yankee Certificates of
Deposit, and Eurodollar Time Deposits. Institutions issuing Eurodollar
instruments are not necessarily subject to the same regulatory requirements
that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, recordkeeping and the
public availability of information.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued and/or guaranteed
by the U.S. government, its agencies or instrumentalities. These securities
are backed by:

othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
oFederal Farm Credit System;
oFederal Home Loan Banks System;
oStudent Loan Marketing Association;
oFederal National Mortgage Association; and
oFederal Home Loan Mortgage Corporation.

GROWTH STOCK FUND
The Growth Stock Fund pursues its investment objective by investing primarily in
equity securities of companies with prospects for above-average growth in
earnings and dividends or companies where significant changes are taking place.
The Fund may invest in common stocks, preferred stocks, convertible securities
of foreign issuers, securities of other investment companies, corporate
obligations, including bonds, debentures, notes, and warrants and the types of
U.S. government obligations set forth above in the section describing Equity
Growth and Income Fund. The Fund may also invest in put and call options,
futures and options on futures. The following supplements the discussion of
acceptable investments in the prospectus.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same

or a different issuer, participations based on revenues, sales or profits,
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Corporate debt securities that are lower-rated (i.e., rated below BBB by
S&P or Baa by Moody's) are commonly referred to as "junk bonds." While
these lower-rated bonds will usually offer higher yields than higher-rated
securities, there is more risk associated with these investments. These
lower-rated bonds may be more susceptible to real or perceived adverse
economic conditions than investment grade bonds. These lower-rated bonds
are regarded as predominately speculative with regard to each issuer's
continuing ability to make principal and interest payments. In addition,
the secondary trading market for lower-rated bonds may be less liquid than
for investment grade bonds. As a result of these factors, lower-rated
bonds tend to have more price volatility and carry more risk to principal
than higher-rated bonds. The investment adviser will endeavor to limit
these risks through diversifying the portfolio and through careful credit
analysis of individual issuers.
CONVERTIBLE SECURITIES
The description of convertible securities which appears under the sub-
section entitled "Convertible Securities" under the section entitled "Types
of Investments--Equity Growth and Income Fund" is also applicable to the
Fund.
WARRANTS
The description of warrants which appears under the sub-section entitled
"Warrants" under the main section entitled "Types of Investments - Equity
Growth and Income Fund" is also applicable to the Fund.

FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of its shares,
the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling futures contracts and options on futures contracts, and buying
put and call options on portfolio securities and securities indices. The
Fund may also write covered put and call options on portfolio securities to
attempt to increase its current income or to hedge a portion of its
portfolio investments. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on a
futures contract may be closed out over-the-counter or on a nationally
recognized exchange which provides a secondary market for options of the
same series. The Fund will not engage in futures transactions for
speculative purposes.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. Although some financial
futures contracts call for making or taking delivery of the underlying
securities, in most cases these obligations are closed out before the
settlement date. The closing of a contractual obligation is accomplished
by purchasing or selling an identical offsetting futures contract. Other
financial futures contracts by their terms call for cash settlements.
The Fund also may purchase and sell stock index futures contracts with
respect to any stock index traded on a recognized stock exchange or board
of trade to hedge against changes in prices. Stock index futures contracts
are based on indices that reflect the market value of common stock of the

firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount
of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the
index contract was originally written. No physical delivery of the
underlying securities in the index is made. Instead, settlement in cash
must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the stock
index at the expiration of the contract.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
"MARGIN " IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S.
government securities or highly-liquid debt securities with its custodian

(or the broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not
involve a borrowing of the funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions. The Fund is also required to deposit and maintain
margin when it writes call options on futures contracts.
To the extent required to comply with Commodity Futures Trading Commission
("CFTC") Regulation 4.5 and thereby avoid status as a "commodity pool
operator," the Fund will not enter into a futures contract, or purchase an
option thereon, if immediately thereafter the initial margin deposits for
futures contracts held by it, plus premiums paid by it for open options on
futures contracts, would exceed 5% of the market value of the Fund's total
assets, after taking into account the unrealized profits and losses on
those contracts it has entered into; and, provided further, that in the
case of an option that is in-the-money at the time of purchase, the in-the-
money amount may be excluded in computing such 5%. Second, the Fund will
not enter into these contracts for speculative purposes; rather, these

transactions are entered into only for bona fide hedging purposes, or other
permissible purposes pursuant to regulations promulgated by the CFTC.
Third, since the Fund does not constitute a commodity pool, it will not
market itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Finally, because the
Fund will submit to the CFTC special calls for information, the Fund will
not register as a commodities pool operator.
PUT OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
The Fund may purchase listed put options on financial and stock index
futures contracts to protect portfolio securities against decreases in
value resulting from market factors, such as an anticipated increase in
interest rates or stock prices. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contracts entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price

of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
When the Fund sells a put on a futures contract, it receives a cash premium
in exchange for granting to the purchaser of the put the right to receive
from the Fund, at the strike price, a short position in such futures
contract, even though the strike price upon exercise of the option is
greater than the value of the futures position received by such holder. If
the value of the underlying futures position is not such that exercise of
the option would be profitable to the option holder, the option will
generally expire without being exercised. It will generally be the policy
of the Fund, in order to avoid the exercise of an option sold by it, to
cancel its obligation under the option by entering into a closing purchase
transaction, if available, unless it is determined to be in the Fund's
interest to deliver the underlying futures position. A closing purchase
transaction consists of the purchase by the Fund of an option having the
same term as the option sold by the Fund, and has the effect of canceling
the Fund's position as a seller. The premium which the Fund will pay in
executing a closing purchase transaction may be higher than the premium
received when the option was sold, depending in large part upon the
relative price of the underlying futures position at the time of each
transaction.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts to hedge its portfolio. When the Fund writes a call option on a

futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As stock
prices fall or market interest rates rise, causing the prices of futures to
go down, the Fund's obligation under a call option on a future (to sell a
futures contract) costs less to fulfill, causing the value of the Fund's
call option position to increase.
In other words, as the underlying futures price falls below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
When the Fund purchases a call on a financial futures contract, it receives
in exchange for the payment of a cash premium the right, but not the
obligation, to enter into the underlying futures contract at a strike price
determined at the time the call was purchased, regardless of the
comparative market value of such futures position at the time the option is
exercised. The holder of a call option has the right to receive a long (or
buyer's) position in the underlying futures contract.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.

PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES AND STOCK INDICES
The Fund may purchase put options on portfolio securities and stock indices
to protect against price movements in the Fund's portfolio securities. A
put option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES AND STOCK INDICES
The Fund may also write covered call options to generate income and thereby
protect against price movements in the Fund's portfolio securities. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price or, in the case of a securities index, a cash
payment equal to the difference between the closing price of the index and
the exercise price of the option. The Fund may only sell call options
either on securities held in its portfolio or on securities which it has
the right to obtain without payment of further consideration (or has
segregated cash in the amount of any additional consideration).

UTILITY FUND
The Utility Fund endeavors to achieve its investment objective by investing
primarily in a professionally managed and diversified portfolio of equity and
debt securities of utility companies. The Fund may also invest in the types of
U.S. government obligations set forth above in the section describing the Equity
Growth and Income Fund.
PRIME MONEY FUND
The Prime Money Fund invests exclusively in money market instruments which
mature in 397 days or less and which include, but are not limited to, commercial
paper and variable rate master demand notes, bank instruments, and U.S.

government obligations of the type set forth above in the section describing the
Equity Growth and Income Fund.
BANK INSTRUMENTS
In addition to domestic bank obligations such as certificates of deposit,
demand and time deposits, savings shares, and bankers' acceptances, the
Fund may invest in:
oEurodollar Certificates of Deposit issued by foreign branches of U.S. or
foreign banks;
oEurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
oCanadian Time Deposits, which are U.S. dollar-denominated deposits issued
by branches of major Canadian banks located in the U.S.; and
oYankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and held
in the U.S.
U.S. GOVERNMENT BOND FUND
The U.S. Government Bond Fund invests in U.S. government securities which are
primary or direct obligations of the U.S. government or its agencies or
instrumentalities or which are guaranteed by the U.S. government, its agencies
or instrumentalities, and in certain collateralized mortgage obligations
described below, and repurchase agreements.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
Privately issued CMOs generally represent an ownership interest in federal
agency mortgage pass-through securities such as those issued by the
Government National Mortgage Association. The terms and characteristics of
the mortgage instruments may vary among pass-through mortgage loan pools.
The market for such CMOs has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the

secondary market by securities dealers and other investors make government-
related pools highly liquid.
STRIPPED MORTGAGE-RELATED SECURITIES
Some of the mortgage-related securities purchased by the Fund may represent
an interest solely in the principal repayments or solely in the interest
payments on mortgage-backed securities (stripped mortgage-backed securities
or "SMBSs"). Due to the possibility of prepayments on the underlying
mortgages, SMBSs may be more interest-rate sensitive than other securities
purchased by the Fund. If prevailing interest rates fall below the level at
which SMBSs were issued, there may be substantial prepayment on the
underlying mortgages, leading to the relatively early prepayment of
principal-only SMBSs and a reduction in the amount of payment made to
holders of interest-only SMBSs. It is possible that the Fund might not
recover its original investment on interest-only SMBSs if there are
substantial prepayments on the underlying mortgages. Therefore, interest-
only SMBSs generally increase in value as interest rates rise and decrease
in value as interest rates fall, counter to changes in value experienced by
most fixed income securities. The Fund's adviser intends to use this
characteristic of interest-only SMBSs to reduce the effects of interest
rate changes on the value of the Fund's portfolio, while continuing to
pursue current income.
CORPORATE BOND FUND
The Corporate Bond Fund endeavors to achieve its objective by investing
primarily in a professionally managed, diversified portfolio of fixed income
securities. Some of these fixed income securities may involve equity features.
Capital growth will be considered, but only when consistent with the investment
objective of high current income.

CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same
or a different issuer, participations based on revenues, sales or profits,
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Equipment lease or trust certificates are secured obligations issued in
serial form, usually sold by transportation companies such as railroads or
airlines, to finance equipment purchases. The certificate holders own a
share of the equipment, which can be resold if the issuer of the
certificate defaults. The Fund does not currently intend to invest more
than 5% of its assets in equipment lease certificates.
EQUITY SECURITIES
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants, or
rights. The Fund's investment adviser may choose to exceed this 10%
limitation if unusual market conditions suggest such investments represent
a better opportunity to reach the Fund's investment objective.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments for defensive purposes
during times of unusual market conditions.
CERTIFICATES OF DEPOSIT
The Fund may invest in certificates of deposit of domestic and foreign
banks and savings and loans if they have capital, surplus, and undivided
profits of over $100,000,000, or if the principal amount of the instrument
is insured by the Bank Insurance Fund or the Savings Association Insurance
Fund, both of which are administered by the Federal Deposit Insurance

Corporation ("FDIC"). These instruments may include Eurodollar Certificates
of Deposit issued by foreign branches of U.S. or foreign banks, Eurodollar
Time Deposits which are U.S. dollar-denominated deposits in foreign
branches of U.S. or foreign banks, Canadian Time Deposits which are U.S.
dollar-denominated deposits issued by branches of major Canadian banks
located in the United States, and Yankee Certificates of Deposit which are
U.S. dollar-denominated certificates of deposit issued by U.S. branches of
foreign banks and held in the United States.
INTERNATIONAL STOCK FUND
The International Stock Fund invests in a diversified portfolio of equity
securities issued by non-U.S. issuers. The International Stock Fund will invest
at least 65%, and under normal market conditions, substantially all of its total
assets, in equity securities of issuers located in at least three different
countries outside of the United States. The International Stock Fund may also
purchase sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") and European Depositary Receipts ("EDRs"); purchase
investment grade corporate and government fixed income securities of issuers
outside the U.S.; enter into forward commitments, repurchase agreements, and
foreign currency transactions; and maintain reserves in foreign or U.S. money
market instruments.
FUTURES AND OPTIONS TRANSACTIONS

As a means of reducing fluctuations in the net asset value of its shares, the
Fund may attempt to hedge all or a portion of its portfolio by buying and
selling futures contracts and options on futures contracts, and buying put and
call options on portfolio securities and securities indices. The Fund may also
write covered put and call options on portfolio securities to attempt to
increase its current income or to hedge a portion of its portfolio investments.

The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position on a futures contract may be closed
out over-the-counter or on a nationally recognized exchange which provides a
secondary market for options of the same series. The Fund will not engage in
futures transactions for speculative purposes.
The following sub-sections which are described above under the main section
entitled "Types of Investments -- Growth Stock Fund," are also applicable to the
Fund: Futures Contracts, "Margin" in Futures Transactions, Put Options on
Financial and Stock Index Futures Contracts, Call Options on Financial and Stock
Index Futures Contracts, Purchasing Put Options on Portfolio Securities and
Stock Indices, and Writing Covered Call Options on Portfolio Securities and
Stock Indices.
FOREIGN CURRENCY HEDGING TRANSACTIONS
In order to hedge against foreign currency exchange rate risks, the Fund may
enter into forward foreign currency exchange contracts and foreign currency
futures contracts, as well as purchase put or call options on foreign
currencies, as described below. The Fund may also conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market.
The Fund may enter into forward foreign currency exchange contracts ("forward
contracts") to attempt to minimize the risk to the Fund from adverse changes in
the relationship between the U.S. dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. The Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.

dollar price of the security. In addition, for example, when the Fund believes
that a foreign currency may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when the Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward contract to buy that foreign currency for a fixed
dollar amount. This second investment practice is generally referred to as
"cross-hedging." Because in connection with the Fund's forward foreign currency
transactions an amount of the Fund's assets equal to the amount of the purchase
will be held aside or segregated to be used to pay for the commitment, the Fund
will always have cash, cash equivalents or high quality debt securities
available sufficient to cover any commitments under these contracts or to limit
any potential risk. The segregated account will be marked to market on a daily
basis. While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such event,
the Fund's ability to utilize forward contracts in the manner set forth above
may be restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not engaged in such contracts.
The Fund may purchase and write put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,

thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Fund's portfolio securities or adversely affect the prices of securities
that the Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the adviser to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
RISKS
When the Fund uses futures and options on futures as hedging devices, there is a
risk that the prices of the securities or foreign currency subject to the
futures contracts may not correlate perfectly with the prices of the securities
or currency in the Fund's portfolio. This may cause the futures contract and any
related options to react differently to market changes than the portfolio
securities or foreign currency. In addition, the adviser could be incorrect in
its expectations about the direction or extent of market factors such as stock
price movements or foreign currency exchange rate fluctuations. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the adviser will consider

liquidity before entering into these transactions, there is no assurance that a
liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market. The inability to close out these positions could have an
adverse effect on the Fund's ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for related
options would exceed 5% of the value of the Fund's total assets after taking
into account the unrealized profits and losses on those contracts it has entered
into; and, provided further, that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount may be excluded in computing
such 5%. When the Fund purchases futures contracts, an amount of cash and cash
equivalents, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to collateralize
the position and thereby insure that the use of such futures contract is
unleveraged. When the Fund sells futures contracts, it will either own or have
the right to receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.

PORTFOLIO TURNOVER

Securities in the portfolios of the Equity Growth and Income Fund, the Growth
Stock Fund, the Utility Fund, the U.S. Government Bond Fund, the Corporate Bond
Fund, and the International Stock Fund will be sold whenever such Fund's
investment adviser believes it is appropriate to do so in light of such Fund's

investment objective, without regard to the length of time a particular security
may have been held. The U.S. Government Bond Fund's policy of managing its
portfolio of U.S. government securities, including the sale of securities held
for a short period of time, to achieve its investment objective of current
income may result in high portfolio turnover. The U.S. Government Bond Fund will
not attempt to set or meet a portfolio turnover rate as any turnover would be
incidental to transactions undertaken in an attempt to achieve the Fund's
investment objective.
For the period from February 1, 1994 (date of initial public investment) to
December 31, 1994, the portfolio turnover rate of Equity Growth and Income Fund
was 32%. For the period from April 14, 1994 (date of initial public investment)
to December 31, 1994, the portfolio turnover rate of Utility Fund was 73%. For
the period from March 29, 1994 (date of initial public investment) to December
31, 1994, the portfolio turnover rate of U.S. Government Bond Fund was 0%. For
the period from February 2, 1994 (date of initial public investment) to December
31, 1994, the portfolio turnover rate of Corporate Bond Fund was 18%. It is
not expected that the portfolio trading engaged in by the Growth Stock Fund will
result in its annual rate of portfolio turnover exceeding 100%.

INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN

The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Growth Stock Fund or the Utility Fund of initial or
variation margin in connection with futures contracts or related options
transactions is not considered the purchase of a security on margin. The

International Stock Fund may make margin payments in connection with its
use of financial futures contracts or related options and transactions.
The International Stock Fund will not sell securities short unless (1) it
owns, or has a right to acquire, an equal amount of such securities, or (2)
it has segregated an amount of its other assets equal to the lesser of the
market value of the securities sold short or the amount required to acquire
such securities. The segregated amount will not exceed 10% of the
International Stock Fund's net assets. While in a short position, the
International Stock Fund will retain the securities, rights, or segregated
assets. To comply with registration requirements in certain states, the
International Stock Fund (1) will limit short sales of securities of any
class of any one issuer to the lesser of 2% of the International Stock
Fund's net assets or 2% of the securities of that class, (2) will make
short sales only on securities listed on recognized stock exchanges. The
latter restrictions, however, do not apply to short sales of securities the
International Stock Fund holds or has a right to acquire without the
payment of any further consideration, and (3) will not invest more that 5%
of its total assets in restricted securities. (If state requirements
change, these restrictions may be revised without shareholder
notification.)

ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities except that each Fund may borrow
money directly or through reverse repurchase agreements (or, with respect
to International Stock Fund, as required by forward commitments to purchase
securities or currencies) as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling such Fund to
meet redemption requests when the liquidation of portfolio securities is

deemed to be inconvenient or disadvantageous, and then only in amounts not
in excess of one-third of the value of its total assets; provided that,
while borrowings and reverse repurchase agreements outstanding exceed 5% of
each such Fund's total assets, any such borrowings will be repaid before
additional investments are made. The Funds will not borrow money or engage
in reverse repurchase agreements for investment leverage purposes.
PLEDGING ASSETS

The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, each Fund may mortgage, pledge
or hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the time of
borrowing. (The International Stock Fund is not subject to this 15%
limitation.) For purposes of this limitation, the following are not deemed
to be pledges by the Growth Stock Fund or the Utility Fund: margin deposits
for the purchase and sale of futures contracts and related options, any
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis. For
purposes of this limitation, neither the deposit of underlying securities
or other assets in escrow in connection with the writing of put or call
options or the purchase of securities on a when-issued basis nor margin
deposits for the purchase and sale of financial futures contracts and
related options are deemed to be a pledge by the International Stock Fund.

CONCENTRATION OF INVESTMENTS
The Utility Fund will not purchase securities if, as a result of such
purchase, 25% or more of its total assets would be invested in securities
of companies engaged principally in any one industry other than the

utilities industry. However, the Utility Fund may at any time invest 25% or
more of its total assets in cash or cash items and securities issued and/or
guaranteed by the U.S. government, its agencies or instrumentalities.

The Prime Fund will not purchase securities if, as a result of such
purchase, 25% or more of its total assets would be invested in securities
of companies engaged principally in any one industry other than finance
companies. However, the Prime Fund may at any time invest 25% or more of
its total assets in cash or cash items and securities issued and/or
guaranteed by the U.S. government, its agencies or instrumentalities.

The International Stock Fund will not invest 25% or more of its total
assets in securities of issuers having their principal business activities
in the same industry.

The Equity Growth and Income Fund, the Growth Stock Fund, the U.S.
Government Bond Fund, and the Corporate Bond Fund will not purchase
securities if, as a result of such purchase, 25% or more of their
respective total assets would be invested in any one industry. However,
each Fund may at any time invest 25% or more of its respective total assets
in cash or cash items and securities issued and/or guaranteed by the U.S.
government, its agencies or instrumentalities.

INVESTING IN COMMODITIES

The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the Utility Fund may purchase and

sell futures and stock index futures contracts and related options; the
Growth Stock Fund may purchase and sell futures contracts and options on
futures contracts; and the International Stock Fund may purchase and sell
financial futures contracts and options on financial futures contracts,
provided that the sum of its initial margin deposits for financial futures
contracts plus premiums paid by it for open options on financial futures
contracts, may not exceed 5% of the fair market value of the International
Stock Fund's total assets, after taking into account the unrealized profits
and losses on those contracts. Further, the International Stock Fund may
engage in foreign currency transactions and purchase or sell forward
contracts with respect to foreign currencies and related options.

INVESTING IN REAL ESTATE
The Funds will not purchase or sell real estate, including limited
partnership interests in real estate, although each Fund may invest in
securities of companies whose business involves the purchase or sale of
real estate or in securities secured by real estate or interests in real
estate.
LENDING CASH OR SECURITIES
No Fund will lend any of its assets, except portfolio securities up to one-
third of its total assets. (The International Stock Fund is not subject to
this one-third limitation). This shall not prevent a Fund from purchasing
or holding money market instruments (with respect to the Prime Money Fund),
corporate or U.S. government bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, entering into
repurchase agreements, or engaging in other transactions which are
permitted by the Fund's investment objective and policies or the Trust's
Declaration of Trust.

UNDERWRITING
No Fund will underwrite any issue of securities, except as such Fund may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its respective investment
objectives, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of its total assets, no Fund will purchase the
securities of any one issuer (other than securities issued and/or
guaranteed by the U.S. government, its agencies or instrumentalities, and
with respect to all Funds except the International Stock Fund, repurchase
agreements collateralized by such securities, cash and cash items) if, as a
result, more than 5% of such Fund's total assets would be invested in the
securities of that issuer.
In addition, no Fund will purchase more than 10% of any class of the
outstanding voting securities of any one issuer. For these purposes, the
Funds consider common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
No Fund will invest more than 15% (10% with respect to the Prime Money
Fund) of its total assets in securities subject to restrictions on resale
under the Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other restricted

securities which meet the criteria for liquidity as established by the
Trustees.
INVESTING IN ILLIQUID SECURITIES
No Fund will invest more than 15% (10% with respect to the Prime Money
Fund) of its net assets in illiquid securities, including, among others,
repurchase agreements providing for settlement more than seven days after
notice, over-the-counter options (with respect to the Growth Stock Fund,
the Utility Fund and the International Stock Fund) and certain restricted
securities not determined by the Trustees to be liquid.
The Prime Money Fund will not invest more than 10% of its net assets in
illiquid securities, including, among others, repurchase agreements
providing for settlement more than seven days after notice and certain
restricted securities not determined by the Trustees to be liquid.
INVESTING IN PUT OPTIONS

The Growth Stock Fund, the Utility Fund and the International Stock Fund
will not purchase put options on securities, unless the securities are held
in the Fund's portfolio and, with respect to the Growth Stock Fund and the
Utility Fund, not more than 5% of the Utility Fund's respective total
assets would be invested in premiums on open put option positions.

WRITING COVERED CALL OPTIONS

The Growth Stock Fund, the Utility Fund and the International Stock Fund
will not write call options on securities unless the securities are held in
the Fund's portfolio or unless the Fund is entitled to them in deliverable
form without further payment or after segregating cash in the amount of any
further payment.

PURCHASING SECURITIES TO EXERCISE CONTROL

The Growth Stock Fund and the International Stock Fund will not purchase
securities of a company for the purpose of exercising control or
management.

INVESTING IN WARRANTS

The Growth Stock Fund and the International Stock Fund will not invest more
than 5% of their respective net assets in warrants. No more than 2% of a
Fund's respective net assets, to be included within the overall 5% limit on
investments in warrants, may be warrants which are not listed on the New
York Stock Exchange or the American Stock Exchange. (If state restrictions
change, this latter restriction may be revised without notice to
shareholders.) For purposes of this investment restriction, warrants
acquired by a Fund in units or attached to securities may be deemed to be
without value.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Growth Stock Fund will limit its investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, will invest no more than 5% of its total assets in any
one investment company, and will invest no more than 10% of its total
assets in investment companies in general. The Growth Stock Fund will
purchase securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these

limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets.

The International Stock Fund will not purchase securities of other
investment companies, except by purchase in the open market involving only
customary brokerage commissions and as a result of which not more than 10%
of the value of its total assets would be invested in such securities, or
except as part of a merger, consolidation or other acquisition.
INVESTING IN NEW ISSUERS

The Growth Stock Fund and the International Stock Fund will not invest more
than 5% of the value of their respective total assets in securities of
issuers which have records of less than three years of continuous
operations, including the operation of any predecessor.

INVESTING IN MINERALS

The International Stock Fund will not invest in interests in oil, gas, or
other mineral exploration or development programs, other than debentures or
equity stock interests.
The Growth Stock Fund will not purchase interests in oil, gas, or other
mineral exploration or development programs, or leases, except it may
invest in the securities of issuers which invest in or sponsor such
programs.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST

The Growth Stock Fund and the International Stock Fund will not purchase or
retain the securities of any issuer if the officers and Trustees of the
Trust or the Funds' investment adviser, or with respect to International
Stock Fund, the sub-adviser, owning individually more than 1/2 of 1% of the
issuer's securities together own more than 5% of the issuer's securities.

ARBITRAGE TRANSACTIONS
To comply with certain state restrictions, the International Stock Fund
will not enter into transactions for the purpose of engaging in arbitrage.
If state requirements change, this restriction may be revised without
shareholder notification.
With respect to all of the Funds, except with respect to borrowing money, if a
percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value of total or net
assets will not result in a violation of such restriction.
No Fund has any present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year.
For purposes of their policies and limitations, the Funds consider certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."

To comply with registration requirements in certain states, the Growth Stock
Fund (1) will limit the margin deposits on futures contracts entered into by it
to 5% of its net assets, (2) will limit the aggregate value of the assets
underlying covered call options or put options written by it to not more than
25% of its net assets, and (3) will limit the premiums paid for options

purchased by it to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification).

INVESTMENT PRACTICES OF THE FUNDS

The following investment practices are common to two or more of the Funds and,
unless indicated otherwise, may be changed without approval of shareholders.
REPURCHASE AGREEMENTS
All of the Funds will engage in repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other organized financial
institutions sell U.S. government securities or other securities to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time and
price. A Fund or its custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from a
Fund, a Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Funds' adviser to
be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, a Fund

transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future a Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Funds through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a nonexclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of

the secondary market for securities eligible for resale under the Rule. The
Funds believe that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities to the Trustees. The Trustees may
consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund`s records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. None of the Funds
intends to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, all of the Funds may lend their
portfolio securities, up to one-third of the value of each Fund's total assets,
to broker/dealers, banks, or other institutional borrowers of securities. (The
International stock Fund is not subject to this one-third limitation).The
collateral received when the Fund lends portfolio securities must be valued

daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
INSURANCE MANAGEMENT SERIES MANAGEMENT
Officers and Trustees are listed with their addresses, present positions with
Insurance Management Series, and principal occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp., and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director, Trustee, or Managing General Partner of
the Funds. Mr. Donahue is the father of J. Christopher Donahue, President and
Trustee of the Trust.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's Hospital of
Pittsburgh; Director, Trustee, or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate ventures in Southwest
Florida; Director, Trustee, or Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and Director, Ryan Homes, Inc.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director, Trustee,
or Managing General Partner of the Funds.

J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee

President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Executive Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the Funds. Mr.
Donahue is the son of John F. Donahue, Chairman and Trustee of the Trust.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine and Member, Board of Trustees, University of Pittsburgh;
Medical Director, University of Pittsburgh Medical Center - Downtown; Member,
Board of Directors, University of Pittsburgh Medical Center; formerly,
Hematologist, Oncologist, and Internist, Presbyterian and Montefiore Hospitals;
Director, Trustee, or Managing General Partner of the Funds.

Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Counsel, Horizon
Financial, F.A., Western Region.

Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Trustee

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

Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee

Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director, Trustee, or
Managing General Partner of the Funds.

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

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee

Professor, International Politics and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., and U.S. Space Foundation; Chairman, Czecho Management Center;
Director, Trustee, or Managing General Partner of the Funds; President Emeritus,
University of Pittsburgh; formerly, founding Chairman, National Advisory
Council for Environmental Policy and Technology and Federal Emergency Management
Advisory Board.

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

Public relations/marketing consultant; Conference Coordinator, Non-profit
entities; Director, Trustee, or Managing General Partner of the Funds.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930

Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp., and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services; Chairman, Treasurer, and
Trustee, Federated Administrative Services; Trustee or Director of some of the
Funds; Executive Vice President, President, or Treasurer of some of the Funds.

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

Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.

David M. Taylor
Federated Investors Tower
Pittsburgh, PA
Birthdate: January 13, 1947

Treasurer

Senior Vice President, Controller, and Trustee, Federated Investors;
Controller, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Senior Vice
President, Federated Shareholder Services; Senior Vice President, Federated
Administrative Services; Treasurer of some of the Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President and Secretary
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, and Federated
Research; Director, Federated Research Corp. and Federated Global Research
Corp.; Trustee, Federated Services Company; Executive Vice President, Secretary,
and Trustee, Federated Administrative Services; President and Trustee, Federated
Shareholder Services; Director, Federated Securities Corp.; Executive Vice
President and Secretary of the Funds.

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

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Cash Trust Series II;
Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Intermediate Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate Government Trust; Federated
Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for
U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insight Institutional Series, Inc.; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.;
Liberty U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The Shawmut
Funds; Short-Term Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
The Virtus Funds; World Investment Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the Fund's outstanding shares. As of
September 27, 1995, the following shareholders of record owned 5% or more of
the outstanding shares of the Funds: Aetna Life Insurance & Annuity Company,
Hartford, Connecticut, owned approximately 769,931.67 shares (60.12%) of
Corporate Bond Fund, approximately 228,130.38 (29.50%) shares of U.S. Government
Bond Fund, approximately 96,413.12 shares (39.05%) of International Stock Fund,
approximately 1,565,544.17 shares (60.63%) of Equity Growth and Income Fund,
approximately 6,665,607.48 shares (51.51%) of Prime Money Fund and approximately
573,048.71 shares (33.66%) of Utility Fund; Aetna Insurance Company of America,
Hartford, Connecticut, owned approximately 203,885.14 shares (15.92%) of
Corporate Bond Fund, approximately 100,110.34 shares (12.95%) of U.S.
Government Bond Fund, approximately 147,992.99 shares (59.93%) of International
Stock Fund, approximately 727,717.84 shares (28.18%) of Equity Growth and Income
Fund, approximately 3,657,448.41 shares (28.26%) of Prime Money Fund and
approximately 255,857.87 shares (15.03%) of Utility Fund; Lincoln Benefit Life
Company, Lincoln, Nebraska, owned approximately 180,949.04 shares (14.13%) of

Corporate Bond Fund, approximately 102,397.19 shares (13.24%) of U.S. Government
Bond Fund, and approximately 136,389.24 shares (8.01%) of Utility Fund; Life of
Virginia, Richmond, Virginia, owned approximately 78,390.21 (6.12%) shares of
Corporate Bond Fund and approximately 685,407.64 shares (40.26%) of Utility
Fund; TransAmerica Occidental Life Insurance Company, Los Angeles, California,
owned approximately 236,631.03 shares (30.60%) of U.S. Government Bond Fund and
approximately 258,699.85 shares (10.02%) of Equity Growth and Income Fund; and
Providian Life & Health Insurance Company, Louisville, Kentucky, owned
approximately 2,111,189.52 shares (16.32%) of Prime Money Fund.

TRUSTEES' COMPENSATION

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

John F. Donahue, $0 $0 for the Trust and
Trustee and Chairman 68 other investment companies in
the Fund Complex
Thomas G. Bigley, $252 $20,688 for the Trust and
Trustee 49 other investment companies in
the Fund Complex
John T. Conroy, Jr., $276 $117,202 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
William J. Copeland, $276 $117,202 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
J. Christopher Donahue, $0 $0 for the Trust and
Trustee and President 14 other investment companies in
the Fund Complex
James E. Dowd, $276 $117,202 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D.,$252 $106,460 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr.,$276 $117,202 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
Peter E. Madden, $100 $90,563 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
Gregor F. Meyer, $252 $106,460 for the Trust and

Trustee 64 other investment companies in
the Fund Complex
John E. Murray, Jr., $0 $0 for the Trust and
Trustee 68 other investment companies in
the Fund Complex
Wesley W. Posvar, $252 $106,460 for the Trust and
Trustee 64 other investment companies in
the Fund Complex
Marjorie P. Smuts, $252 $106,460 for the Trust and
Trustee 64 other investment companies in
the Fund Complex

*Information is furnished for the fiscal year ended December 31, 1994. The
aggregate compensation is provided for the
Trust which was comprised of six portfolios at December 31, 1994.

+The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUNDS
The investment adviser to the Funds is Federated Advisers. It is a subsidiary of
Federated Investors. All voting securities of Federated Investors are owned by a
trust, the trustees of which are John F. Donahue, his wife and his son, J.
Christopher Donahue.
The Adviser shall not be liable to the Funds or any shareholder for any losses
that may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, Federated Advisers receives annual investment
advisory fees as described in the prospectus.

For the period from December 9, 1993 (start of business) to December 31, 1994,
the adviser earned advisory fees from Equity Growth and Income Fund, Utility
Fund, and Corporate Bond Fund of $4,397, $2,077, and $7,966, respectively, all
of which was voluntarily waived. For the period from December 10, 1993 (start
of business) to December 31, 1994, the adviser earned advisory fees from the
Prime Money Fund of $287, all of which was voluntarily waived. For the period
from December 8, 1993 (start of business) to December 31, 1994, the adviser
earned advisory fees from the U.S. Government Bond Fund of $2,605, all of which
was voluntarily waived.
ADMINISTRATIVE SERVICES

Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Trust for a fee as described in the
prospectus. For the period from December 9, 1993 (start of business) to
December 31, 1994, Equity Growth and Income Fund, Utility Fund, and Corporate
Bond Fund incurred $73,288, $73,289, and $52,398, respectively, for
administrative services. For the period from December 10, 1993 (start of
business) to December 31, 1994, the Prime Money Fund incurred $14,041 for
administrative services. For the period from December 8, 1993 (start of
business) to December 31, 1994, the U.S. Government Bond Fund incurred $63,015
for administrative services.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to the
Fund, holds approximately 20% of the outstanding common stock and serves as a
director of Commercial Data Services, Inc., a company which provides computer
processing services to Federated Administrative Services.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend disbursing
agent for the Fund. The fee paid to the transfer agent is based upon the size,
type and number of accounts and transactions made by shareholders.
Federated Services Company also maintains the Fund's accounting records. The fee
paid for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS

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

The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the International Stock Fund's
portfolio. The Adviser is not obligated to obtain any material non-public
("inside") information about any securities issuer, or to base purchase or sale
recommendations on such information.
For the period from December 9, 1993 (start of business) to December 31, 1994,
Equity Growth and Income Fund, Utility Fund, and Corporate Bond Fund paid
$3,714, $476, and $0, respectively, in brokerage commissions. For the period
from December 10, 1993 (start of business) to December 31, 1994, the Prime Money
Fund paid $0 in brokerage commissions. For the period from December 8, 1993
(start of business) to December 31, 1994, the U.S. Government Bond Fund paid $0
in brokerage commissions.
PURCHASING SHARES

Shares of the Funds are sold at their net asset value without a sales charge on
days the New York Stock Exchange is open for business. The procedure for
purchasing shares of the Funds is explained in the prospectus under "Purchases
and Redemptions" and "What Shares Cost."
DETERMINING NET ASSET VALUE

Net asset value of the Equity Growth and Income Fund, Growth Stock Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund, and International Stock
Fund generally changes each day. The days on which net asset value is calculated
by the Funds are described in the prospectus.

DETERMINING VALUE OF SECURITIES
The values of the portfolio securities in the Equity Growth and Income Fund,
Growth Stock Fund, Utility Fund, U.S. Government Bond Fund, and Corporate Bond
Fund, and are determined as follows:
o for equity securities and bonds and other fixed income securities,
according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;
o for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise as determined by an
independent pricing service;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by the
Board of Trustees.
The values of the portfolio securities in the International Stock Fund are
determined as follows:
o according to the last reported sale price on a recognized securities
exchange, if available. (If a security is traded on more than one exchange,
the price on the primary market for that security, as determined by the
Adviser, is used.);
o according to the last reported bid price, if no sale on the recognized
exchange is reported or if the security is traded over-the-counter;
o at fair value as determined in good faith by the Board of Trustees; or
o for short-term obligations with remaining maturities of less than 60 days
at the time of purchase, at amortized cost, which approximates value.

TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments for the Prime Money Fund is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
The Prime Money Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with certain conditions in Rule 2a-7 (the
"Rule") promulgated by the Securities and Exchange Commission under the
Investment Company Act of 1940. Under the Rule, the Trustees must establish
procedures reasonably designed to stabilize the net asset value per share, as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and the Prime Money Fund's investment
objective. Under the Rule, the Prime Money Fund is permitted to purchase
instruments which are subject to demand features or standby commitments. As
defined by the Rule, a demand feature entitles the Prime Money Fund to receive
the principal amount of the instrument from the issuer or a third party on (1)
no more than 30 days' notice or (2) at specified intervals not exceeding 397
calendar days on no more than 30 days' notice. A standby commitment entitles the
Prime Money Fund to achieve same-day settlement and to receive an exercise price
equal to the amortized cost of the underlying instrument plus accrued interest
at the time of exercise.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. The Trustees will decide what, if
any, steps should be taken if there is a difference of more than 0.5 of 1%
between the two values. The Trustees will take any steps they consider
appropriate (such as redemption in kind or shortening the average portfolio
maturity) to minimize any material dilution or other unfair results arising
from differences between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Prime Money Fund limit its investments to
instruments that, in the opinion of the Trustees, present minimal credit
risks and have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are not
rated, the Trustees must determine that they are of comparable quality. The
Rule also requires the Prime Money Fund to maintain a dollar-weighted
average portfolio maturity (not more than 90 days) appropriate to the
objective of maintaining a stable net asset value of $1.00 per share. In
addition, no instrument with a remaining maturity of more than thirteen
months can be purchased by the Prime Money Fund.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Prime Money Fund will
invest its available cash to reduce the average maturity to 90 days or less
as soon as possible.
The Prime Money Fund may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations. This policy may,
from time to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset value
is affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Prime Money Fund computed by dividing the annualized daily income on the
Prime Money Fund's portfolio by the net asset value computed as above may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Prime Money Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders of a Fund may be held liable as
partners under Massachusetts law for obligations of the Fund. To protect
shareholders, each Fund has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for acts or obligations of the
Fund. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign on behalf of the Funds.
In the unlikely event a shareholder of a Fund is held personally liable for the
Trust's obligations on behalf of the Fund, the Trust is required to use the
property of the Fund to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder of a
Fund for any act or obligation of the Trust on behalf of that Fund. Therefore,
financial loss resulting from liability as a shareholder of a Fund will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them from the assets of that Fund.
TAX STATUS

THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because each expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, a Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
However, the International Stock Fund may invest in the stock of certain foreign
corporations which would constitute a Passive Foreign Investment Company (PFIC).
Federal income taxes may be imposed on the International Stock Fund upon
disposition of PFIC investments.
SHAREHOLDER'S TAX STATUS
Each Fund intends to comply with the variable asset diversification regulations
which are described in the prospectus and this Statement. If a Fund fails to
comply with these regulations, contracts invested in that fund shall not be
treated as annuity, endowment, or life insurance contracts under the Internal
Revenue Code.
Contract owners should review the contract prospectus for information concerning
the federal income tax treatment of their contracts and distributions from each
Fund to the separate accounts.
FOREIGN TAXES
Investment income on certain foreign securities in which the International Stock
Fund may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the International Stock Fund would be subject.
TOTAL RETURN

Equity Growth and Income Fund's cumulative total return for the period from
February 1, 1994 (date of initial public investment) to December 31, 1994, was
(0.70%). Utility Fund's cumulative total return for the period from April 14,
1994 (date of initial public investment) to December 31, 1994, was 1.12%. U.S.
Government Bond Fund's cumulative total return for the period from March 29,
1994 (date of initial public investment) to December 31, 1994, was 2.62%.
Corporate Bond Fund's cumulative total return for the period from February 2,
1994 (date of initial public investment) to December 31, 1994, was (3.73%).
Cumulative total returns reflect a Fund's total performance over a specific
period of time. The Fund's cumulative total returns are representative of
eleven, nine, nine, and eleven months of Fund activity, respectively.

The average annual total return for the Growth Stock Fund, the Equity Growth and
Income Fund, Utility Fund, U.S. Government Bond Fund, Corporate Bond Fund and
International Stock Fund is the average compounded rate of return for a given
period that would equate a $1,000 initial investment to the ending redeemable
value of that investment. The ending redeemable value is computed by multiplying
the number of shares owned at the end of the period by the offering price per
share at the end of the period. The number of shares owned at the end of the
period is based on the number of shares purchased at the beginning of the period
with $1,000, adjusted over the period by any additional shares, assuming the
monthly, quarterly, or annual, as applicable, reinvestment of all dividends and
distributions. You should review the performance figures for your insurance
contract, which figures reflect the applicable charges and expenses of the
contract. Such performance figures will accompany any advertisement of a Fund's
performance.

YIELD

The yield for the Equity Growth and Income Fund, Utility Fund, and Corporate
Bond Fund for the thirty-day period ended December 31, 1994, was 3.14%, 4.74%,
and 10.43%, respectively. The U.S. Government Bond Fund did not calculate a
thirty-day yield for the period ended December 31, 1994.

The yield for the Growth Stock Fund, the Equity Growth and Income Fund, Utility
Fund, U.S. Government Bond Fund, Corporate Bond Fund and International Stock
Fund is determined by dividing the net investment income per share (as defined
by the Securities and Exchange Commission) earned by the Fund over a thirty-day
period by the offering price per share of the Fund on the last day of the
period. This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by a Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Also the yield does not reflect the charges
and expenses of an insurance contract. You should review the performance figures
for your contract, which figures reflect the applicable charges and expenses of
the contract. Such performance figures will accompany any advertisement of a
Fund's performance.

The Prime Money Fund calculates its yield daily, based upon the seven days
ending on the day of the calculation, called the "base period." This yield is
computed by:
o determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net
change excluding capital changes but including the value of any additional
shares purchased with dividends earned from the original one share and all
dividends declared on the original and any purchased shares;
o dividing the net change in the account's value by the value of the account
at the beginning of the base period to determine the base period return;
and
o multiplying the base period return by 365/7.
The yield for the seven-day period ended December 31, 1994, for the Prime Money
Fund was 4.16%.

EFFECTIVE YIELD

The Prime Money Fund's effective yield is computed by compounding the
unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
The effective yield for the seven-day period ended December 31, 1994, for the
Prime Money Fund was 4.25%.
Effective yield does not reflect the charges and expense of a variable annuity
contract. You should review the performance figures for your insurance contract,
which figures reflect the applicable charges and expenses of the contract. Such
performance figures will accompany any advertisement of a Fund's performance.
PERFORMANCE COMPARISONS

Each Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses; and
o the relative amount of the Fund's cash flow.
A Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share (except with respect to Prime Money Fund) fluctuate
daily. Both net earnings and offering price per share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include:
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is cited
as a principal indicator of market conditions.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industrial, transportation, and financial and
public utility companies, can be used to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated
in the Standard & Poor's figures.
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all income dividends and capital gains distributions,
if any. From time to time, the Trust may quote its Lipper ranking in
various fund categories in advertising and sales literature.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: nonconvertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry, public
utilities and finance. The average maturity of these bonds approximates
nine years. Tracked by Lehman BROTHERS , Inc., the index calculates total
returns for one month, three month, twelve month, and ten year periods and
year-to-date.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (LONG-TERM) INDEX is composed of the
same types of issues as defined above. However, the average maturity of the
bonds included in this index approximates 22 years.
o LEHMAN BROTHERS GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
o BANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank
and thrift institution money market deposit accounts. The rates published
in the index are an average of the personal account rates offered on the
Wednesday prior to the date of publication by ten of the largest banks and
thrifts in each of the five largest Standard Metropolitan Statistical
Areas. Account minimums range upward from $2,500 in each institution, and
compounding methods vary. If more than one rate is offered, the lowest rate
is used. Rates are subject to change at any time specified by the
institution.
o MONEY, a monthly magazine, regularly ranks money market funds in various
categories based on the latest available seven-day compound (effective)
yield. From time to time, the Fund will quote its Money ranking in
advertising and sales literature.
o STANDARD & POOR'S UTILITY INDEX is an unmanaged index of common stocks from
forty different utilities. This index indicates daily changes in the price
of the stocks. The index also provides figures for changes in price from
the beginning of the year to date, and for a twelve month period.
o DOW JONES UTILITY INDEX is an unmanaged index comprised of fifteen utility
stocks that tracks changes in price daily and over a six month period. The
index also provides the highs and lows for each of the past five years.
o MORGAN STANLEY EUROPE, AUSTRALIA, AND FAR EAST (EAFE) Index is a market
capitalization weighted foreign securities index, which is 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. EAFE U.S.
dollar total return is a net dividend figure less Luxembourg withholding
tax. The EAFE is monitored by Capital International, S.A., Geneva,
Switzerland.
o SALOMON BROTHERS WORLD EQUITY INDEX EX U.S. is a capitalization-weighted
index comprised of equities from 22 countries excluding the United States.
o FT ACTUARIES WORLD - EX U.S. index is comprised of 1,740 stocks, excluding
U.S. stocks, jointly compiled by the Financial Times Ltd., Goldman, Sachs &
Co., and NatWest Securities Ltd. in conjunction with the Institute of
Actuaries and the Faculty of Actuaries.

o STANDARD & POOR'S LOW-PRICED INDEX compares a group of approximately twenty
actively traded stocks priced under $25 for one month periods and year-to-
date.
o STANDARD & POOR'S 500 ("S&P 500") is an unmanaged index of common stocks in
industry, transportation, finance, and public utilities denoting general
market performance, as monitored by Standard & Poor's Ratings Group.
o LIPPER GROWTH FUND AVERAGE is an average of the total returns for 251
growth funds tracked by Lipper Analytical Services, Inc., an independent
mutual fund rating service.
o LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc.

Advertisements and other sales literature for the Funds may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Funds based
on monthly, quarterly, or yearly, as applicable, reinvestment of dividends over
a specific period of time.
From time to time as it deems appropriate, the Funds may advertise their
performance using charts, graphs and descriptions compared to federally insured
bank products, including certificates of deposit and time deposits, and to money
market funds using the Lipper Analytical Services money market instrument
average.

ABOUT FEDERATED INVESTORS

Federated Investors is dedicated to meeting investor needs which is reflected in
its investment decision making -- structured, straightforward, and consistent.

This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the equity sector, Federated has more than 25 years' experience. As of
December 31, 1994, Federated managed 15 equity funds totaling approximately $4
billion in assets across growth, value, equity income, international, index and
sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1994, Federated managed 8 money
market funds, 5 investment grade and 4 high yield bond funds with assets
approximating $7.4 billion, $.9 billion and $.8 billion, respectively.
Federated's corporate bond decision making -- based on intensive, diligent
credit analysis -- is backed by over 20 years of experience in the corporate
bond sector. In 1972, Federated introduced one of the first high-yield bond
funds in the industry. In 17 years ending December 1994, Federated's high-yield
portfolios experienced a default rate of just 1.86%, versus 3.10% for the market
as a whole. In 1983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market totaling more than
$200 billion.
In the government sector, as of December 31, 1994, Federated managed 9
mortgage-backed, 4 government/agency and 17 government money market mutual
funds, with assets approximating $8.5 billion, $1.6 billion and $17 billion
respectively. Federated trades approximately $300 million in U.S. government
and mortgage-backed securities daily and places approximately $13 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages nearly $10 billion in government funds within these
maturity ranges.
In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1994, Federated managed more than $31 billion in assets across approximately 43
money market funds, including 17 government, 8 prime and 18 municipal with
assets approximating $17 billion, $7.4 billion and $6.6 billion respectively.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:

INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
*Source: Investment Company Institute

TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide -- including 200 New York Stock Exchange firms --
supported by more wholesalers than any other mutual fund distributor. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Division.

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