FEDERATED TOTAL RETURN SERIES INC, 497, 1999-12-02

FEDERATED TOTAL RETURN SERIES INC
497, 1999-12-02

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STATEMENT OF ADDITIONAL INFORMATION

Federated Mortgage Fund

A Portfolio of Federated Total Return Series, Inc.

INSTITUTIONAL SHARES

INSTITUTIONAL SERVICE SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated Mortgage Fund (Fund),
dated November 30, 1999. Obtain the prospectuses and the Annual Report's
Management Discussion and Analysis without charge by calling 1- 800-341-7400.

NOVEMBER 30, 1999

(Revised December 2, 1999)

[Graphic]
Federated

World-Class Investment Manager
Federated Mortgage Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

WWW.FEDERATEDINVESTORS.COM

Federated Securities Corp., Distributor

G01922-03 (11/99)

[Graphic]

CONTENTS

How is the Fund Organized? 1

Securities in Which the Fund Invests 1

What Do Shares Cost? 7

How is the Fund Sold? 7

Subaccounting Services 7

Redemption in Kind 8

Account and Share Information 8

Tax Information 8

Who Manages and Provides Services to the Fund? 9

How Does the Fund Measure Performance? 12

Who is Federated Investors, Inc.? 13

Addresses 15

How is the Fund Organized?

The Fund is a diversified portfolio of Federated Total Return Series, Inc.
(Corporation). The Corporation is an open-end, management investment
company that was established under the laws of the State of Maryland on
October 11, 1993. The Corporation may offer separate series of shares
representing interests in separate portfolios of securities. The
Corporation changed its name from Insight Institutional Series, Inc. to
Federated Total Return Series, Inc. on March 21, 1995. The Fund changed its
name from Federated Government Fund to Federated Mortgage Fund on June 30,
1998.

The Board of Directors (the "Board") has established two classes of shares of
the Fund, known as Institutional Shares and Institutional Service Shares
(Shares). This SAI relates to both classes of Shares. The Fund's investment
adviser is Federated Investment Management Company (Adviser). Effective March
31, 1999, Federated Management, former Adviser to the Fund, became Federated
Investment Management Company (formerly, Federated Advisers).

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

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 interest rate and prepayment risks of these mortgage backed
securities.

MORTGAGE BACKED SECURITIES

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

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

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

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

Sequential CMOs

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

PACs, TACs and Companion Classes

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

IOs and POs

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

Floaters and Inverse Floaters

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

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.

NON-GOVERNMENTAL MORTGAGE BACKED SECURITIES

Non-governmental mortgage backed securities (including non- governmental CMOs)
are issued by private entities, rather than by U. S. government agencies. The
Fund may invest in non-governmental mortgage backed securities that are rated
BBB or higher by a nationally recognized statistical rating agency. These
securities involve credit risks and liquidity risks.

ZERO COUPON SECURITIES

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

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

MORTGAGE RELATED ASSET BACKED SECURITIES

Asset backed securities are payable from pools of obligations other than first
mortgages. Most asset backed securities involve consumer or commercial debts.
The Fund will purchase only mortgage related asset backed securities such as
home equity loans, secured mortgages and manufactured housing obligations.
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. Also, asset backed securities may be issued by a private entity and,
although these securities must be rated investment grade, they present credit
risks.

CREDIT ENHANCEMENT

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

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/sell the following type of 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 put options on portfolio securities and financial futures contracts
in anticipation of a decrease in the value of the underlying asset;

* Buy or write options to close out existing options positions; and

* The Fund may also write call options on portfolio securities 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 not buy or sell futures or related options if the margin deposits
and premiums paid for these securities would exceed 5% of the Fund's total
assets.

SWAPS

Swaps are contracts in which two parties agree to pay each other (swap) the
returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party, and
the parties might not own the assets underlying the swap. The payments are
usually made on a net basis so that, on any given day, the Fund would receive
(or pay) only the amount by which its payment under the contract is less than
(or exceeds) the amount of the other party's payment. Swap agreements are
sophisticated instruments that can take many different forms, and are known by a
variety of names including caps, floors, and collars. Common swap agreement[s]
that the Fund may use include:

INTEREST RATE SWAPS

Interest rate swaps are contracts in which one party agrees to make regular
payments equal to a fixed or floating interest rate times a stated principal
amount of fixed income securities, in return for payments equal to a different
fixed or floating rate times the same principal amount, for a specific period.
For example, a $10 million LIBOR swap would require one party to pay the
equivalent of the London Interbank Offer Rate of interest (which fluctuates) on
$10 million principal amount in exchange for the right to receive the equivalent
of a stated fixed rate of interest on $10 million principal amount.

CAPS AND FLOORS

Caps and Floors are contracts in which one party agrees to make payments only if
an interest rate or index goes above (Cap) or below (Floor) a certain level in
return for a fee from the other party.

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 AND BORROWING FOR LEVERAGE

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. The
Fund may borrow an amount up to one-third of the Fund's net assets (exclusive of
such borrowings) for leverage purposes.

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.

TO BE ANNOUNCED SECURITIES (TBAS)

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

SECURITIES LENDING

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

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

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

Securities lending activities are subject to interest rate and credit risks.

ASSET COVERAGE

In order to secure its obligations in connection with 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
special transactions.

Inter-fund Borrowing and Lending Arrangements

The SEC has granted an exemption that permits the Fund and all other funds
advised by subsidiaries of Federated Investors, Inc. ("Federated funds") to lend
and borrow money for certain temporary purposes directly to and from other
Federated funds. Participation in this inter-fund lending program is voluntary
for both borrowing and lending funds, and an interfund loan is only made if it
benefits each participating fund. Federated administers the program according to
procedures approved by the Fund's Board, and the Board monitors the operation of
the program. Any inter-fund loan must comply with certain conditions set out in
the exemption, which are designed to assure fairness and protect all
participating funds.

For example, inter-fund lending is permitted only (a) to meet shareholder
redemption requests, and (b) to meet commitments arising from "failed" trades.
All inter-fund loans must be repaid in seven days or less. The Fund's
participation in this program must be consistent with its investment policies
and limitations, and must meet certain percentage tests. Inter-fund loans may be
made only when the rate of interest to be charged is more attractive to the
lending fund than market-competitive rates on overnight repurchase agreements
(the "Repo Rate") and more attractive to the borrowing fund than the rate of
interest that would be charged by an unaffiliated bank for short-term borrowings
(the "Bank Loan Rate"), as determined by the Board. The interest rate imposed on
inter-fund loans is the average of the Repo Rate and the Bank Loan Rate.

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 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.

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

INVESTMENT RISKS

There are many factors which may affect an investment in the Fund. The Fund's
principal risks are outlined below.

INTEREST RATE RISKS

* Prices of fixed income securities rise and fall in response to changes in the
interest rate paid by similar securities. Generally, when interest rates rise,
prices of fixed income securities fall. However, market factors, such as the
demand for particular fixed income securities, may cause the price of certain
fixed income securities to fall while the prices of other securities rise or
remain unchanged.

* 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, Inc. 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.

PREPAYMENT RISKS

* 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 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 or 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 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 weighted average life (the spread).
An increase in the spread will cause the price of the security to decline.
Spreads may generally increase in response to adverse economic or market
conditions.

LIQUIDITY RISKS

* Liquidity risk 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.

* Trading opportunities are more limited for CMOs that have complex terms or
that 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.

RISKS ASSOCIATED WITH COMPLEX CMOS

* CMOs with complex terms, such as companion classes, IOs, POs, and Inverse
Floaters, generally entail greater market, prepayment and liquidity risks than
other mortgage backed securities. For example, their prices are more volatile
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.

FUNDAMENTAL INVESTMENT OBJECTIVE

The Fund's investment objective is to provide total return. The investment
objective may not be changed by the Fund's Directors without shareholder
approval.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

BORROWING MONEY

The Fund will not borrow money, except to the extent permitted under the 1940
Act (which currently limits borrowings to no more than 33-1/3% of the value of
the Fund's total assets). For purposes of this investment restriction, the entry
into options, forward contracts, futures contracts, including those related to
indices, options on futures contracts or indices, and dollar roll transactions
shall not constitute borrowing.

CONCENTRATION OF INVESTMENTS

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

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 U.S. government, 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, and will not acquire more than 10%
of the outstanding voting securities of any one issuer.

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 10% of the value of total assets at
the time of the borrowing.

LENDING CASH OR SECURITIES

The Fund will not lend any assets except portfolio securities. (This will not
prevent the purchase or holding of bonds, debentures, notes, certificates of
indebtedness, or other debt securities of an issuer, repurchase agreements, or
other transactions which are permitted by the Fund's investment objective and
policies or Articles of Incorporation).

ISSUING SENIOR SECURITIES

The Fund will not issue senior securities, except as permitted by its investment
objective and policies.

THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
DIRECTORS (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT OF 1940. THE FOLLOWING
LIMITATION, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THIS LIMITATION
BECOMES EFFECTIVE.

INVESTING IN RESTRICTED AND ILLIQUID SECURITIES

The Fund will not invest more than 15% of its net assets in illiquid securities,
including certain restricted securities (except for Section 4(2) commercial
paper and certain other restricted securities which meet the criteria for
liquidity as established by the Directors), non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice.

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.

DETERMINING MARKET VALUE OF SECURITIES

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

* for 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 generally 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 generally
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.

What Do Shares Cost?

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

The NAV for each class of Shares may differ due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.

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-INSTITUTIONAL SERVICE SHARES

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

Redemption in Kind

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

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

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

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

Account and Share Information

VOTING RIGHTS

Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote.

All Shares of the Corporation have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote.

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

As of November 12, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Shares: Mitbanko
Trust and Savings Bank, Mitchell, SD owned approximately 156,982 shares (9.08%);
Colonial Trust Company, Phoenix, AR owned approximately 161,030 shares (9.31%);
The Fulton Company, Lancaster, PA owned approximately 167,967 shares (9.71%);
Vernat Company, Rutland, VT owned approximately 321,762 shares (18.61%); and STC
& CO., Springfield, MO owned approximately 573,294 shares (33.15%).

As of November 12, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Service Shares:
Edna E. Hamilton, Pinellas Park, FL owned approximately 3,793 shares (6.32%);
Elizabeth Lewis Doyle, Santa Rosa, CA owned approximately 4,009 shares (6.68%);
State Street Bank & Trust (CUST IRA Rollover FBO Donald L. Mott), Middleton, TN
owned approximately 6,260 shares (10.43%); Michael E. Carlisle and Thelma W.
Carlisle, Lexington, KY owned approximately 8,022 shares (13.36%); Fairy Turner,
McKee, KY owned approximately 11,581 shares (19.29%); and Dewey Fee,
Middlesboro, KY owned approximately 13,040 shares (21.72%).

Shareholders owning 25% or more of outstanding Shares may be in control and be
able to affect the outcome of certain matters presented for a vote of
shareholders.

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
Corporation's other portfolios will be separate from those realized by the Fund.

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

Who Manages and Provides Services to the Fund?

BOARD OF DIRECTORS

The Board is responsible for managing the Corporation's business affairs and for
exercising all the Corporation'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
Corporation, principal occupations for the past five years and positions held
prior to the past five years, total compensation received as a Director from the
Corporation for its most recent fiscal year, and the total compensation received
from the Federated Fund Complex for the most recent calendar year. The
Corporation is comprised of four funds and the Federated Fund Complex is
comprised of 54 investment companies, whose investment advisers are affiliated
with the Fund's Adviser.

As of November 12, the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Institutional and Institutional Service Shares.

<TABLE>

NAME AGGREGATE TOTAL
BIRTH DATE COMPENSATION COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS FROM FROM CORPORATION
POSITION WITH CORPORATION FOR PAST FIVE YEARS CORPORATION AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*#+ Chief Executive Officer $0 $0 for the Corporation and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the Fund
1001 Liberty Avenue Complex; Chairman and Complex
Pittsburgh, PA Director, Federated
CHARIMAN AND DIRECTOR 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 $1,087.15 $113,860.22 for the
Birth Date: February 3, 1934 the Federated Fund Corporation and 54 other
15 Old Timber Trail Complex; Director, Member investment companies in
Pittsburgh, PA of Executive Committee, the Fund Complex
DIRECTOR Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.

JOHN T. CONROY, JR. Director or Trustee of the $1,196.04 $125,264.48 for the
Birth Date: June 23, 1937 Federated Fund Complex; Corporation and 54 other
Wood/Commercial Dept. President, Investment investment companies in
John R. Wood Associates, Inc. Realtors Properties Corporation; the Fund Complex

3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
DIRECTOR Associates, Inc.,

Realtors; Partner or
Trustee in private real
estate ventures in
Southwest Florida;
formerly: President,
Naples Property
Management, Inc. and
Northgate Village
Development Corporation.

NICHOLAS CONSTANTAKIS Director or Trustee of the $1,087.15 $47,958.02 for the
Birth Date: September 3, 1939 Federated Fund Complex; Corporation and 29 other
175 Woodshire Drive formerly: Partner, investment companies in
Pittsburgh, PA Andersen Worldwide SC. the Fund Complex
DIRECTOR

JOHN F. CUNNINGHAM Director or Trustee of some $570.74 $0 for the Corporation and
Birth Date: March 5, 1943 of the Federated Fund 46 other investment
353 El Brillo Way Complex; Chairman, companies in the Fund
Palm Beach, FL President and Chief Complex
DIRECTOR Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting) ; Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
J. CHRISTOPHER DONAHUE*+ President or Executive $0 $0 for the Corporation and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the Fund
1001 Liberty Avenue Director or Trustee of some Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT AND Federated Fund Complex;
DIRECTOR President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.

LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,087.15 $113,860.22 for the
Birth Date: October 11, 1932 Federated Fund Complex; Corporation and 54 other
3471 Fifth Avenue Professor of Medicine, investment companies in
Suite 1111 University of Pittsburgh; the Fund Complex
Pittsburgh, PA Medical Director,
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.

NAME AGGREGATE TOTAL
BIRTH DATE COMPENSATION COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS FROM FROM CORPORATION
POSITION WITH CORPORATION FOR PAST FIVE YEARS CORPORATION AND FUND COMPLEX
<S> <C> <C> <C>
PETER E. MADDEN Director or Trustee of the $989.03 $113,860.22 for the
Birth Date: March 16, 1942 Federated Fund Complex; Corporation and 54 other
One Royal Palm Way formerly: Representative, investment companies in
100 Royal Palm Way Commonwealth of the Fund Complex
Palm Beach, FL Massachusetts General
DIRECTOR Court; President, State
Street Bank and Trust
Company and State
Street Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston
Stock Exchange.

CHARLES F. MANSFIELD, JR. Director or Trustee of some $600.16 $0 for the Corporation and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the Fund
Westhampton Beach, NY Consultant. Complex
DIRECTOR Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.

JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,171.83 $113,860.22 for the
Birth Date: December 20, 1932 the Federated Fund Corporation and 54 other
President, Duquesne University Complex; President, Law investment companies in
Pittsburgh, PA Professor, Duquesne the Fund Complex
DIRECTOR University; Consulting

Partner, Mollica & Murray;
Director, Michael Baker
Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.

MARJORIE P. SMUTS Director or Trustee of the $1,087.15 $113,860.22 for the
Birth Date: June 21, 1935 Federated Fund Complex; Corporation and 54 other
4905 Bayard Street Public Relations/ investment companies in
Pittsburgh, PA Marketing/Conference the Fund Complex
DIRECTOR Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.

JOHN S. WALSH Director or Trustee of some $570.74 $0 for the Corporation and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the Fund
Valparaiso, IN Director, Heat Wagon, Inc. Complex
DIRECTOR (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.

GLEN R. JOHNSON Staff member, Federated $0 $0 for the Corporation and
Birth Date: May 2, 1929 Securities Corp. 8 other investment
Federated Investors Tower companies in the Fund
1001 Liberty Avenue Complex

Pittsburgh, PA

PRESIDENT

EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Corporation and
Birth Date: October 22, 1930 of the Funds in the 1 other investment company
Federated Investors Tower Federated Fund Complex; in the Fund Complex
1001 Liberty Avenue President, Executive Vice
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, 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 $0 $0 for the Corporation and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the Fund
1001 Liberty Avenue Executive Vice President, Complex
Pittsburgh, PA Secretary, and Director,
EXECUTIVE VICE PRESIDENT AND SECRETARY Federated Investors, Inc.;

Trustee, Federated Investment
Management Company and Federated
Investment Counseling; Director,
Federated Global Investment Management
Corp., Federated Services Company and
Federated Securities Corp.

TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.

NAME AGGREGATE TOTAL
BIRTH DATE COMPENSATION COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS FROM FROM CORPORATION
POSITION WITH CORPORATION FOR PAST FIVE YEARS CORPORATION AND FUND COMPLEX
<S> <C> <C> <C>
WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Corporation and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the Fund
1001 Liberty Avenue Federated Fund Complex; Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment

Counseling, Federated Global Investment
Management 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.

JOSEPH M. BALESTRINO Joseph M. Balestrino is $0 $0 for the Corporation and
Birth Date: November 3, 1954 Vice President of the 3 other investment
Federated Investors Tower Corporation. companies in the Fund
1001 Liberty Avenue Mr. Balestrino joined Complex
Pittsburgh, PA Federated in 1986 and has
VICE PRESIDENT 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.

</TABLE>

* An asterisk denotes a Director who is deemed to be an interested person as
defined in the Investment Company Act of 1940.

# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.

+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Director of the Corporation.

++ Messr. Cunningham, Mansfield and Walsh became members of the Board of
Directors on April 1, 1999. They did not earn any fees for serving the Fund
Complex since these fees are reported as of the end of the last calendar year.

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 Corporation 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 Corporation.

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. 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.

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

The independent auditor for the Fund, Deloitte & Touche LLP, plans and performs
its audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.

FEES PAID BY THE FUND FOR SERVICES

<TABLE>

FOR THE YEAR ENDED SEPTEMBER 30 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $ 41,413 $ 20,745 $ 6,692
Advisory Fee Reduction 41,413 20,745 6,692
Brokerage Commissions 0 0 0
Administrative Fee 155,000 155,001 155,001
12B-1 FEE

Institutional Service Shares 81 - -
SHAREHOLDER SERVICES FEE

Institutional Shares 0 - -
Institutional Service Shares 404 - -

</TABLE>

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

How Does the Fund Measure Performance?

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

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.

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns are given for the one-year and Start of Performance periods ended
September 30, 1999.

Yield is given for the 30-day period ended September 30, 1999.

<TABLE>

START OF PERFORMANCE

30-DAY PERIOD 1 YEAR ON MAY 31, 1997
<S> <C> <C> <C>
INSTITUTIONAL SHARES:
Total Return NA 3.20% 7.12%
Yield 6.96% NA NA

START OF PERFORMANCE

30-DAY PERIOD 1 YEAR ON MAY 31, 1997
<S> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES:
Total Return NA 2.89% 6.82%
Yield 6.66% NA NA

</TABLE>

TOTAL RETURN

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

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

YIELD

The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 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 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 Fund; 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 offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "U.S. mortgage "
category in advertising and sales literature.

LEHMAN BROTHERS MORTGAGE BACKED SECURITIES INDEX

Lehman Brothers Mortgage Backed Securities Index is composed of all fixed rate,
securitized mortgage pools by Federal Home Loan Mortgage Corp. (Freddie Mac),
Federal National Mortgage Association (Fannie Mae), and Government National
Mortgage Association (GNMA), including GNMA Graduated Payment Mortgages. The
minimum principal amount required for inclusion is $50 million. Total return
comprises price appreciation/depreciation and income as a percentage of the
original investment. Indexes are unmanaged and rebalanced monthly by market
capitalization. Investments cannot be made in an index.

Who is Federated Investors, Inc.?

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

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

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS

In the municipal sector, as of December 31, 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 27 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 managed 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.

Addresses

FEDERATED MORTGAGE FUND

Institutional Shares

Institutional Service Shares

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

200 Berkeley Street

Boston, MA 02116

STATEMENT OF ADDITIONAL INFORMATION

Federated Total Return Bond Fund

A Portfolio of Federated Total Return Series, Inc.

INSTITUTIONAL SHARES

INSTITUTIONAL SERVICE SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated Total Return Bond Fund
(Fund), dated November 30, 1999. Obtain the prospectuses and the Annual Report's
Management Discussion and Analysis without charge by calling 1-800-341-7400.

NOVEMBER 30, 1999

(Revised December 2, 1999)

[Graphic]
Federated

World-Class Investment Manager
Federated Total Return Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

WWW.FEDERATEDINVESTORS.COM

Federated Securities Corp., Distributor

G01722-02 (11/99)

[Graphic]

CONTENTS

How is the Fund Organized? 1

Securities in Which the Fund Invests 1

What Do Shares Cost? 9

How is the Fund Sold? 9

Subaccounting Services 9

Redemption in Kind 10

Account and Share Information 10

Tax Information 10

Who Manages and Provides Services to the Fund? 11

How Does the Fund Measure Performance? 14

Who is Federated Investors, Inc.? 16

Investment Ratings 17

Addresses 19

How is the Fund Organized?

The Fund is a diversified portfolio of Federated Total Return Series, Inc.
(Corporation). The Corporation is an open-end, management investment
company that was established under the laws of the State of Maryland on
October 11, 1993. The Corporation may offer separate series of shares
representing interests in separate portfolios of securities. The
Corporation changed its name from Insight Institutional Series, Inc. to
Federated Total Return Series, Inc. on March 21, 1995. The Fund changed its
name from Insight U.S. Government Fund to Federated Government Total
Return Fund on March 21, 1995, and from Federated Government Total Return
Fund to Federated Total Return Bond Fund on May 15, 1996.

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

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

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

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

COMMERCIAL PAPER

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

DEMAND INSTRUMENTS

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

MUNICIPAL SECURITIES

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

MORTGAGE BACKED SECURITIES

Mortgage backed securities 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.

The Fund may invest in mortgage backed securities primarily by investing in
another investment company (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 investment company is managed independently of the Fund and
may incur additional 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.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

Sequential CMOs

PACs, TACs and Companion Classes

IOs and POs

Floaters and Inverse Floaters

Z Classes and Residual Classes

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 pass through
instruments or asset-backed bonds. Asset backed securities have prepayment
risks. Like CMOs, asset backed securities may be structured like Floaters,
Inverse Floaters, IOs and POs.

BANK INSTRUMENTS

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

ZERO COUPON 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. If
a default occurs, these assets may be sold and the proceeds paid to security's
holders. Either form of credit enhancement reduces credit risks by providing
another source of payment for a fixed income security.

CONVERTIBLE SECURITIES

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

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

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

FOREIGN SECURITIES

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

* 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. The Fund may
invest more than 10% in foreign securities.

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.

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 also attempt to hedge by using combinations of different derivatives
contracts, or derivatives contracts and securities. The Fund's ability to hedge
may be limited by the costs of the derivatives contracts. 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.

DERIVATIVE 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 interest
rate and currency risks, and may also expose the Fund to liquidity risks.

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

FUTURES CONTRACTS

The Fund may buy and sell financial and foreign currency futures contracts

OPTIONS

The Fund may:

* Buy call options on financial and foreign currency futures contracts in
anticipation of an increase in the value of the underlying asset;

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

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

The Fund may also write call options on portfolio securities, financial and
foreign currency 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 and foreign currency 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.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.

SWAPS

INTEREST RATE SWAPS

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

DELAYED DELIVERY TRANSACTIONS

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.

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 without 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.

Inter-fund Borrowing and Lending Arrangements

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in mortgage backed and high yield securities primarily by
investing in another investment company (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 investment company is managed independently
of the Fund and may incur additional 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.

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

If a security is downgraded below the minimum quality grade discussed above, the
Adviser will reevaluate the security, but will not be required to sell it.

INVESTMENT RISKS

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

INTEREST RATE RISKS

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.

* 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 AND PREPAYMENT 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.

* Generally, homeowners have the option to prepay their mortgages at any time
without penalty. Homeowners frequently refinance high interest rate mortgages
when mortgage rates fall. This results in the prepayment of mortgage backed
securities with higher interest rates. Conversely, prepayments due to
refinancings decrease when mortgage rates increase. This extends the life of
mortgage backed securities with lower interest rates. Other economic factors can
also lead to increases or decreases in prepayments. Increases in prepayments of
high interest rate mortgage backed securities, or decreases in prepayments of
lower interest rate mortgage backed securities, may reduce their yield and
price. These factors, particularly the relationship between interest rates and
mortgage prepayments makes the price of mortgage backed securities more volatile
than many other types of fixed income securities with comparable credit risks.

* Mortgage backed securities generally compensate for greater prepayment risk by
paying a higher yield. 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) 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 is perceived to have an
increased prepayment risk or perceived to have less market demand. An increase
in the spread will cause the price of the security to decline.

* The Fund may have to reinvest the proceeds of mortgage prepayments in other
fixed income securities with lower interest rates, higher prepayment risks, or
other less favorable characteristics.

LIQUIDITY RISKS

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

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

RISKS ASSOCIATED WITH COMPLEX CMOS

* CMOs with complex or highly variable prepayment terms, such as companion
classes, IOs, POs, Inverse Floaters and residuals, generally entail greater
market, prepayment and liquidity risks than other mortgage backed securities.
For example, their prices are more volatile and their trading market may be more
limited.

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.

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.

EURO RISKS

* The Fund may make significant 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.

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 companies may not provide information (including financial statements)
as frequently or to as great an extent as companies in the United States.
Foreign companies may also receive less coverage than United States companies by
market analysts and the financial press. In addition, foreign countries may lack
uniform accounting, auditing and financial reporting standards or regulatory
requirements comparable to those applicable to U.S. companies. These factors may
prevent the Fund and its Adviser from obtaining information concerning foreign
companies that is as frequent, extensive and reliable as the information
available concerning companies in the United States.

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

LEVERAGE RISKS

* Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

FUNDAMENTAL INVESTMENT OBJECTIVE

The Fund's investment objective is to provide total return. The investment
objective may not be changed by the Fund's Directors without shareholder
approval.

INVESTMENT LIMITATIONS

SELLING SHORT OR BUYING ON MARGIN

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

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities, except that the Fund may borrow money
directly or through reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amount borrowed. 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 Fund 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 any borrowings
in excess of 5% of its total assets are outstanding.

PLEDGING ASSETS

The Fund will not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. For purposes of this limitation, the following will not be
deemed to be pledges of the Fund's assets: 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.

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 U.S. government, 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, and will not acquire more than 10%
of the outstanding voting securities of any one issuer.

INVESTING IN REAL ESTATE

The Fund will not purchase 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 except to the extent that the Fund may engage in
transactions involving financial futures contracts or options on financial
futures contracts.

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.

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.

CONCENTRATION OF INVESTMENTS

The Fund will not invest 25% or more of the value of its total assets in any one
industry (other than securities issued by the U.S. government, its agencies, or
instrumentalities).

THE ABOVE LIMITATIONS CANNOT BE CHANGED BY THE BOARD OF DIRECTORS (BOARD) UNLESS
AUTHORIZED BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS
DEFINED BY THE INVESTMENT COMPANY ACT OF 1940. THE FOLLOWING LIMITATION,
HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS
WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THIS LIMITATION BECOMES
EFFECTIVE.

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for settlement in
more than seven days after notice, interest rate swaps, non-negotiable
fixed-time deposits with maturities over seven days, and certain restricted
securities not determined by the Directors to be liquid.

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

The Fund does not expect to borrow money, pledge securities or engage in reverse
repurchase agreements during the coming fiscal year.

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

DETERMINING MARKET VALUE OF SECURITIES

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

* for 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

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.

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-INSTITUTIONAL SERVICE SHARES

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

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

Redemption in Kind

Account and Share Information

VOTING RIGHTS

Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote.

All Shares of the Corporation have equal voting rights, except that in matters
affecting only a particular Fund or class, only Shares of that Fund or class are
entitled to vote.

As of November 15, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Shares: Grand Old
Co., Zanesville, OH owned approximately 1,689,787 shares (11.18%); and Onedun,
Dundee, IL owned approximately 1,698,292 shares (11.23%).

As of November 15, 1999, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Service Shares:
Merchants National Bank (as trustee for retirement plan of Plano Molding Co.,
PSP), Aurora, IL owned approximately 104,514 shares (6.38%); Anbee & Company,
Aurora, IL owned approximately 104,675 shares (6.39%); Hometown Bank & Co.,
Wilson, NC owned approximately 326,701 shares (19.95%); and FNB Nominee Co.,
Indiana, PA owned approximately 384,000 shares (23.45%).

Tax Information

FEDERAL INCOME TAX

FOREIGN INVESTMENTS

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

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

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

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

Who Manages and Provides Services to the Fund?

BOARD OF DIRECTORS

As of November 15, 1999, the Fund's Board and Officers as a group owned less
than 1% of the Fund's outstanding Institutional and Institutional Service
Shares.

<TABLE>

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM CORPORATION AND
POSITION WITH CORPORATION FOR PAST FIVE YEARS FROM CORPORATION FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*#+ Chief Executive Officer $0 $0 for the Corporation and
Birth Date: July 28, 1924 and Director or Trustee of 54 other investment
Federated Investors Tower the Federated Fund companies in the
1001 Liberty Avenue Complex; Chairman and Fund Complex
Pittsburgh, PA Director, Federated
CHARIMAN AND DIRECTOR 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 $1,087.15 $113,860.22 for the Corporation
Birth Date: February 3, 1934 the Federated Fund and 54 other investment
15 Old Timber Trail Complex; Director, Member companies in the
Pittsburgh, PA of Executive Committee, Fund Complex
DIRECTOR Children's Hospital of
Pittsburgh; Director,
Robroy Industries, Inc.
(coated steel conduits/
computer storage
equipment); formerly:
Senior Partner, Ernst &
Young LLP; Director, MED
3000 Group, Inc.
(physician practice
management); Director,
Member of Executive
Committee, University of
Pittsburgh.

JOHN T. CONROY, JR. Director or Trustee of the $1,196.04 $125,264.48 for the Corporation
Birth Date: June 23, 1937 Federated Fund Complex; and 54 other investment
Wood/Commercial Dept. President, Investment companies in the
John R. Wood Associates, Inc. Realtors Properties Corporation; Fund Complex

3255 Tamiami Trail North Senior Vice President,
Naples, FL John R. Wood and
DIRECTOR Associates, Inc.,

Realtors; Partner or
Trustee in private real
estate ventures in
Southwest Florida;
formerly: President,
Naples Property
Management, Inc. and
Northgate Village
Development Corporation.

NICHOLAS CONSTANTAKIS Director or Trustee of the $1,087.15 $47,958.02 for the Corporation
Birth Date: September 3, 1939 Federated Fund Complex; and 29 other investment
175 Woodshire Drive formerly: Partner, companies in the
Pittsburgh, PA Andersen Worldwide SC. Fund Complex
DIRECTOR

JOHN F. CUNNINGHAM Director or Trustee of some $570.74 $0 for the Corporation and
Birth Date: March 5, 1943 of the Federated Fund 46 other investment
353 El Brillo Way Complex; Chairman, companies in the
Palm Beach, FL President and Chief Fund Complex
DIRECTOR Executive Officer,
Cunningham & Co., Inc.
(strategic business
consulting) ; Trustee
Associate, Boston College;
Director, Iperia Corp.
(communications/software);
formerly: Director,
Redgate Communications and
EMC Corporation (computer
storage systems).
Previous Positions:
Chairman of the Board and
Chief Executive Officer,
Computer Consoles, Inc.;
President and Chief
Operating Officer, Wang
Laboratories; Director,
First National Bank of
Boston; Director, Apollo
Computer, Inc.
J. CHRISTOPHER DONAHUE*+ President or Executive $0 $0 for the Corporation and
Birth Date: April 11, 1949 Vice President of the 16 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Director or Trustee of some Fund Complex
Pittsburgh, PA of the Funds in the
EXECUTIVE VICE PRESIDENT Federated Fund Complex;
AND DIRECTOR President, Chief Executive
Officer and Director, Federated
Investors, Inc.; President and Trustee,
Federated Investment Management
Company; President and Trustee,
Federated Investment Counseling;
President and Director, Federated
Global Investment Management Corp.;
President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services
Company; Director, Federated Services
Company.

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM CORPORATION AND
POSITION WITH CORPORATION FOR PAST FIVE YEARS FROM CORPORATION FUND COMPLEX
<S> <C> <C> <C>
LAWRENCE D. ELLIS, M.D.* Director or Trustee of the $1,087.15 $113,860.22 for the Corporation
Birth Date: October 11, 1932 Federated Fund Complex; and 54 other investment
3471 Fifth Avenue Professor of Medicine, companies in the
Suite 1111 University of Pittsburgh; Fund Complex
Pittsburgh, PA Medical Director,
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.

PETER E. MADDEN Director or Trustee of the $989.03 $113,860.22 for the Corporation
Birth Date: March 16, 1942 Federated Fund Complex; and 54 other investment
One Royal Palm Way formerly: Representative, companies in the
100 Royal Palm Way Commonwealth of Fund Complex
Palm Beach, FL Massachusetts General
DIRECTOR Court; President, State
Street Bank and Trust
Company and State Street
Corporation.
Previous Positions:
Director, VISA USA and VISA
International; Chairman
and Director,
Massachusetts Bankers
Association; Director,
Depository Trust
Corporation; Director, The
Boston Stock Exchange.

CHARLES F. MANSFIELD, JR. Director or Trustee of some $600.16 $0 for the Corporation and
Birth Date: April 10, 1945 of the Federated Fund 50 other investment
80 South Road Complex; Management companies in the
Westhampton Beach, NY Consultant. Fund Complex
DIRECTOR Previous Positions: Chief
Executive Officer, PBTC International
Bank; Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief
Financial Officer of Retail Banking
Sector, Chase Manhattan Bank; Senior
Vice President, Marine Midland Bank;
Vice President, Citibank; Assistant
Professor of Banking and Finance, Frank
G. Zarb School of Business, Hofstra
University.

JOHN E. MURRAY, JR., J.D., S.J.D.# Director or Trustee of $1,171.83 $113,860.22 for the Corporation
Birth Date: December 20, 1932 the Federated Fund Complex; and 54 other investment
President, Duquesne University President, Law Professor, companies in the
Pittsburgh, PA Duquesne University; Fund Complex
DIRECTOR Consulting Partner, Mollica
& Murray; Director, Michael
Baker Corp. (engineering,
construction, operations
and technical services).
Previous Positions: Dean
and Professor of Law,
University of Pittsburgh
School of Law; Dean and
Professor of Law,
Villanova University
School of Law.

MARJORIE P. SMUTS Director or Trustee of the $1,087.15 $113,860.22 for the Corporation
Birth Date: June 21, 1935 Federated Fund Complex; and 54 other investment
4905 Bayard Street Public Relations/ companies in the
Pittsburgh, PA Marketing/Conference Fund Complex
DIRECTOR Planning.
Previous Positions:
National Spokesperson,
Aluminum Company of
America; television
producer; business owner.

JOHN S. WALSH Director or Trustee of some $570.74 $0 for the Corporation and
Birth Date: November 28, 1957 of the Federated Fund 48 other investment
2007 Sherwood Drive Complex; President and companies in the
Valparaiso, IN Director, Heat Wagon, Inc. Fund Complex
DIRECTOR (manufacturer of
construction temporary
heaters); President and
Director, Manufacturers
Products, Inc.
(distributor of portable
construction heaters);
President, Portable Heater
Parts, a division of
Manufacturers Products,
Inc.; Director, Walsh &
Kelly, Inc. (heavy highway
contractor); formerly:
Vice President, Walsh &
Kelly, Inc.

GLEN R. JOHNSON Staff member, Federated $0 $0 for the Corporation and
Birth Date: May 2, 1929 Securities Corp. 8 other investment
Federated Investors Tower companies in the
1001 Liberty Avenue Fund Complex

Pittsburgh, PA

PRESIDENT

EDWARD C. GONZALES Trustee or Director of some $0 $0 for the Corporation and
Birth Date: October 22, 1930 of the Funds in the 1 other investment
Federated Investors Tower Federated Fund Complex; company in the
1001 Liberty Avenue President, Executive Vice Fund Complex
Pittsburgh, PA President and Treasurer of
EXECUTIVE VICE PRESIDENT some of the Funds in the
Federated Fund Complex; Vice Chairman,
Federated Investors, Inc.; Vice
President, Federated Investment
Management Company, 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.

NAME TOTAL
BIRTH DATE AGGREGATE COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS COMPENSATION FROM CORPORATION AND
POSITION WITH CORPORATION FOR PAST FIVE YEARS FROM CORPORATION FUND COMPLEX
<S> <C> <C> <C>
JOHN W. MCGONIGLE Executive Vice President $0 $0 for the Corporation and
Birth Date: October 26, 1938 and Secretary of the 54 other investment
Federated Investors Tower Federated Fund Complex; companies in the
1001 Liberty Avenue Executive Vice President, Fund Complex
Pittsburgh, PA Secretary, and Director,
EXECUTIVE VICE PRESIDENT Federated Investors, Inc.;
AND SECRETARY Trustee, Federated

Investment Management Company and
Federated Investment Counseling;
Director, Federated Global Investment
Management Corp., Federated Services
Company and Federated Securities Corp.

RICHARD J. THOMAS Treasurer of the Federated $0 $0 for the Corporation and
Birth Date: June 17, 1954 Fund Complex; Vice 54 other investment
Federated Investors Tower President - Funds companies in the
1001 Liberty Avenue Financial Services Fund Complex
Pittsburgh, PA Division, Federated
TREASURER Investors, Inc.; formerly:
various management
positions within Funds
Financial Services
Division of Federated
Investors, Inc.

WILLIAM D. DAWSON, III Chief Investment Officer $0 $0 for the Corporation and
Birth Date: March 3, 1949 of this Fund and various 41 other investment
Federated Investors Tower other Funds in the companies in the

1001 Liberty Avenue Federated Fund Complex; Fund Complex
Pittsburgh, PA Executive Vice President,
CHIEF INVESTMENT OFFICER Federated Investment

JOSEPH M. BALESTRINO Joseph M. Balestrino is $0 $0 for the Corporation and
Birth Date: November 3, 1954 Vice President of the 3 other investment
Federated Investors Tower Corporation. companies in the
1001 Liberty Avenue Mr. Balestrino joined Fund Complex
Pittsburgh, PA Federated in 1986 and has
VICE PRESIDENT 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.

</TABLE>

* An asterisk denotes a Director who is deemed to be an interested person as
defined in the Investment Company Act of 1940.

# A pound sign denotes a Member of the Board's Executive Committee, which
handles the Board's responsibilities between its meetings.

+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President and Director of the Corporation.

INVESTMENT ADVISER

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

The Adviser is a wholly owned subsidiary of Federated.

OTHER RELATED SERVICES

BROKERAGE TRANSACTIONS

ADMINISTRATOR

<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>

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

shareholders.

INDEPENDENT AUDITORS

FEES PAID BY THE FUND FOR SERVICES

<TABLE>

FOR THE YEAR ENDED

SEPTEMBER 30 1999 1998 1997
<S> <C> <C> <C>
Advisory Fee Earned $551,737 $187,800 $ 33,489
Advisory Fee Reduction 504,690 187,800 33,489
Brokerage Commissions 0 0 0
Administrative Fee 155,000 155,001 154,935

12B-1 FEE

Institutional Service Shares 40,782 - -
SHAREHOLDER SERVICES FEE

Institutional Shares 304,061 - -
Institutional Service Shares 40,766 - -

</TABLE>

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.

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns are given for the one-year and Start of Performance periods ended
September 30, 1999.

Yield is given for the 30-day period ended September 30, 1999.

<TABLE>

START OF PERFORMANCE

SHARE CLASS 30-DAY PERIOD 1 YEAR ON OCTOBER 1, 1996
<S> <C> <C> <C>
INSTITUTIONAL SHARES:

Total Return NA (0.63%) 7.27%
Yield 6.67% NA NA

START OF PERFORMANCE

SHARE CLASS 30-DAY PERIOD 1 YEAR ON OCTOBER 1, 1996
<S> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES:

Total Return NA (0.93%) 6.96%
Yield 6.34% NA NA

</TABLE>

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.

YIELD

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 Fund; 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.

RUSSELL ACTIVE SECTOR ROTATION ACCOUNTS UNIVERSE

Russell Active Sector Rotation Accounts Universe includes portfolios that change
interest rate exposure relative to the Lehman Brothers Aggregate Bond Index or
other broad market indexes, with changes in portfolio interest rate sensitivity
limited to approximately plus or minus 20% index duration. Durations have
typically been 3.5 to 6 years. Primary emphasis is on selecting undervalued
sectors or issues. Includes separate accounts, pooled funds, or mutual funds
managed by investment advisors, banks or insurance companies.

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 offering price over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "Intermediate
Investment Grade Debt" category in advertising and sales literature.

LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX

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

LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX

Lehman Brothers Intermediate Government/Corporate Bond Index is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years. Total
return is based on price appreciation/depreciation and income as a percentage of
the original investment. Indices are rebalanced monthly by market
capitalization.

LEHMAN BROTHERS AGGREGATE BOND INDEX

Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and
the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indices are rebalanced monthly by market capitalization.

Who is Federated Investors, Inc.?

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS

EQUITY FUNDS

CORPORATE BOND FUNDS

GOVERNMENT FUNDS

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.

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; and

* 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 TOTAL RETURN BOND FUND

Institutional Shares

Institutional Service Shares

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

200 Berkeley Street

Boston, MA 02116