FEDERATED INSURANCE SERIES, 497, 1999-05-21

FEDERATED INSURANCE SERIES
497, 1999-05-21

Previous: STORAGE USA INC, S-3/A, 1999-05-21

Next: NICHOLAS EQUITY INCOME FUND INC, 485APOS, 1999-05-21

Federated Small Cap Strategies Fund II

A Portfolio of Federated Insurance Series

A mutual fund seeking capital appreciation by investing primarily in equity
securities of small cap companies.

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

Fund shares are available exclusively as a funding vehicle for life
insurance companies writing variable life insurance policies and
variable annuity contracts. This prospectus should be accompanied by the
prospectuses for such contracts.

MAY 21, 1999

CONTENTS

Risk/Return Summary 1

What are the Fund's Investment Strategies? 2

What are the Principal Securities in Which the

Fund Invests? 2

What are the Specific Risks of Investing in the Fund? 3

What Do Shares Cost? 4

How is the Fund Sold? 4

How to Purchase and Redeem Shares 4

Account and Share Information 5

Who Manages the Fund? 5

Financial Information 6

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide capital appreciation. While
there is no assurance that the Fund will achieve its investment objective,
it endeavors to do so by following the strategies and policies described in
this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the Standard & Poor's 600 Small Cap Index. The
investment adviser, Federated Investment Management Company (Adviser)
invests in companies that offer growth prospects or in companies whose
stock is undervalued.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose
money by investing in the Fund. The primary factors that may reduce the
Fund's returns include:

* STOCK MARKET RISKS. The value of equity securities in the Fund's
portfolio will fluctuate and, as a result, the Fund's share price may
decline suddenly or over a sustained period of time.

* LIQUIDITY RISKS. Smaller company securities in which the Fund invests may
be less readily marketable and may be subject to greater fluctuation in
price than other securities.

* RISKS RELATED TO COMPANY SIZE. Because the smaller companies in which the
Fund may invest may have unproven track records, a limited product or
services base and limited access to capital, they may be more likely to
fail than larger companies.

* SECTOR RISKS. Because the Fund may allocate relatively more assets to
certain industry sectors than others, the Fund's performance may be more
susceptible to any developments which affect those sectors emphasized by
the Fund.

* RISKS OF FOREIGN INVESTING. Because the Fund invests in securities issued
by foreign companies, the Fund's share price may be more affected by
foreign economic and political conditions, taxation policies and
accounting and auditing standards than would otherwise be the case.

The Shares offered by this prospectus are not deposits or obligations of
any bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.

RISK/RETURN BAR CHART AND TABLE

A performance bar chart and total returns for the Fund are not provided
since this is a new Fund and has not been in operation for a full calendar
year.

What are the Fund's Investment Strategies?

The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the Standard & Poor's 600 Small Cap Index (Index).
As of October 21, 1998 this range was $18.5 million to $3.2 billion. Market
capitalization is determined by multiplying the number of outstanding
shares by the current market price per share.

The Adviser invests in companies that offer growth prospects or in
companies whose stock is undervalued. Using its own quantitative process,
the Adviser rates the future performance potential of companies. The
Adviser evaluates each company's earnings quality in light of their current
valuation to narrow the list of attractive companies. The Adviser then
evaluates product positioning, management quality and sustainability of
current growth trends of those companies. Using this type of fundamental
analysis, the Adviser selects the most promising companies for the Fund's
portfolio.

Companies with similar characteristics may be grouped together in broad
categories called sectors. In determining the amount to invest in a
security, the Adviser limits the Fund's exposure to each business sector
that comprises the Index. The Fund's allocation to a sector will not be
less than 50% or more than 200% of the Index's allocation to that sector.
The Fund ordinarily will hold between 80 and 300 companies in its
portfolio.

The Fund may also seek capital appreciation by buying securities in initial
public offerings. The Fund will participate in such offerings without
regard to the issuer's market capitalization. The Adviser may select
initial public offerings based on its fundamental analysis of the issuer.

The Fund may attempt to manage market risk by buying and selling financial
futures and options. This may include the purchase of index futures
contracts as a substitute for direct investments in stocks. It may also
include the purchase and sale of options to protect against general
declines in small capitalization stocks economically.

PORTFOLIO TURNOVER

The Fund actively trades its portfolio securities in an attempt to achieve
its investment objective. Actively trading portfolio securities increases
the Fund's trading costs and may have an adverse impact on the Fund's
performance.

TEMPORARY DEFENSIVE INVESTMENTS

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

What are the Principal Securities in Which the Fund Invests?

COMMON STOCKS

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

AMERICAN DEPOSITARY RECEIPTS

American Depositary Receipts (ADRs) represent interests in underlying
securities issued by a foreign company, but traded in another market than
the underlying security. ADRs provide a way to buy shares of foreign-based
companies in the U.S. rather than in overseas markets. ADRs are also traded
in U.S. dollars, eliminating the need for foreign exchange transactions.
Depositary Receipts involve many of the same risks of investing directly in
foreign securities, including Country Risk and Currency Risks.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

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

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

LIQUIDITY RISKS

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

RISK RELATED TO COMPANY SIZE

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

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

SECTOR RISK

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

RISK OF FOREIGN INVESTING

Exchange rates for currency fluctuate daily. The combination of currency
risk and market risks tends to make securities traded in foreign markets
more volatile than securities traded exclusively in the U.S.

Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United States.
Foreign financial markets may also have fewer investor protections.
Securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S. investors.

Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.

What Do Shares Cost?

Shares can be purchased or redeemed by participating insurance companies
any day the New York Stock Exchange (NYSE) is open. Transaction requests
received in proper form are processed at the next calculated net asset
value (NAV). NAV is determined at the end of regular trading (normally 4:00
p.m. Eastern time) each day the NYSE is open. If the Fund owns foreign
securities that trade in foreign markets on days the NYSE is closed, the
value of the Fund's assets may change on days you cannot purchase or redeem
Shares.

How is the Fund Sold?

The Fund's Distributor markets the Shares described in this prospectus to
insurance companies as funding vehicles for variable annuity contracts and
variable life insurance policies issued by the insurance companies.

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

RULE 12B-1 PLAN

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay up to 0.25%
for marketing fees to the Distributor and investment professionals for the
sale, distribution and customer servicing of the Fund's Shares. Because
these Shares pay marketing fees on an ongoing basis, your investment cost
may be higher over time than other shares with different sales charges and
marketing fees. The Fund is not currently paying any 12b-1 fees under the
Rule 12b-1 Plan. Should the Fund begin to pay these fees, shareholders will
be notified. The Fund is not currently paying or accruing fees under the
Plan.

How to Purchase and Redeem Shares

Shares are used solely as the investment vehicle for separate accounts of
participating insurance companies offering variable annuity contracts and
variable life insurance policies. The general public has access to the Fund
only by purchasing a variable annuity contract or variable life insurance
policy (thus becoming a contract owner). Shares are not sold directly to
the general public.

Purchase orders must be received by your participating insurance company by
4:00 p.m. (Eastern time). The order will be processed at the NAV
calculated on that day if the Fund receives from the participating
insurance company:

* orders in proper form by 8:00 a.m. (Eastern time) on the next business
day; and

* federal funds on the business day following the day the Fund received the
order.

Participating insurance companies are responsible for properly
transmitting purchase orders and federal funds to the Fund.

Account and Share Information

DIVIDENDS

The Fund declares and pays any dividends annually.

Shares of the Fund will begin earning dividends if owned on the record
date. Dividends of the Fund are automatically reinvested in additional
shares.

TAX INFORMATION

The Fund intends to comply with variable asset diversification
regulations. If the Fund fails to comply with these regulations, contracts
invested in the Fund will 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 the Fund to the separate accounts.

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

Who Manages the Fund?

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

THE FUND'S PORTFOLIO MANAGERS ARE:

AASH M. SHAH

Aash M. Shah has been the Fund's portfolio manager since inception.
Mr. Shah joined Federated Investors in 1993 and has been a Portfolio
Manager and a Vice President of the Fund's Adviser since January 1997.
Mr. Shah was a Portfolio Manager and served as an Assistant Vice President
of the Adviser from 1995 to 1996, and as an Investment Analyst from 1993 to
1995. Mr. Shah received his Masters in Industrial Administration from
Carnegie Mellon University with a concentration in finance and accounting.
Mr. Shah is a Chartered Financial Analyst.

KEITH J. SABOL

Keith J. Sabol has been the
Fund's portfolio manager
since inception. Mr. Sabol
joined Federated Investors in
1994 and has been a Portfolio
Manager since 1996 and a
Vice President of the Fund's
Adviser since 1998.
Mr. Sabol was an Investment
Analyst, and then Equity Research Coordinator for the Fund's Adviser from
1994 to 1996. Mr. Sabol is a Chartered Financial Analyst; he earned his
M.S. in Industrial Administration from Carnegie Mellon University.

The Adviser and other subsidiaries of Federated advise approximately 175
mutual funds and separate accounts, which total approximately $110 billion
in assets as of December 31, 1998. Federated was established in 1955 and is
one of the largest mutual fund investment managers in the United States
with 1,900 employees. More than 4,000 investment professionals make
Federated Funds available to their customers.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.75% of the
Fund's average daily net assets. The Adviser may voluntarily waive a
portion of its fee or reimburse the Fund for certain operating expenses.

YEAR 2000 READINESS

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

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

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

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

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

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

Financial Information

The Fund's fiscal year end is December 31. As this is the Fund's first
fiscal year, financial information is not yet available.

[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS

Federated Small Cap Strategies Fund II

A Portfolio of Federated Insurance Series

MAY 21, 1999

A Statement of Additional Information (SAI) dated May 21, 1999 is
incorporated by reference into this prospectus. To obtain the SAI without
charge and make inquiries call the Fund at

1-800-341-7400. To obtain other information, call your investment
professional or the Fund.

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

[Graphic]
Federated
Federated Small Cap Strategies Fund II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor

Investment Company Act File No. 811-8042

Cusip 313916876

G02583-01 (5/99)

[Graphic]

STATEMENT OF ADDITIONAL INFORMATION

Federated Small Cap Strategies Fund II

A Portfolio of Federated Insurance Series

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Small Cap
Strategies Fund II (Fund), dated May 21, 1999. This SAI incorporates by
reference the Fund's Annual Report. Obtain the prospectus or the Annual
Report without charge by calling 1-800-341-7400.

MAY 21, 1999

[Graphic]

Federated
World-Class Investment Manager
Federated Small Cap Strategies Fund II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor

G02585-01 (5/99)

[Graphic]

CONTENTS

How is the Fund Organized? 1

Securities in Which the Fund Invests 1

What Do Shares Cost? 7

Mixed Funding and Shared Funding 7

How is the Fund Sold? 7

Subaccounting Services 8

Redemption in Kind 8

Massachusetts Partnership Law 8

Account and Share Information 8

Tax Information 9

Who Manages and Provides Services to the Fund? 10

How Does the Fund Measure Performance? 13

Who is Federated Investors, Inc.? 15

Investment Ratings 16

Addresses 18

How is the Fund Organized?

The Fund is a diversified portfolio of Federated Insurance Series (Trust).
The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on
September 15, 1993. The Trust may offer separate series of shares
representing interests in separate portfolios of securities. The Trust
changed its name from Insurance Management Series to Federated Insurance
Series on November 14, 1995. The Fund's investment adviser is Federated
Investment Management Company (Adviser). The Adviser, formerly known as
Federated Advisers, changed its name effective March 31, 1999.

Securities in Which the Fund Invests

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

EQUITY SECURITIES

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

COMMON STOCKS

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

PREFERRED STOCKS

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

REAL ESTATE INVESTMENT TRUSTS (REITS)

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

WARRANTS

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

FIXED INCOME SECURITIES

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

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

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

TREASURY SECURITIES

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

AGENCY SECURITIES

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

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

CORPORATE DEBT SECURITIES

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

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

Commercial Paper

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

Demand Instruments

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

BANK INSTRUMENTS

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

CONVERTIBLE SECURITIES

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

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

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

DERIVATIVE CONTRACTS

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

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

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

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

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

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

FUTURES CONTRACTS

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

The Fund may buy and sell financial futures contracts.

OPTIONS

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

The Fund may:

* Buy call options on portfolio securities, indexes and futures
in anticipation of an increase in the value of the underlying asset; and

* Buy put options on portfolio securities, indexes and futures in
anticipation of a decrease in the value of the underlying asset.

The Fund may also write call options on portfolio securities, indexes and
futures to generate income from premiums, and in anticipation of a decrease
or only limited increase in the value of the underlying asset. If a call
written by the Fund is exercised, the Fund foregoes any possible profit
from an increase in the market price of the underlying asset over the
exercise price plus the premium received.

The Fund may also write put options on portfolio securities, indexes and
futures to generate income from premiums, and in anticipation of an
increase or only limited decrease in the value of the underlying asset. In
writing puts, there is a risk that the Fund may be required to take
delivery of the underlying asset when its current market price is lower
than the exercise price.

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

FOREIGN SECURITIES

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

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

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

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

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

DEPOSITARY RECEIPTS

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

FOREIGN EXCHANGE CONTRACTS

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

FOREIGN GOVERNMENT SECURITIES

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

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

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

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

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

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

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

DELAYED DELIVERY TRANSACTIONS

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

SECURITIES LENDING

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

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

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

Securities lending activities are subject to market risks and credit risks.
These transactions create leverage risks.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient
means of carrying out its investment policies and managing its uninvested
cash.

INVESTMENT RISKS

There are many factors which may effect an investment in the Fund. The
Fund's principal risks are described in its prospectus. Additional risk
factors are outlined below.

STOCK MARKET RISKS

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

RISK RELATED TO COMPANY SIZE

SECTOR RISK

RISK OF FOREIGN INVESTING

Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.

INTEREST RATE RISKS

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

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

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.

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

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

* Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.

CALL RISKS

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

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

LIQUIDITY RISKS

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

* Liquidity risk also refers to the possibility that the Fund may not be
able to sell a security when it wants to. If this happens, the Fund will
be required to continue to hold the security and the Fund could incur
losses.

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

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

* Securities rated below investment grade, also known as junk bonds,
generally entail greater market, credit and liquidity risks than
investment grade securities. For example, their prices are more volatile,
economic downturns and financial setbacks may affect their prices more
negatively, and their trading market may be more limited.

LEVERAGE RISKS

* Leverage risk is created when an investment exposes the Fund to a level
of risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures contracts,
put options on stock index futures, put options on financial futures and
portfolio securities, and writing covered call options, 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 Fund of initial or
variation margin in connection with financial futures contracts or related
options transactions is not considered the purchase of a security on
margin.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.

PLEDGING ASSETS

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options, and
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.

INVESTING IN REAL ESTATE

The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options on
stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered
call options.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.

DIVERSIFICATION OF INVESTMENTS

With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities) if as a result more than 5%
of the value of its total assets would be invested in the securities of
that issuer. Also, the Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer. For these purposes, the
Fund takes all common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.

CONCENTRATION OF INVESTMENTS

The Fund will not invest 25% or more of the value of its total assets in
any one industry except that the Fund may invest 25% or more of the value
of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities.

LENDING CASH OR SECURITIES

The Fund will not lend any of its assets, except portfolio securities. This
shall not prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions
where permitted by the Fund's investment objective, policies, and
limitations.

The above investment limitations cannot be changed unless authorized by the
"vote of a majority of its outstanding voting securities," as defined by
the Investment Company Act. The following investment limitations, however,
may be changed by the Board without shareholder approval (except that no
investment limitation of the Fund shall prevent the Fund from investing
substantially all of its assets (except for assets which are not considered
"investment securities" under the Investment Company Act of 1940 or assets
exempted by the SEC) in an open-end investment company with substantially
the same investment objectives). Shareholders will be notified before any
material changes in these limitations becomes effective.

INVESTING IN RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may invest pursuant to its investment
objective and policies but which are subject to restrictions on resale
under federal securities law. Under criteria established by the Trustees,
certain restricted securities are determined to be liquid. To the extent
that restricted securities are not determined to be liquid the Fund will
limit its purchase, together with other illiquid securities, to 15% of its
net assets.

PURCHASING SECURITIES TO EXERCISE CONTROL

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

WRITING COVERED CALL OPTIONS

The 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.

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 or net assets will not result
in a violation of such restriction.

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

The Fund has no present intent to borrow money, pledge securities, or
invest in reverse repurchase agreements in excess of 5% of the value of its
total assets in the coming fiscal year. In addition, the Fund expects to
lend not more than 5% of its total assets in the coming fiscal year.

DETERMINING MARKET VALUE OF SECURITIES

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

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

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

* 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;

* futures contracts and options are valued at market values established by
the exchanges on which they are traded at the close of trading on such
exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for
the option as provided by an investment dealer or other financial
institution that deals in the option. The Board may determine in good
faith that another method of valuing such investments is necessary to
appraise their fair market value;

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

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

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

TRADING IN FOREIGN SECURITIES

Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its NAV, the
Fund values foreign securities at the latest closing price on the exchange
on which they are traded immediately prior to the closing of the NYSE.
Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the NYSE. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE.
If such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by
the Fund's Board, although the actual calculation may be done by others.

What Do Shares Cost?

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

Mixed Funding and Shared Funding

Shares used as investments for both variable annuity contracts and variable
life insurance policies is called "mixed funding." Shares used as
investments by separate accounts of unaffiliated life insurance companies
is called "shared funding."

The Fund does engage in mixed funding and shared funding. Although the Fund
does 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 will 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 Fund.

How is the Fund Sold?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.

RULE 12B-1 PLAN

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

The Fund may compensate the Distributor more or less than its actual
marketing expenses. In no event will the Fund pay for any expenses of the
Distributor that exceed the maximum Rule 12b-1 Plan fee.

SHAREHOLDER SERVICES

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

SUPPLEMENTAL PAYMENTS

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

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

Subaccounting Services

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

Redemption in Kind

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

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

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

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

Massachusetts Partnership Law

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust.

In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required by the Declaration of Trust to
use its property to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder
for any act or obligation of the Trust. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Trust itself cannot
meet its obligations to indemnify shareholders and pay judgments
against them.

Account and Share Information

VOTING RIGHTS

The insurance company separate accounts, as shareholders of the Fund, will
vote the Fund Shares held in their separate accounts at meetings of the
shareholders. Voting will be in accordance with instructions received from
contract owners of the separate accounts, as more fully outlined in the
prospectus of the separate account.

Each share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All Shares of the
Trust have equal voting rights, except that in matters affecting only a
particular Fund, only Shares of that Fund are entitled to vote.

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

Tax Information

FEDERAL INCOME TAX

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

The Fund will be treated as a single, separate entity for federal income
tax purposes so that income earned and capital gains and losses realized by
the Trust's other portfolios will be separate from those realized by the
Fund.

The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder
would be subject, in the future.

FOREIGN INVESTMENTS

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

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

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

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

Who Manages and Provides Services to the Fund?

BOARD OF TRUSTEES

The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the
shareholders. Information about each Board member is provided below and
includes each person's: name, address, birth date, present position(s)
held with the Trust, principal occupations for the past five years and
positions held prior to the past five years, total compensation received as
a Trustee from the Trust for its most recent fiscal year, and the total
compensation received from the Federated Fund Complex for the most recent
calendar year. The Trust is comprised of nine funds and the Federated Fund
Complex is comprised of 54 investment companies, whose investment advisers
are affiliated with the Fund's Adviser.

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

<TABLE>

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer $0 $0 for the
Birth date: July 28, 1924 and Director or Trustee Trust and 54 other
Federated Investors Tower of the Federated Fund investment companies
1001 Liberty Avenue Complex; Chairman and in the Fund Complex
Pittsburgh, PA Director, Federated
TRUSTEE AND CHAIRMAN Investors, Inc.;
Chairman and Trustee,
Federated Investment
Management Company;
Chairman and Director,
Federated Investment
Counseling, and
Federated Global
Investment Management
Corp.; Chairman,
Passport Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: February 3, 1934 Complex; Director, Member of Executive Trust and 54 other
15 Old Timber Trail Committee, Children's Hospital of investment companies
Pittsburgh, PA Pittsburgh; formerly: Senior Partner, Ernst & in the Fund Complex
TRUSTEE Young LLP; Director, MED 3000 Group, Inc.;
Director, Member of Executive Committee,
University of Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: June 23, 1937 Complex; President, Investment Properties Trust and 54 other
Wood/IPC Commercial Dept. Corporation; Senior Vice President, investment companies
John R. Wood Associates, Inc. Realtors John R. Wood and Associates, Inc., Realtors; in the Fund Complex
3255 Tamiami Trail North Partner or Trustee in private real estate
Naples, FL ventures in Southwest Florida; formerly:
TRUSTEE President, Naples Property Management,
Inc. and Northgate Village Development
Corporation.
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $1,591.19 $47,958.02 for the
Birth date: September 3, 1939 Complex; formerly: Partner, Andersen Trust and 39 other
175 Woodshire Drive Worldwide SC. Investment companies
Pittsburgh, PA in the Fund Complex
TRUSTEE
WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: July 4, 1918 Complex; Director and Member of the Trust and 37 other
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; investment companies
Pittsburgh, PA formerly: Vice Chairman and Director, PNC in the Fund Complex
TRUSTEE Bank, N.A., and PNC Bank Corp.; Director,
Ryan Homes, Inc.
Previous Positions: Director, United Refinery;
Director, Forbes Fund; Chairman, Pittsburgh
Foundation; Chairman, Pittsburgh Civic
Light Opera.
J. CHRISTOPHER DONAHUE*+ President or Executive Vice President of the $0 $0 for the
Birth date: April 11, 1949 Federated Fund Complex; Director or Trust and 22 other
Federated Investors Tower Trustee of some of the Funds in the investment companies
1001 Liberty Avenue Federated Fund Complex; President and in the Fund Complex
Pittsburgh, PA Director, Federated Investors, Inc.; President
TRUSTEE AND PRESIDENT and Trustee, Federated Investment
Management Company; President and
Director, Federated Investment Counseling
and Federated Global Investment
Management Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: May 18, 1922 Complex; Attorney-at-law; Director, The Trust and 10 other
571 Hayward Mill Road Emerging Germany Fund, Inc. investment companies
Concord, MA Previous Positions: President, Boston Stock in the Fund Complex
TRUSTEE Exchange, Inc.; Regional Administrator,
United States Securities and Exchange
Commission.

<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
LAWRENCE D. ELLIS, M.D.* Director or Trustee of $1,591.19 $113,860.22 for the
Birth date: October 11, 1932 the Federated Fund Trust and 54 other
3471 Fifth Avenue Complex; Professor of investment companies
Suite 1111 Medicine, University of in the Fund Complex
Pittsburgh, PA Pittsburgh; Medical
TRUSTEE Director, University of
Pittsburgh Medical
Center - Downtown;
Hematologist,
Oncologist, and
Internist, University of
Pittsburgh Medical
Center; Member, National
Board of Trustees,
Leukemia Society of
America.
Edward L. Flaherty, Jr., Esq. # Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: June 18, 1924 Complex; Attorney of Counsel, Miller, Trust and 10 other
Miller, Ament, Henny & Kochuba Ament, Henny & Kochuba; Director investment companies
205 Ross Street Emeritus, Eat'N Park Restaurants, Inc.; in the Fund Complex
Pittsburgh, PA formerly: Counsel, Horizon Financial, F.A.,
TRUSTEE Western Region; Partner, Meyer and
Flaherty.
PETER E. MADDEN Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: March 16, 1942 Complex; formerly: Representative, Trust and 54 other
One Royal Palm Way Commonwealth of Massachusetts General investment companies
100 Royal Palm Way Court; President, State Street Bank and Trust in the Fund Complex
Palm Beach, FL Company and State Street Corporation.
TRUSTEE Previous Positions: Director, VISA USA and
VISA International; Chairman and Director,
Massachusetts Bankers Association;
Director, Depository Trust Corporation.
JOHN E. MURRAY, JR., J.D., S.J.D. Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: December 20, 1932 Complex; President, Law Professor, Trust and 54 other
President, Duquesne University Duquesne University; Consulting Partner, investment companies
Pittsburgh, PA Mollica & Murray. in the Fund Complex
TRUSTEE Previous Positions: Dean and Professor of
Law, University of Pittsburgh School of Law;
Dean and Professor of Law, Villanova
University School of Law.
WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: September 14, 1925 Complex; President, World Society of Trust and 10 other
1202 Cathedral of Learning Ekistics (metropolitan planning), Athens; investment companies
University of Pittsburgh Professor, International Politics; in the Fund Complex
Pittsbugh, PA Management Consultant; Trustee, Carnegie
TRUSTEE Endowment for International Peace, RAND
Corporation, Online Computer Library
Center, Inc., National Defense
University
and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding
Chairman, National Advisory Council for
Environmental Policy and Technology,
Federal Emergency Management Advisory
Board; Trustee, Czech Management Center,
Prague.
Previous Positions: Professor, United States
Military Academy; Professor, United States
Air Force Academy.
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: June 21, 1935 Complex; Public Relations/Marketing/ Trust and 54 other
4905 Bayard Street Conference Planning. Investment companies
Pittsburgh, PA Previous Positions: National Spokesperson, in the Fund Complex
TRUSTEE Aluminum Company of America; business
owner.
JOHN S. WALSH Director or Trustee of some of the Federated $0 $0 for the
Birth date: November 28, 1957 Funds; President and Director, Heat Wagon, Trust and 40 other
2007 Sherwood Drive Inc.; President and Director, Manufacturers investment companies
Valparaiso, IN Products, Inc.; President, Portable Heater in the Fund Complex
TRUSTEE Parts, a division of Manufacturers Products,
Inc.; Director, Walsh & Kelly, Inc.; formerly:
Vice President, Walsh & Kelly, Inc.
EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birth date: October 22, 1930 the Federated Fund Complex; President, Trust and 1 other
Federated Investors Tower Executive Vice President and Treasurer of investment company
1001 Liberty Avenue some of the Funds in the Federated Fund in the Fund Complex
Pittsburgh, PA Complex; Vice Chairman, Federated
EXECUTIVE VICE PRESIDENT Investors, Inc.; Vice President, Federated
Investment Management Company and
Federated Investment Counseling,
Federated Global Investment Management
Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birth date: October 26, 1938 the Federated Fund Complex; Executive Vice Trust and 54 other
Federated Investors Tower President, Secretary, and Director, Federated investment companies
1001 Liberty Avenue Investors, Inc.; Trustee, Federated in the Fund Complex
Pittsburgh, PA Investment Management Company;
EXECUTIVE VICE PRESIDENT Director, Federated Investment Counseling
AND SECRETARY and Federated Global Investment
Management Corp.; Director, Federated
Services Company; Director, Federated
Securities Corp.

<CAPTION>
NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM TRUST AND
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST FUND COMPLEX
<S> <C> <C> <C>
RICHARD B. FISHER President or Vice $0 $0 for the
Birth date: May 17, 1923 President of some of the Trust and 6 other
Federated Investors Tower Funds in the Federated investment companies
1001 Liberty Avenue Fund Complex; Director in the Fund Complex
Pittsburgh, PA or Trustee of some of the
VICE PRESIDENT Funds in the Federated
Fund Complex; Executive
Vice President,
Federated Investors,
Inc.; Chairman and
Director, Federated
Securities Corp.
RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birth date: June 17, 1954 Vice President - Funds Financial Services Trust and 54 other
Federated Investors Tower Division, Federated Investors, Inc.; Formerly: investment companies
1001 Liberty Avenue various management positions within Funds in the Fund Complex
Pittsburgh, PA Financial Services Division of Federated
TREASURER Investors, Inc.
HENRY A. FRANTZEN Chief Investment Officer of this Fund and $0 $0 for the
Birth date: November 28, 1942 various other Funds in the Federated Fund Trust and 3 other
Federated Investors Tower Complex; Executive Vice President, investment companies
1001 Liberty Avenue Federated Investment Counseling, in the Fund Complex
Pittsburgh, PA Federated Global Investment Management
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.;
Registered Representative, Federated
Securities Corp.; Vice President, Federated
Investors, Inc.; formerly: Executive Vice
President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Chief Investment Officer/Manager,
International Equities, Brown Brothers
Harriman & Co.; Managing Director, BBH
Investment Management Limited.
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birth date: March 3, 1949 various other Funds in the Federated Fund Trust and 41 other
Federated Investors Tower Complex; Executive Vice President, investment companies
1001 Liberty Avenue Federated Investment Counseling, in the Fund Complex
Pittsburgh, PA Federated Global Investment Management
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.;
Registered Representative, Federated
Securities Corp.; Portfolio Manager,
Federated Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Investment
Management Company and Passport
Research, Ltd.
J. THOMAS MADDEN Chief Investment Officer of this Fund and $0 $0 for the
Birth date: October 22, 1945 various other Funds in the Federated Fund Trust and 12 other
Federated Investors Tower Complex; Executive Vice President, investment companies
1001 Liberty Avenue Federated Investment Counseling, in the Fund Complex
Pittsburgh, PA Federated Global Investment Management
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Investment
Management Company and Passport
Research, Ltd.

</TABLE>

+ Mr. Donahue is the father of J. Christopher Donahue, President and
Trustee of the Trust.

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions
for the Fund.

The Adviser is a wholly owned subsidiary of Federated.

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

OTHER RELATED SERVICES

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

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. The Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Adviser may
select brokers and dealers based on whether they also offer research
services (as described below). In selecting among firms believed to meet
these criteria, the Adviser may give consideration to those firms which
have sold or are selling Shares of the Fund and other funds distributed by
the Distributor and its affiliates. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by
the Fund's Board.

RESEARCH SERVICES

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

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

ADMINISTRATOR

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

<TABLE>

MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
<S> <C>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 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 Services Company may voluntarily waive a portion of its fee and
may reimburse the Fund for expenses.

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

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

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

INDEPENDENT AUDITORS

Deloitte & Touche LLP is the independent auditors for the Fund.

How Does the Fund Measure Performance?

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

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

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

TOTAL RETURN

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

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

When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather
than annualizing the total return.

YIELD

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

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

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

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

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

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

LIPPER ANALYTICAL SERVICES, INC.

Lipper Analytical Services, Inc. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "short-term
investment grade debt funds" category in advertising and sales literature.

LIPPER SMALL COMPANY GROWTH FUND AVERAGE

Lipper Small Company Growth Fund Average is an average of the total returns
for 312 growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.

LIPPER SMALL COMPANY GROWTH FUND INDEX

Lipper Small Company Growth Fund Index is an average of the net asset-
valuated total returns for the top 30 small company growth funds tracked by
Lipper Analytical Services, Inc., an independent mutual fund rating
service.

MORNINGSTAR, INC.

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.

WILSHIRE 5000 EQUITY INDEXES

Wilshire 5000 Equity Indexes consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available, and can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks.

STANDARD & POOR'S DAILY STOCK PRICE INDEX

Standard & Poor's Daily Stock Price Index of 500 Common Stocks (S&P 500),
an unmanaged composite index of common stocks in industrial,
transportation, and financial and public utility companies, can be used to
gauge general market performance and to compare to the total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the S&P 500 assumes reinvestments of all dividends paid by stocks
listed on its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in the Standard &
Poor's figures.

S&P 600 SMALL CAP INDEX

S&P 600 Small Cap Index is an unmanaged capitalization weighted index that
measures the performance of selected U.S. stocks with a small market
capitalization.

STRATEGIC INSIGHT SMALL COMPANY GROWTH FUNDS INDEX

Strategic Insight Small Company Growth Funds Index consists of mutual funds
that invest in well-established companies primarily for long-term capital
gains rather than current income.

STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING

Strategic Insight Mutual Fund Research and Consulting, ranks fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all capital gains distributions and
income dividends and takes into account any change in net asset value over
a specified period of time. From time to time, the Fund will quote its
Strategic Insight ranking in advertising and sales literature.

RUSSELL 2000 SMALL STOCK INDEX

Russell 2000 Small Stock Index is an unmanaged capitalization weighted
index consisting of 2,000 small capitalization common stocks. Investments
cannot be made in an index.

VALUE LINE COMPOSITE INDEX

Value Line Composite Index consists of approximately 1,700 common equity
securities. It is based on a geometric average of relative price changes of
the component stocks and does not include income.

VALUE LINE MUTUAL FUND SURVEY

Value Line Mutual Fund Survey, published by Value Line Publishing, Inc.,
analyzes price, yield, risk, and total return for equity and fixed income
mutual funds. The highest rating is One, and ratings are effective for two
weeks.

MUTUAL FUND SOURCE BOOK

Mutual Fund Source Book, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.

CDA MUTUAL FUND REPORT

CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.

FINANCIAL PUBLICATIONS:

The Wall Street Journal, Business Week, Changing Times, Financial World,
Forbes, Fortune, and Money Magazines, among others-provide performance
statistics over specified time periods.

Who is Federated Investors, Inc.?

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

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

MUNICIPAL FUNDS

In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds
with approximately $12.5 billion in total assets. In 1976, Federated
introduced one of the first municipal bond mutual funds in the industry and
is now one of the largest institutional buyers of municipal securities. The
Funds may quote statistics from organizations including The Tax Foundation
and the National Taxpayers Union regarding the tax obligations of
Americans.

EQUITY FUNDS

In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 279 equity funds totaling
approximately $14.9 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated's value-
oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system
that was developed in the 1970s.

CORPORATE BOND FUNDS

In the corporate bond sector, as of December 31, 1998, Federated managed 9
money market funds and 15 bond funds with assets approximating
$22.8 billion and $7.1 billion, respectively. Federated's corporate bond
decision making-based on intensive, diligent credit analysis-is backed by
over 26 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the
industry. In 1983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market totaling more
than $209 billion.

GOVERNMENT FUNDS

In the government sector, as of December 31, 1998, Federated manages 9
mortgage-backed, 5 government/agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and
$41.6 billion, respectively. Federated trades approximately $425 million
in U.S. government and mortgage-backed securities daily and places
approximately $25 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in U.S. government
bond securities in 1969. Federated has been a major force in the short- and
intermediate-term government markets since 1982 and currently manages
approximately $43.2 billion in government funds within these maturity
ranges.

MONEY MARKET FUNDS

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market
fund. Simultaneously, the company pioneered the use of the amortized cost
method of accounting for valuing shares of money market funds, a principal
means used by money managers today to value money market fund shares. Other
innovations include the first institutional tax-free money market fund.
As of December 31, 1998, Federated managed more than $76.7 billion in
assets across 52 money market funds, including 19 government, 9 prime and
23 municipal with assets approximating $41.6 billion, $22.8 billion and
$12.5 billion, respectively.

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

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $5 trillion to the more than 7,300 funds
available, according to the Investment Company Institute.

FEDERATED CLIENTS OVERVIEW

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

INSTITUTIONAL CLIENTS

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

BANK MARKETING

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

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

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

Investment Ratings

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

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

AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

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

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

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

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

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

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

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

MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

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

* Leading market positions in well established industries.

* High rates of return on funds employed.

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

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS

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

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

FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS

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

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

Addresses

FEDERATED SMALL CAP STRATEGIES FUND II

Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER

Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

INDEPENDENT AUDITORS

Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110-1617

PROSPECTUS

Federated Strategic Income Fund II

A Portfolio of Federated Insurance Series

A mutual fund seeking a high level of current income by investing in
three categories of fixed income securities: domestic investment grade,
domestic non-investment grade corporate and foreign.

MAY 21, 1999

CONTENTS

Risk/Return Summary 1

What are the Fund's Investment Strategies? 2

What are the Principal Securities in Which the

Fund Invests? 4

What are the Specific Risks of Investing in the Fund? 6

What Do Shares Cost? 9

How is the Fund Sold? 9

How to Purchase and Redeem Shares 9

Account and Share Information 10

Who Manages the Fund? 10

Financial Information 12

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to seek a high level of current income.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the strategies and policies
described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund allocates the portfolio among three categories of fixed income
securities: domestic investment grade (including U.S. government, mortgage
backed and corporate), domestic non-investment grade corporate and
foreign. Based upon historical returns, the investment adviser, Federated
Investment Management Company (Adviser) expects the three categories of
investments to have different returns and risks under similar market
conditions. The Adviser relies on the differences in the expected
performance of each category to manage risks by allocating the Fund's
portfolio among the three categories. The Adviser also seeks to enhance the
Fund's performance by allocating more of its portfolio to the category that
the Adviser expects to offer the best balance between risk and return.
While the Fund's portfolio usually includes securities from all three
categories, the Fund limits the amount it may invest in a single category
to 50% of assets.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose
money by investing in the Fund. The primary factors that may reduce the
Fund's returns include:

* INTEREST RATE RISK. Prices of fixed income securities generally fall when
interest rates rise.

* PREPAYMENT RISK. When homeowners prepay their mortgages in response to
lower interest rates, the Fund will be required to reinvest the proceeds
at the lower interest rates available. Also, when interest rates fall,
the price of mortgage backed securities may not rise to as great an extent
as that of other fixed income securities.

* CALL RISKS. The Fund's performance may be adversely affected by the
possibility that an issuer of a security held by the Fund may redeem the
security prior to maturity at a price below its current market value.

* CURRENCY RISKS. Because exchange rates for currencies fluctuate daily,
prices of the foreign securities in which the Fund invests are more
volatile than prices of securities traded exclusively in the U.S.

* LIQUIDITY RISKS. The foreign securities in which the Fund invests may be
less readily marketable and may be subject to greater fluctuation in
price than other securities.

* SECTOR RISKS. Because the Fund may allocate relatively more assets to
certain industry sectors and geographic regions than others, the Fund's
performance may be more susceptible to any developments which affect
those sectors or geographic areas emphasized by the Fund.

* CREDIT RISKS. There is a possibility that issuers of securities in which
the Fund may invest may default in the payment of interest or principal on
the securities when due, which would cause the Fund to lose money.

* RISKS ASSOCIATED WITH NON-INVESTMENT GRADE SECURITIES. The Fund may
invest a portion of its assets in securities rated below investment grade
which may be subject to greater interest rate, credit and liquidity risks
than investment grade securities.

RISK/RETURN BAR CHART AND TABLE

A performance bar chart and total returns for the Fund are not provided
since this is a new Fund and has not been in operation for a full calendar
year.

What are the Fund's Investment Strategies?

The Fund allocates the portfolio among three categories of fixed income
securities: investment grade (including U.S. government, mortgage backed
and corporate), domestic non-investment grade corporate and foreign. In
allocating the Fund's portfolio among the three categories, the Adviser
begins by analyzing a variety of economic and market indicators, such as:

* the current level of global interest rates and the likely direction of
changes in interest rates;

* the current state of the global economy and the outlook for future
economic activity; and

* the historical returns of each category.

Based on this analysis, the Adviser compares the anticipated effects on the
performance and risks of each category of securities. The Adviser relies on
the differences in the expected performance of each category to manage
risks by allocating the Fund's portfolio among the three categories. The
Adviser also seeks to enhance the Fund's performance by allocating more of
its portfolio to the category that the Adviser expects to offer the best
balance between risk and return. While the Fund's portfolio usually
includes securities from all three categories, the Fund limits the amount
it may invest in a single category to 50% of assets.

The selection of portfolio securities involves an approach that is specific
to each category of fixed income securities. With regard to the selection
of domestic investment grade fixed income securities, the Adviser analyzes
expected trends in corporate earnings to determine the proper mix between
U.S. government securities, mortgage backed and corporate. The Adviser
manages the U.S. government securities domestic investment grade portion
of the category by analyzing the dollar weighted average duration. Duration
measures the price sensitivity of a group of fixed income securities to
changes in interest rates. The Adviser generally shortens the
U.S. government securities' average duration when it expects interest
rates to rise and extends the duration when it expects interest rates to
fall. The Adviser selects U.S. government securities used to lengthen or
shorten the portfolio's duration by comparing the returns currently
offered by different investments to their historical and expected returns.

The Fund may invest in mortgage backed securities primarily by investing in
another mutual fund (which is not available for general investment by the
public) that owns those securities and that is advised by an affiliate of
the Adviser. This other mutual fund is managed independently of the Fund
and may incur administrative expenses. Therefore, any such investment by
the Fund may be subject to duplicate expenses. However, the Adviser
believes that the benefits and efficiencies of this approach should
outweigh the potential additional expenses. The Fund may also invest in
such securities directly.

In selecting U.S. government mortgage backed securities, the analysis
involves a duration evaluation similar to that of the U.S. government
securities portion. The analysis also focuses on the expected cash flows
from the pool of mortgage obligations supporting the security. To assess
the relative returns and risks of these securities, the Adviser analyzes
how the timing, amount, and division of cash flows from the pool might
change in response to changing economic and market conditions.

The Adviser uses corporate earnings analysis to determine which business
sectors and credit ratings to look for when investing the domestic
corporate securities portion of the category. In selecting a domestic
corporate fixed income security, the Adviser analyzes the business,
competitive position, and financial condition of the issuer to assess
whether the security's risk is commensurate with its potential return.

The Fund will invest in domestic non-investment grade corporate fixed
income securities primarily by investing in another mutual fund (which is
not available for general investment by the public) advised by an affiliate
of the Adviser. The other mutual fund is managed independently of the Fund
and may incur administrative expenses. Therefore, any such investment by
the Fund may be subject to duplicate expenses. However, the Adviser
believes that the benefits and efficiencies of this approach should
outweigh the potential additional expenses. The Fund may also invest
directly in non-investment grade corporate securities. Although the
selection of domestic non-investment grade corporate securities involves
the same factors as investment grade securities, the Adviser gives greater
emphasis to its analysis of the issuer.

With regard to the foreign fixed income securities allocation, the Fund
invests in foreign government and corporate debt obligations. The
securities may be denominated in foreign currency or in U.S. dollars. The
Adviser looks primarily for securities offering higher interest rates. The
Adviser attempts to manage the risks of these securities in two ways:
first, by investing the foreign security portion of the portfolio in a
large number of securities from a wide range of foreign countries; and
second, by allocating this portion of the portfolio among countries whose
markets, based on historical analysis, respond differently to changes in
the global economy.

In implementing this strategy, the Adviser also invests a portion of the
foreign securities allocation in emerging market countries. Many emerging
market countries issue securities rated below investment grade. The Fund
may invest up to 80% of its foreign securities portfolio in emerging
markets, with the balance invested in developed markets.

The Adviser weighs several factors in selecting investments for the
portfolio. First, the Adviser analyzes a country's general economic
condition and outlook, including its interest rates, foreign exchange
rates and current account balance. The Adviser then analyzes the country's
financial condition, including its credit ratings, government budget, tax
base, outstanding public debt and the amount of public debt held outside
the country. In connection with this analysis, the Adviser also considers
how developments in other countries in the region or the world might affect
these factors. Using its analysis, the Adviser tries to identify countries
with favorable characteristics, such as a strengthening economy, favorable
inflation rate, sound budget policy or strong public commitment to repay
government debt. The Adviser then analyzes the business, competitive
position, and financial condition of the issuer to assess whether the
security's risk is commensurate with its potential return.

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

FIXED INCOME SECURITIES

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

TREASURY SECURITIES

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

AGENCY SECURITIES

CORPORATE DEBT SECURITIES

MORTGAGE BACKED SECURITIES

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

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

FOREIGN SECURITIES

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

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

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

Foreign securities are often denominated in foreign currencies. Along with
the risks normally associated with domestic fixed income securities,
foreign securities are subject to currency risks and risks of foreign
investing.

CONVERTIBLE SECURITIES

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

CREDIT ENHANCEMENT

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

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

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

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

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

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.

CALL AND PREPAYMENT RISKS

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

* Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due,
payments on mortgage backed securities include both interest and a
partial payment of principal. This partial payment of principal may be
comprised of a scheduled principal payment as well as an unscheduled
payment from the voluntary prepayment, refinancing or foreclosure of the
underlying loans. These unscheduled payments of principal can adversely
affect the price and yield of mortgage backed securities. For example,
during periods of declining interest rates, prepayments can be expected
to accelerate, and the Fund would be required to reinvest the proceeds at
the lower interest rates then available. In addition, like other
interest-bearing securities, the values of mortgage backed securities
generally fall when interest rates rise. Since rising interest rates
generally result in decreased prepayments of mortgage backed securities,
this could cause mortgage securities to have greater average lives than
expected and their value may decline more than other fixed income
securities. Conversely, when interest rates fall, their potential for
capital appreciation is limited due to the existence of the prepayment
feature.

* Generally, mortgage backed securities compensate for greater prepayment
risk by paying a higher yield. The additional interest paid for risk is
measured by the difference between the yield of a mortgage backed
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread). An increase in the spread will cause the price of
the security to decline. Spreads generally increase in response to
adverse economic or market conditions.

LIQUIDITY RISKS

SECTOR RISKS

* A substantial part of the Fund's portfolio may be comprised of securities
issued or credit enhanced by companies in similar businesses, or with
other similar characteristics. As a result, the Fund will be more
susceptible to any economic, business, political or other developments
which generally affect these issuers.

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

CURRENCY RISKS

* Exchange rates for currencies fluctuate daily. The combination of
currency risk and market risks tends to make securities traded in foreign
markets more volatile than securities traded exclusively in the U.S.

* The adviser attempts to manage currency risk by limiting the amount the
Fund invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in
the value of the U.S. dollar relative to other currencies.

RISKS OF FOREIGN INVESTING

* Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United
States. Securities in foreign markets may also be subject to taxation
policies that reduce returns for U.S. investors.

* Foreign countries may have restrictions on foreign ownership or may
impose exchange controls, capital flow reductions or repatriation
restrictions which could adversely affect the Fund's investments.

* Foreign financial markets may have fewer investor protections than
domestic markets. For instance, there may be less publicly available
information about foreign companies and foreign countries may lack
uniform accounting, auditing and financial reporting standards or
regulatory requirements comparable to those applicable to U.S. companies.

* Due to these risk factors, foreign securities may be more volatile and
less liquid than similar securities traded in the U.S.

What Do Shares Cost?

How is the Fund Sold?

RULE 12B-1 PLAN

How to Purchase and Redeem Shares

Purchase orders must be received by your participating insurance company by
4:00 p.m. (Eastern time). The order will be processed at the NAV calculated
on that day if the Fund receives from the participating insurance company:

* orders in proper form by 8:00 a.m. (Eastern time) on the next business
day; and

* federal funds on the business day following the day the Fund received the
order.

Participating insurance companies are responsible for properly
transmitting purchase orders and federal funds to the Fund.

Account and Share Information

DIVIDENDS

The Fund declares and pays any dividends annually.

Shares of the Fund will begin earning dividends if owned on the record
date. Dividends of the Fund are automatically reinvested in additional
shares.

TAX INFORMATION

The Fund intends to comply with variable asset diversification
regulations. If the Fund fails to comply with these regulations, contracts
invested in the Fund will 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 the Fund
to the separate accounts.

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

Who Manages the Fund?

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

The Adviser has delegated daily management of some of the Fund assets to
the Sub-Adviser, Federated Global Investment Management Corp. (formerly,
Federated Global Research Corp.), who is paid by the Adviser and not the
Fund, based on the portion of foreign securities the Sub-Adviser manages.

THE FUND'S PORTFOLIO MANAGERS ARE:

JOSEPH M. BALESTRINO

Joseph M. Balestrino has been the Fund's overall portfolio manager since
inception as well as managing the Fund's domestic investment grade
category. Mr. Balestrino joined Federated Investors in 1986 and has been a
Senior Portfolio Manager and Senior Vice President of the Fund's Adviser
since 1998. He was a Portfolio Manager and a Vice President of the Fund's
Adviser from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager and
an Assistant Vice President of the Adviser from 1993 to 1995.
Mr. Balestrino is a Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the University of Pittsburgh.

MARK E. DURBIANO

Mark E. Durbiano has been the Fund's portfolio manager since inception for
the Fund's domestic high yield category. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Portfolio Manager and a Senior Vice
President of the Fund's Adviser since 1996. From 1988 through 1995,
Mr. Durbiano was a Portfolio Manager and a Vice President of the Fund's
Adviser. Mr. Durbiano is a Chartered Financial Analyst and received his
M.B.A. in Finance from the University of Pittsburgh.

ROBERT M. KOWIT

Robert M. Kowit has been the Fund's portfolio manager since inception for
the Fund's foreign government/foreign corporate debt category. Mr. Kowit
joined Federated Investors in 1995 as a Senior Portfolio Manager and a Vice
President of the Fund's Sub-Adviser. Mr. Kowit served as a Managing Partner
of Copernicus Global Asset Management from January 1995 through
October 1995. From 1990 to 1994, he served as Senior Vice
President/Portfolio Manager of International Fixed Income and Foreign
Exchange for John Hancock Advisers. Mr. Kowit received his M.B.A. from Iona
College with a concentration in finance.

MICHEAL W. CASEY, PH.D.

Micheal W. Casey, Ph.D. has been the Fund's portfolio manager since
inception for the Fund's foreign government/foreign corporate debt
category. Mr. Casey joined Federated Investors in 1996 as a Senior
Investment Analyst and an Assistant Vice President. Mr. Casey currently
serves as a Portfolio Manager and has been a Vice President of the Sub-
Adviser since 1998. Mr. Casey served as an International Economist and
Portfolio Strategist for Maria Fiorini Ramirez Inc. from 1990 to 1996.
Mr. Casey earned a Ph.D. concentrating in economics from The New School for
Social Research and a M.Sc. from the London School of Economics.

The Adviser, the Sub-Adviser and other subsidiaries of Federated advise
approximately 175 mutual funds and separate accounts, which total
approximately $110 billion in assets as of December 31, 1998. Federated
was established in 1955 and is one of the largest mutual fund investment
managers in the United States with 1,900 employees. More than 4,000
investment professionals make Federated Funds available to their
customers.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.85% of the
Fund's average daily net assets. The Adviser may voluntarily waive a
portion of its fee or reimburse the Fund for certain operating expenses.

YEAR 2000 READINESS

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

Financial Information

The Fund's fiscal year end is December 31. As this is the Fund's first
fiscal year, financial information is not yet available.

[Graphic]
Federated
World-Class Investment Manager
PROSPECTUS

Federated Strategic Income Fund II

A Portfolio of Federated Insurance Series

MAY 21, 1999

A Statement of Additional Information (SAI) dated May 21, 1999 is
incorporated by reference into this prospectus. To obtain the SAI without
charge and make inquiries call the Fund at 1-800-341-7400. To obtain other
information, call your investment professional or the Fund.

[Graphic]
Federated
Federated Strategic Income Fund II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor

Investment Company Act File No. 811-8042

Cusip 313916868

G02586-01 (5/99)

[Graphic]

STATEMENT OF ADDITIONAL INFORMATION

Federated Strategic Income Fund II

A Portfolio of Federated Insurance Series

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Strategic Income
Fund II (Fund), dated May 21, 1999. This SAI incorporates by reference the
Fund's Annual Report. Obtain the prospectus or the Annual Report without
charge by calling 1-800-341-7400.

MAY 21, 1999

[Graphic]

Federated
World-Class Investment Manager
Federated Strategic Income Fund II
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor

G02588-01 (5/99)

[Graphic]

CONTENTS

How is the Fund Organized? 1

Securities in Which the Fund Invests 1

What Do Shares Cost? 10

Mixed Funding and Shared Funding 10

How is the Fund Sold? 10

Subaccounting Services 10

Redemption in Kind 10

Massachusetts Partnership Law 11

Account and Share Information 11

Tax Information 11

Who Manages and Provides Services to the Fund? 12

How Does the Fund Measure Performance? 15

Who is Federated Investors, Inc.? 17

Investment Ratings 18

Addresses 20

How is the Fund Organized?

The Fund is a diversified portfolio of Federated Insurance Series (Trust).
The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on
September 15, 1993. The Trust may offer separate series of shares
representing interests in separate portfolios of securities. The Trust
changed its name from Insurance Management Series to Federated Insurance
Series on November 14, 1995. The Fund's investment adviser is Federated
Investment Management Company (Adviser) and the sub-adviser is Federated
Global Investment Management Corp. (Sub-Adviser). The Adviser, formerly
known as Federated Advisers, changed its name effective March 31, 1999.

Securities in Which the Fund Invests

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

NON-PRINCIPAL INVESTMENT STRATEGY

HEDGING

Hedging transactions are intended to reduce specific risks. For example, to
protect the Fund against circumstances that would normally cause the Fund's
portfolio securities to decline in value, the Fund may buy or sell a
derivative contract that would normally increase in value under the same
circumstances. The Fund may attempt to lower the cost of hedging by
entering into transactions that provide only limited protection, including
transactions that (1) hedge only a portion of its portfolio, (2) use
derivatives contracts that cover a narrow range of circumstances or
(3) involve the sale of derivatives contracts with different terms.
Consequently, hedging transactions will not eliminate risk even if they
work as intended. In addition, hedging strategies are not always
successful, and could result in increased expenses and losses to the Fund.

FIXED INCOME SECURITIES

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

TREASURY SECURITIES

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

AGENCY SECURITIES

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

CORPORATE DEBT SECURITIES

Commercial Paper

Demand Instruments

MUNICIPAL SECURITIES

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

MORTGAGE BACKED SECURITIES

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

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

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

Sequential CMOs

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

PACs, TACs and Companion Classes

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

IOs and POs

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

Floaters and Inverse Floaters

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

Z Classes and Residual Classes

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

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

ASSET BACKED SECURITIES

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

ZERO COUPON SECURITIES

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

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

BANK INSTRUMENTS

INSURANCE CONTRACTS

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

CREDIT ENHANCEMENT

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

CONVERTIBLE SECURITIES

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

EQUITY SECURITIES

Generally, less than 10% of the value of the Fund's total assets may be
invested in equity securities. The Fund may exceed this limitation for
temporary defensive purposes or if unusual market conditions occur. Equity
securities represent a share of an issuer's earnings and assets, after the
issuer pays its liabilities. Investors cannot predict the income they will
receive from equity securities because issuers generally have discretion
as to the payment of any dividends or distributions. However, equity
securities offer greater potential for appreciation than many other types
of securities, because their value increases directly with the value of the
issuer's business. The following describes the types of equity securities
in which the Fund invests.

COMMON STOCKS

PREFERRED STOCKS

WARRANTS

The Fund may invest up to 5% of its assets in warrants. Warrants give the
Fund the option to buy the issuer's equity securities at a specified price
(the exercise price) at a specified future date (the expiration date). The
Fund may buy the designated securities by paying the exercise price before
the expiration date. Warrants may become worthless if the price of the
stock does not rise above the exercise price by the expiration date. This
increases the interest rate risks of warrants as compared to the underlying
security. Rights are the same as warrants, except companies typically issue
rights to existing stockholders.

FOREIGN SECURITIES

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

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

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

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

BRADY BONDS

Brady bonds are U.S. dollar denominated debt obligations that foreign
governments issue in exchange for commercial bank loans. The International
Monetary Fund typically negotiates the exchange to cure or avoid a default
by restructuring the terms of the bank loans. The principal amount of some
Brady bonds is collateralized by zero coupon U.S. Treasury securities
which have the same maturity as the Brady bonds. However, neither the
U.S. government not the International Monetary Fund has guaranteed the
repayment of any Brady Bond.

FOREIGN EXCHANGE CONTRACTS

FOREIGN GOVERNMENT SECURITIES

DERIVATIVE CONTRACTS

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

FUTURES CONTRACTS

The Fund may buy and sell financial futures contracts.

OPTIONS

The Fund may:

* Buy put options on portfolio securities, securities indices, and listed
put options on futures contracts in anticipation of a decrease in the
value of the underlying asset;

* Write covered call options on portfolio securities and listed call
options on futures contracts to generate income from premiums, and in
anticipation of a decrease or only limited increase in the value of the
underlying asset. If a call written by the Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying asset over the exercise price plus the premium received;

* Write secured put options on portfolio securities (to generate income
from premiums, and in anticipation of an increase or only limited
decrease in the value of the underlying asset). In writing puts, there is
a risk that the Fund may be required to take delivery of the underlying
asset when its current market price is lower than the exercise price;

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

* Buy or write options to close out existing options positions.

The Fund may also write call options on financial futures contracts to
generate income from premiums, and in anticipation of a decrease or only
limited increase in the value of the underlying asset. If a call written by
the Fund is exercised, the Fund foregoes any possible profit from an
increase in the market price of the underlying asset over the exercise
price plus the premium received.

The Fund may also write put options on financial futures contracts to
generate income from premiums, and in anticipation of an increase or only
limited decrease in the value of the underlying asset. In writing puts,
there is a risk that the Fund may be required to take delivery of the
underlying asset when its current market price is lower than the exercise
price.

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

HYBRID INSTRUMENTS

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

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

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

DELAYED DELIVERY TRANSACTIONS

TO BE ANNOUNCED SECURITIES (TBAS)

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

DOLLAR ROLLS

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

SECURITIES LENDING

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

Securities lending activities are subject to interest rate risks and credit
risks. These transactions create leverage risks.

ASSET COVERAGE

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

INVESTMENT RISKS

There are many factors which may effect an investment in the Fund. The
Fund's principal risks are described in its prospectus. Additional risk
factors are outlined below.

INTEREST RATE RISKS

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

CREDIT RISKS

* Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
the Fund will lose money.

CALL AND PREPAYMENT RISKS

SECTOR RISKS

* A substantial part of the Fund's portfolio may be comprised of securities
issued or credit enhanced by companies in similar businesses, or with
other similar characteristics. As a result, the Fund will be more
susceptible to any economic, business, political, or other developments
which generally affect these issuers.

CURRENCY RISKS

RISKS OF FOREIGN INVESTING

* Due to these risk factors, foreign securities may be more volatile and
less liquid than similar securities traded in the U.S.

STOCK MARKET RISKS

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

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

EURO RISKS

* The Fund may make investments in securities denominated in the Euro, the
new single currency of the European Monetary Union (EMU). Therefore, the
exchange rate between the Euro and the U.S. dollar will have a
significant impact on the value of the Fund's investments.

* With the advent of the Euro, the participating countries in the EMU can
no longer follow independent monetary policies. This may limit these
countries' ability to respond to economic downturns or political
upheavals, and consequently reduce the value of their foreign government
securities.

LIQUIDITY RISKS

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

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

LEVERAGE RISKS

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with the purchase and sale of options,
financial futures and options on financial futures, but may obtain such
short-term credits as may be necessary for clearance of transactions.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling the
Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of the value
of the Fund's total assets are outstanding. During the period any reverse
repurchase agreements are outstanding, but only to the extent necessary to
assure completion of the reverse repurchase agreements, the Fund will
restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements.

PLEDGING ASSETS

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it 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
the borrowing. Margin deposits for the purchase and sale of options,
financial futures contracts and related options are not deemed to be a
pledge.

INVESTING IN REAL ESTATE

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities, except that the Fund may
purchase and sell financial futures contracts and related options.
Further, the Fund may engage in transactions in foreign currencies and may
purchase and sell options on foreign currencies and indices for hedging
purposes.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Fund may purchase pursuant
to its investment objective, policies, and limitations.

DIVERSIFICATION OF INVESTMENTS

With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities of any one issuer (other than cash,
cash items or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

CONCENTRATION OF INVESTMENTS

The Fund will not invest 25% or more of the value of its total assets in
any one industry or in government securities of any one foreign country,
except it may invest 25% or more of the value of its total assets in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.

LENDING CASH OR SECURITIES

The Fund will not lend any of its assets, except portfolio securities up to
one-third of the value of its total assets. This shall not prevent the Fund
from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objective, policies, and limitations.

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits with maturities over seven days, interest rate swaps, caps and
floors determined by the investment adviser to be illiquid, and certain
securities not determined to be liquid under guidelines established by the
Trustees.

DEALING IN PUTS AND CALLS

The Fund may not write or purchase options, except that the Fund may write
covered call options and secured put options on up to 25% of its nets
assets and may purchase put and call options, provided that no more than 5%
of the fair market value of its net assets may be invested in premiums on
such options.

The Fund has no present intent to borrow money or pledge securities in
excess of 5% of the value of its total assets in the coming fiscal year.

DETERMINING MARKET VALUE OF SECURITIES

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

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

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

* 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;

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

TRADING IN FOREIGN SECURITIES

What Do Shares Cost?

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

Mixed Funding and Shared Funding

How is the Fund Sold?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.

RULE 12B-1 PLAN

The Fund may compensate the Distributor more or less than its actual
marketing expenses. In no event will the Fund pay for any expenses of the
Distributor that exceed the maximum Rule 12b-1 Plan fee.

SHAREHOLDER SERVICES

SUPPLEMENTAL PAYMENTS

Subaccounting Services

Redemption in Kind

Massachusetts Partnership Law

Account and Share Information

VOTING RIGHTS

Tax Information

FEDERAL INCOME TAX

The Fund is entitled to a loss carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder
would be subject, in the future.

FOREIGN INVESTMENTS

Who Manages and Provides Services to the Fund?

BOARD OF TRUSTEES

<TABLE>

NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST TRUST AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer $0 $0 for the
Birth date: July 28, 1924 and Director or Trustee Trust and
Federated Investors Tower of the Federated Fund 54 other investment
1001 Liberty Avenue Complex; Chairman and companies
Pittsburgh, PA Director, Federated in the Fund Complex
TRUSTEE AND CHAIRMAN Investors, Inc.;
Chairman and Trustee,
Federated Investment
Management Company;
Chairman and Director,
Federated Investment
Counseling and Federated
Global Investment
Management Corp.;
Chairman, Passport
Research, Ltd.
THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: February 3, 1934 Complex; Director, Member of Executive Trust and
15 Old Timber Trail Committee, Children's Hospital of 54 other investment
Pittsburgh, PA Pittsburgh; formerly: Senior Partner, Ernst & companies
TRUSTEE Young LLP; Director, MED 3000 Group, Inc.; in the Fund Complex
Director, Member of Executive Committee,
University of Pittsburgh.
JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: June 23, 1937 Complex; President, Investment Properties Trust and 54 other
Wood/IPC Commercial Dept. Corporation; Senior Vice President, investment companies
John R. Wood Associates, Inc. Realtors John R. Wood and Associates, Inc., Realtors; in the Fund Complex
3255 Tamiami Trail North Partner or Trustee in private real estate
Naples, FL ventures in Southwest Florida; formerly:
TRUSTEE President, Naples Property Management,
Inc. and Northgate Village Development
Corporation.
NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $1,591.19 $47,958.02 for the
Birth date: September 3, 1939 Complex; formerly: Partner, Andersen Trust and 39 other
175 Woodshire Drive Worldwide SC. investment companies
Pittsburgh, PA in the Fund Complex
TRUSTEE
WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: July 4, 1918 Complex; Director and Member of the Trust and 37 other
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; investment companies
Pittsburgh, PA formerly: Vice Chairman and Director, PNC in the Fund Complex
TRUSTEE Bank, N.A., and PNC Bank Corp.; Director,
Ryan Homes, Inc.
Previous Positions: Director, United Refinery;
Director, Forbes Fund; Chairman, Pittsburgh
Foundation; Chairman, Pittsburgh Civic
Light Opera.
J. CHRISTOPHER DONAHUE*+ President or Executive Vice President of the $0 $0 for the
Birth date: April 11, 1949 Federated Fund Complex; Director or Trust and 22 other
Federated Investors Tower Trustee of some of the Funds in the investment companies
1001 Liberty Avenue Federated Fund Complex; President and in the Fund Complex
Pittsburgh, PA Director, Federated Investors, Inc.; President
TRUSTEE AND PRESIDENT and Trustee, Federated Investment
Management Company; President and
Director, Federated Investment Counseling
and Federated Global Investment
Management Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.
JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,750.56 $125,264.48 for the
Birth date: May 18, 1922 Complex; Attorney-at-law; Director, The Trust and 10 other
571 Hayward Mill Road Emerging Germany Fund, Inc. investment companies
Concord, MA Previous Positions: President, Boston Stock in the Fund Complex
TRUSTEE Exchange, Inc.; Regional Administrator,
United States Securities and Exchange
Commission.
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: October 11, 1932 Complex; Professor of Medicine, University Trust and 54 other
3471 Fifth Avenue of Pittsburgh; Medical Director, University of investment companies
Suite 1111 Pittsburgh Medical Center - Downtown; in the Fund Complex
Pittsburgh, PA Hematologist, Oncologist, and Internist,
TRUSTEE University of Pittsburgh Medical Center;
Member, National Board of Trustees,
Leukemia Society of America.

<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST TRUST AND FUND COMPLEX
<S> <C> <C> <C>
EDWARD L. FLAHERTY, JR., ESQ. # Director or Trustee of $1,750.56 $125,264.48 for the
Birth date: June 18, 1924 the Federated Fund Trust and 10 other
Miller, Ament, Henny & Kochuba Complex; Attorney of investment companies
205 Ross Street Counsel, Miller, Ament, in the Fund Complex
Pittsburgh, PA Henny & Kochuba;
TRUSTEE Director Emeritus, Eat'N
Park Restaurants, Inc.;
formerly: Counsel,
Horizon Financial, F.A.,
Western Region; Partner,
Meyer and Flaherty.
PETER E. MADDEN Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: March 16, 1942 Complex; formerly: Representative, Trust and 54 other
One Royal Palm Way Commonwealth of Massachusetts General investment companies
100 Royal Palm Way Court; President, State Street Bank and Trust in the Fund Complex
Palm Beach, FL Company and State Street Corporation.
TRUSTEE Previous Positions: Director, VISA USA and
VISA International; Chairman and Director,
Massachusetts Bankers Association;
Director, Depository Trust Corporation.
JOHN E. MURRAY, JR., J.D., S.J.D. Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: December 20, 1932 Complex; President, Law Professor, Trust and 54 other
President, Duquesne University Duquesne University; Consulting Partner, investment companies
Pittsburgh, PA Mollica & Murray. in the Fund Complex
TRUSTEE Previous Positions: Dean and Professor of
Law, University of Pittsburgh School of Law;
Dean and Professor of Law, Villanova
University School of Law.
WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: September 14, 1925 Complex; President, World Society of Trust and 10 other
1202 Cathedral of Learning Ekistics (metropolitan planning), Athens; investment companies
University of Pittsburgh Professor, International Politics; in the Fund Complex
Pittsbugh, PA Management Consultant; Trustee, Carnegie
TRUSTEE Endowment for International Peace, RAND
Corporation, Online Computer Library
Center, Inc., National Defense University
and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding
Chairman, National Advisory Council for
Environmental Policy and Technology,
Federal Emergency Management Advisory
Board; Trustee, Czech Management Center,
Prague.
Previous Positions: Professor, United States
Military Academy; Professor, United States
Air Force Academy.
MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,591.19 $113,860.22 for the
Birth date: June 21, 1935 Complex; Public Relations/Marketing/ Trust and 54 other
4905 Bayard Street Conference Planning. investment companies
Pittsburgh, PA Previous Positions: National Spokesperson, in the Fund Complex
TRUSTEE Aluminum Company of America; business
owner.
JOHN S. WALSH Director or Trustee of some of the Federated $0 $0 for the
Birth date: November 28, 1957 Funds; President and Director, Heat Wagon, Trust and
2007 Sherwood Drive Inc.; President and Director, Manufacturers 40 other investment
Valparaiso, IN Products, Inc.; President, Portable Heater companies in the
TRUSTEE Parts, a division of Manufacturers Products, Fund Complex
Inc.; Director, Walsh & Kelly, Inc.; formerly:
Vice President, Walsh & Kelly, Inc.
EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birth date: October 22, 1930 the Federated Fund Complex; President, Trust and 1 other
Federated Investors Tower Executive Vice President and Treasurer of investment company
1001 Liberty Avenue some of the Funds in the Federated Fund in the Fund Complex
Pittsburgh, PA Complex; Vice Chairman, Federated
EXECUTIVE VICE PRESIDENT Investors, Inc.; Vice President, Federated
Investment Management Company and
Federated Investment Counseling,
Federated Global Investment Management
Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.
JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birth date: October 26, 1938 the Federated Fund Complex; Executive Vice Trust and 54 other
Federated Investors Tower President, Secretary and Director, Federated investment companies
1001 Liberty Avenue Investors, Inc.; Trustee, Federated in the Fund Complex
Pittsburgh, PA Investment Management Company;
EXECUTIVE VICE PRESIDENT Director, Federated Investment Counseling
AND SECRETARY and Federated Global Investment
Management Corp.; Director, Federated
Services Company; Director, Federated
Securities Corp.
RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birth date: May 17, 1923 Funds in the Federated Fund Complex; Trust and
Federated Investors Tower Director or Trustee of some of the Funds in 6 other investment
1001 Liberty Avenue the Federated Fund Complex; Executive Vice companies
Pittsburgh, PA President, Federated Investors, Inc.; in the Fund Complex
VICE PRESIDENT Chairman and Director, Federated Securities
Corp.

<CAPTION>
NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION COMPENSATION FROM
POSITION WITH TRUST FOR PAST FIVE YEARS FROM TRUST TRUST AND FUND COMPLEX
<S> <C> <C> <C>
RICHARD J. THOMAS Treasurer of the $0 $0 for the
Birth date: June 17, 1954 Federated Fund Complex; Trust and
Federated Investors Tower Vice President-Funds 54 other investment
1001 Liberty Avenue Financial Services companies
Pittsburgh, PA Division, Federated in the Fund Complex
TREASURER Investors, Inc.;
Formerly: various
management positions
within Funds Financial
Services Division of
Federated Investors,
Inc.
HENRY A. FRANTZEN Chief Investment Officer of this Fund and $0 $0 for the Trust and
Birth date: November 28, 1942 various other Funds in the Federated Fund 3 other investment
Federated Investors Tower Complex; Executive Vice President, companies in the
1001 Liberty Avenue Federated Investment Counseling, Fund Complex
Pittsburgh, PA Federated Global Investment Management
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.;
Registered Representative, Federated
Securities Corp.; Vice President, Federated
Investors, Inc.; formerly: Executive Vice
President, Federated Investment Counseling
Institutional Portfolio Management Services
Division; Chief Investment Officer/Manager,
International Equities, Brown Brothers
Harriman & Co.; Managing Director, BBH
Investment Management Limited.
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birth date: March 3, 1949 various other Funds in the Federated Fund Trust and
Federated Investors Tower Complex; Executive Vice President, 41 other investment
1001 Liberty Avenue Federated Investment Counseling, companies
Pittsburgh, PA Federated Global Investment Management in the Fund Complex
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.;
Registered Representative, Federated
Securities Corp.; Portfolio Manager,
Federated Administrative Services; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Investment
Management Company and Passport
Research, Ltd.
J. THOMAS MADDEN Chief Investment Officer of this Fund and $0 $0 for the
Birth date: October 22, 1945 various other Funds in the Federated Fund Trust and
Federated Investors Tower Complex; Executive Vice President, 12 other investment
1001 Liberty Avenue Federated Investment Counseling, companies
Pittsburgh, PA Federated Global Investment Management in the Fund Complex
CHIEF INVESTMENT OFFICER Corp., Federated Investment Management
Company and Passport Research, Ltd.; Vice
President, Federated Investors, Inc.;
formerly: Executive Vice President and
Senior Vice President, Federated Investment
Counseling Institutional Portfolio
Management Services Division; Senior Vice
President, Federated Investment
Management Company and Passport
Research, Ltd.

</TABLE>

+ Mr. Donahue is the father of J. Christopher Donahue, President and
Trustee of the Trust.

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions
for the Fund.

The Adviser is a wholly owned subsidiary of Federated.

OTHER RELATED SERVICES

BROKERAGE TRANSACTIONS

RESEARCH SERVICES

ADMINISTRATOR

<TABLE>

</TABLE>

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

CUSTODIAN

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

INDEPENDENT AUDITORS

Deloitte & Touche LLP is the independent auditors for the Fund.

How Does the Fund Measure Performance?

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

TOTAL RETURN

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

When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time, rather
than annualizing the total return.

YIELD

The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a 30-day period; by (ii) the
maximum offering price per Share on the last day of the period. This number
is then annualized using semi-annual compounding. This means that the
amount of income generated during the 30-day period is assumed to be
generated each month over a 12-month period and is reinvested every
6 months. The yield does not necessarily reflect income actually earned by
Shares because of certain adjustments required by the SEC and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

FINANCIAL PUBLICATIONS

The Wall Street Journal, Business Week, Changing Times, Financial World,
Forbes, Fortune and Money magazines, among others-provide performance
statistics over specified time periods.

INTERNATIONAL FINANCIAL STATISTICS

International Financial Statistics is produced by the International
Monetary Fund.

LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX

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

LEHMAN BROTHERS HIGH YIELD INDEX

Lehman Brothers High Yield Index covers the universe of fixed- rate,
publicly issued, non-investment grade debt registered with the SEC. All
bonds included in the High Yield Index must be dollar-denominated and
nonconvertible and have at least one year remaining to maturity and an
outstanding par value of at least $100 million. Generally securities must
be rated Ba1 or lower by Moody's Investors Service, including defaulted
issues. If no Moody's rating is available, bonds must be rated BB+ or lower
by S&P; and if no S&P rating is available, bonds must be rated below
investment grade by Fitch IBCA, Inc. A small number of unrated bonds is
included in the index; to be eligible they must have previously held a high
yield rating or have been associated with a high yield issuer, and must
trade accordingly.

LIPPER ANALYTICAL SERVICES, INC.

MOODY'S INVESTORS SERVICE, INC., FITCH IBCA, INC., AND STANDARD &
POOR'S

Moody's Investors Service, Inc., Fitch IBCA, Inc., and Standard & Poor's
are various publications.

MORNINGSTAR, INC.

Morningstar, Inc. is an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values, which rates more than 1,000 NASDAQ-listed
mutual funds of all types, according to their risk-adjusted returns. The
maximum rating is five stars, and ratings are effective for two weeks.

Who is Federated Investors, Inc.?

MUNICIPAL FUNDS

EQUITY FUNDS

CORPORATE BOND FUNDS

GOVERNMENT FUNDS

In the government sector, as of December 31, 1998, Federated manages 9
mortgage backed, 5 government/agency and 19 government money market mutual
funds, with assets approximating $5.3 billion, $1.8 billion and
$41.6 billion, respectively. Federated trades approximately $425 million
in U.S. government and mortgage backed securities daily and places
approximately $25 billion in repurchase agreements each day. Federated
introduced the first U.S. government fund to invest in U.S. government
bond securities in 1969. Federated has been a major force in the short- and
intermediate-term government markets since 1982 and currently manages
approximately $43.2 billion in government funds within these maturity
ranges.

MONEY MARKET FUNDS

MUTUAL FUND MARKET

FEDERATED CLIENTS OVERVIEW

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

INSTITUTIONAL CLIENTS

BANK MARKETING

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Investment Ratings

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

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

AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

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

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

MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS

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

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

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

FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS

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

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

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

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

* Leading market positions in well established industries.

* High rates of return on funds employed.

* Conservative capitalization structure with moderate 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.

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS

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

FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS

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

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

Addresses

FEDERATED STRATEGIC INCOME FUND II

Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER

Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

SUB-ADVISER

Federated Global Investment Management Corp.
175 Water Street
New York, NY 10038-4965

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

INDEPENDENT AUDITORS

Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110-1617