FEDERATED INTERNATIONAL SERIES, INC.

485BPOS 1 form.htm FEDERATED INTERNATIONAL SERIES, INC. - 485BPOS



                                               1933 Act File No. 2-91776
                                               1940 Act File No. 811-3984

                          SECURITIES AND EXCHANGE COMMISSION
                                 Washington, DC 20549

                                       Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933                     X

    Pre-Effective Amendment No.....................................

    Post-Effective Amendment No.   49..............................         X_

                                        and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940           _ X

    Amendment No.   44  ...........................................        _X

                         FEDERATED INTERNATIONAL SERIES, INC.

                  (Exact Name of Registrant as Specified in Charter)

                               Federated Investors Funds
                                 5800 Corporate Drive
                          Pittsburgh, Pennsylvania 15237-7000
                       (Address of Principal Executive Offices)

                                    (412) 288-1900
                            (Registrant's Telephone Number)

                              John W. McGonigle, Esquire
                               Federated Investors Tower
                                  1001 Liberty Avenue
                          Pittsburgh, Pennsylvania 15222-3779
                        (Name and Address of Agent for Service)
                   (Notices should be sent to the Agent for Service)

It is proposed that this filing will become effective:

     immediately upon filing pursuant to paragraph (b)
__X_ on February 1, 2007 pursuant to paragraph (b)
___  60 days after filing pursuant to paragraph (a) (i)
     on, _______________pursuant to paragraph (a) (i)
      75 days after filing pursuant to paragraph (a)(ii)
     on _           _ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

     This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
                                 Copies To:
Matthew G. Maloney, Esquire
Dickstein Shapiro LLP
1825 Eye Street, NW
Washington, D.C.  20006

Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated International Bond Fund

A Portfolio of Federated International Series, Inc.

PROSPECTUS

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February 1, 2007

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking to obtain a total return on its assets by investing primarily in fixed-income securities of foreign governments and their agencies or foreign corporations.

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

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		4
What are the Fund’s Investment Strategies?		5
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		13
What Do Shares Cost?		16
How is the Fund Sold?		24
Payments to Financial Intermediaries		24
How to Purchase Shares		27
How to Redeem and Exchange Shares		29
Account and Share Information		33
Who Manages the Fund?		37
Legal Proceedings		38
Financial Information		39
Appendix A: Hypothetical Investment and Expense Information		43

Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

The Fund’s investment objective is to obtain a total return on its assets. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing primarily in non-dollar denominated, investment-grade, fixed-income securities of foreign governments and their agencies or foreign corporations. The Fund may invest in derivative contracts to implement its investment strategies as more fully described herein. The Fund will endeavor to maintain a dollar-weighted average credit rating of its portfolio securities of A. The Fund invests primarily in developed market countries.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

fluctuations in the exchange rate between the U.S. dollar and foreign currencies;
a general rise in interest rates in a foreign market in which the Fund has invested. Generally, when interest rates rise, prices of fixed-income securities fall. Interest rate changes have a greater effect on the price of fixed-income securities with longer durations;
default in the timely payment of interest or principal by issuers of securities held by the Fund; and

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the Fund’s use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Also, derivative contracts and hybrid instruments may involve other risks described in this prospectus or the Fund’s Statement of Additional Information (SAI), such as interest rate, credit, liquidity and leverage risks.

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The Fund is non-diversified. Compared to diversified mutual funds, it may invest a higher percentage of its assets among fewer issuers of portfolio securities. This increases the Fund’s risk by magnifying the impact (positively or negatively) that any one issuer has on the Fund’s Share price and performance.

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

Risk/Return Bar Chart and Table

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The performance information shown below will help you analyze the Fund’s investment risks in light of its historical returns. The bar chart shows the variability of the Fund’s Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund’s performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The total returns shown in the bar chart do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.

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Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 12.44% (quarter ended June 30, 2002). Its lowest quarterly return was (5.19)% (quarter ended March 31, 1997).

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Average Annual Total Return Table

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The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all Classes. In addition, Return After Taxes is shown for Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the J.P. Morgan Global Government Bond (non U.S.) Index (unhedged) (JPMGXUS), a broad-based market index. The JPMGXUS is a total return, trade-weighted index of over 360 government and high-grade bonds in 12 developed countries. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index.

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(For the Periods Ended December 31, 2006)

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	1 Year		5 Years	10 Years

Class A Shares:

Return Before Taxes	(2.43	)%	7.97%	2.59%

Return After Taxes on Distributions¹	(2.94	)%	6.21%	1.17%

Return After Taxes on Distributions and Sale of Fund Shares¹	(1.58	)%	5.84%	1.33%

Class B Shares:

Return Before Taxes	(4.05	)%	7.88%	2.47%

Class C Shares:²

Return Before Taxes	0.37	%	8.16%	2.31%

JPMGXUS	6.84	%	9.48%	4.68%

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1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns for Class B and Class C Shares will differ from those shown above for Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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2 Historical returns do not include the effect of a 1.00% front-end sales charge on Class C Shares purchased prior to February 1, 2007. Effective February 1, 2007, this sales charge was eliminated.

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What are the Fund’s Fees and Expenses?

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FEDERATED INTERNATIONAL BOND FUND

FEES AND EXPENSES

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	4.50%	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)	0.00%	5.50%	1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)	None	None	None
Redemption Fee (as a percentage of amount redeemed, if applicable)	None	None	None
Exchange Fee	None	None	None

Annual Fund Operating Expenses (Before Waivers and Reduction)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²	0.75%	0.75%	0.75%
Distribution (12b-1) Fee	0.25%³	0.75%	0.75%
Other Expenses⁴	0.70%	0.70%	0.70%
Total Annual Fund Operating Expenses⁵	1.70%	2.20%⁶	2.20%


1 The percentages shown are based on expenses for the entire fiscal year ended November 30, 2006. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not obligated to do so (except as discussed in Note 5, below), the Adviser, distributor, shareholder services provider and administrator waived and/or elected not to charge certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended November 30, 2006.
Total Waivers and Reduction of Fund Expenses	0.80%	0.58%	0.58%
Total Actual Annual Fund Operating Expenses (after waivers and reduction)	0.90%	1.62%	1.62%
2 The Adviser voluntarily waived a portion of the management fee. The Adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.20% for the fiscal year ended November 30, 2006.
3 A portion of the distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund’s Class A Shares (after the voluntary waiver) was 0.08% for the fiscal year ended November 30, 2006.
4 Includes a shareholder services fee/account administration fee which is used to compensate intermediaries for shareholder services or account administrative services. Also includes a recordkeeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein. The administrator voluntarily waived a portion of its fee. The administrator can terminate this voluntary waiver at any time. Additionally, the shareholder services provider elected not to charge, and therefore the Fund did not accrue, a portion of its fee. The shareholder services provider can terminate this reduction at any time. Total other expenses paid by the Fund’s Class A, Class B and Class C Shares (after the voluntary waivers and reduction) were 0.62%, 0.67% and 0.67%, respectively, for the fiscal year ended November 30, 2006.
5 The Adviser and its affiliates have voluntarily agreed to waive their fees and/or reimburse expenses (including the distribution (12b-1) fee) so that the total operating expenses paid by the Fund’s Class A Shares, Class B Shares, and Class C Shares (after the voluntary waivers and reimbursements) will not exceed 0.90%, 1.62%, and 1.62%, respectively, for the fiscal year ending November 30, 2007. Although these actions are voluntary, the Adviser and its affiliates have agreed not to terminate these waivers and/or reimbursements until after January 31, 2008.
6 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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

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

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$615	$962	$1,331	$2,368

Expenses assuming no redemption	$615	$962	$1,331	$2,368

Class B:

Expenses assuming redemption	$773	$1,088	$1,380	$2,408

Expenses assuming no redemption	$223	$688	$1,180	$2,408

Class C:

Expenses assuming redemption	$323	$688	$1,180	$2,534

Expenses assuming no redemption	$223	$688	$1,180	$2,534

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What are the Fund’s Investment Strategies?

The Fund pursues its investment objective by investing primarily in an unhedged portfolio of non-dollar denominated, investment-grade, foreign fixed-income securities. Foreign fixed-income securities are debt securities issued by foreign governments or corporations. Historically, the performance of non-dollar denominated, investment grade foreign debt securities has had a low correlation to the performance of comparable quality domestic debt securities.

The fixed-income securities in which the Fund invests will be of investment-grade credit quality (at the time of purchase). The Fund will endeavor to maintain a dollar-weighted average portfolio credit rating of A or better.

The Fund’s investment adviser (Adviser) expects that the Fund’s portfolio will consist primarily of government securities of developed market countries and debt securities of corporations in developed market countries. Developed markets include, for example, certain of the countries that are members of the Organization for Economic Cooperation and Development (OECD). The OECD is an organization of member countries, which share the principles of the market economy and pluralist democracy. The countries included in the J.P. Morgan Global Government Bond (non U.S.) Index (unhedged) (JPMGXUS) are developed markets. The Adviser expects that, normally, the Fund’s portfolio securities will be denominated in foreign currencies; although the Fund is permitted to invest in debt securities denominated in either foreign currency or in U.S. dollars. The Adviser will not attempt to fully insulate the Fund’s investment returns from the influence of currency fluctuations on the value of portfolio securities denominated in foreign currencies (i.e., will not attempt to “fully hedge” the Fund’s entire portfolio of investments into U.S. dollars). However, from time to time, the Adviser may use derivatives to limit the negative effect on the Fund’s investment returns that may result from anticipated changes in the relative values of selected currencies in the portfolio (“Selected Portfolio Currencies”). This strategy is designed to limit the downside risk to the Fund from fluctuations in the value of the Selected Portfolio Currencies, without completely removing the influence of currency fluctuations on investment returns. There is no guarantee that this strategy will work as intended.

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The Adviser actively manages the Fund’s portfolio seeking to outperform the JPMGXUS. The Adviser’s investment process is primarily concerned with selecting the currencies and countries in which portfolio securities are purchased and placement of those securities along the yield curves in their respective markets. Since the Fund invests in securities with relatively low credit risk, currency risks and interest rate risks will be the primary determinants of the Fund’s investment performance versus the JPMGXUS instead of credit risks. The Fund may invest in securities of issuers that are not represented in the JPMGXUS, which could further effect (positively or negatively) the Fund’s performance relative to the JPMGXUS. The prices of investment-grade, developed-market bonds will decline or rise more due to a rise or fall in market interest rates than due to deterioration or improvement in the issuer’s credit quality. Similarly, currency gains and losses occur regardless of whether issuer credit quality changes. Under normal market conditions, the Fund’s dollar weighted average duration will remain within a range of +/- 30% of the duration of the JPMGXUS. Duration measures the price sensitivity of a fixed-income security to changes in market interest rates.

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The Adviser selects securities by, first, formulating its outlook for foreign exchange and interest rates in each developed market currency and country around the world. This outlook is based upon an analysis of a country’s or region’s general economic and financial condition. The Adviser attempts to identify countries with favorable characteristics, such as a strengthening economy, favorable inflation rate, and sound budget policy. The Adviser also considers how developments in other countries in the region or the world might affect these factors. The Adviser then analyzes the issuers of available securities in selected countries.

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The Fund may use derivative contracts and/or hybrid instruments to implement elements of its investment strategy. For example, the Fund may use derivative contracts and/or hybrid instruments to increase or decrease the allocation of the portfolio to securities, currencies or types of securities in which the Fund may invest directly. The Fund may also, for example, use derivative contracts to:

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obtain premiums from the sale of derivative contracts;

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realize gains from trading a derivative contract; or

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hedge against potential losses.

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There can be no assurance that the Fund’s use of derivative contracts or hybrid instruments will work as intended.

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Because the Fund refers to fixed-income investments in its name, it will notify shareholders at least 60 days in advance of any change in its investment policies that would enable the Fund to normally invest less than 80% of its assets in fixed-income investments.

PORTFOLIO TURNOVER

The Fund actively trades its portfolio securities in an attempt to achieve its investment objective. Active trading will cause the Fund to have an increased portfolio turnover rate, which is likely to generate shorter-term gains (losses) for its shareholders, which are taxed at a higher rate than longer-term gains (losses). Actively trading portfolio securities increases the Fund’s trading costs and may have an adverse impact on the Fund’s performance.

TEMPORARY DEFENSIVE INVESTMENTS

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

What are the Principal Securities in Which the Fund Invests?

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.

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

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Foreign securities are often 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. The following describes the type of foreign fixed-income securities in which the Fund invests.

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FOREIGN GOVERNMENT SECURITIES

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

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

FOREIGN 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.

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In determining the country in which a foreign corporate bond is considered to be issued, the Fund bases its allocation decision primarily on the country in which the issuing company has registered that particular security. However, the Fund’s Adviser may allocate the position to a country based on other factors such as the location of the issuer’s office, the jurisdiction of the issuer’s incorporation, the location of the principal trading market for the issuer’s securities or the country from which a majority of the issuer’s revenue is derived.

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FOREIGN EXCHANGE CONTRACTS

DERIVATIVE CONTRACTS

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Derivative contracts are financial instruments that require payments based upon changes in the values of designated securities, commodities, currencies, indices, or other assets or instruments including other derivative contracts, (each a “Reference Instrument” and collectively, “Reference Instruments”). Each party to a derivative contract is referred to as a counterparty. Some derivative contracts require payments relating to an actual, future trade involving the Reference Instrument. These types of derivatives are frequently referred to as “physically settled” derivatives. Other derivative contracts require payments relating to the income or returns from, or changes in the market value of, a Reference Instrument. These types of derivatives are known as “cash settled” derivatives, since they require cash payments in lieu of delivery of the Reference Instrument.

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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.

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.

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Depending on how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the Reference Instrument, derivative contracts may increase or decrease the Fund’s exposure to the risks of the Reference Instrument, 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.

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Payment obligations arising in connection with derivative contracts are frequently required to be secured with collateral (in the case of OTC contracts) or margin (in the case of exchange-traded contracts, as previously noted).

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The Fund may not invest in a derivative contract if it is not permitted to own, invest in, or otherwise have economic exposure to the Reference Instrument (or, in the case of a Reference Instrument that is an index, the securities or derivatives that comprise the index). The Fund may trade in the following specific types and/or combinations of derivative contracts:

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Futures Contracts

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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a Reference Instrument at a specified price, date and time. Entering into a contract to buy a Reference Instrument is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell a Reference Instrument is commonly referred to as selling a contract or holding a short position in the Reference Instrument. Futures contracts are considered to be commodity contracts. The Fund has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures (such as currency futures, index futures and security futures), as well as, currency forward contracts.

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Option Contracts

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Option contracts (also called “options”) are rights to buy or sell a Reference Instrument for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or 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. A call option gives the holder (buyer) the right to buy the Reference Instrument from the seller (writer) of the option. A put option gives the holder the right to sell the Reference Instrument to the writer of the option. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of Reference Instruments. Options that are written on futures contracts will be subject to margin requirements similar to those applied to futures contracts. The Fund may buy or sell options on a Reference Instrument if it is permitted to own, invest, or otherwise have economic exposure to that instrument. The Fund is not required to own a Reference Instrument, in order to buy or sell an option on that Reference Instrument.

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Swap Contracts

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A swap contract (also known as a “swap”) is a type of derivative contract in which two parties agree to pay each other (swap) the returns derived from Reference Instruments. Swaps do not always involve the delivery of the Reference Instruments by either party, and the parties might not own the Reference Instruments 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. Common types of swaps in which the Fund may invest include interest rate swaps, total return swaps, credit default swaps, currency swaps and caps and floors.

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SPECIAL TRANSACTIONS

Hybrid Instruments

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Hybrid instruments combine elements of two different kinds of securities or financial instruments (such as a derivative contract). Frequently, the value of a hybrid instrument is determined by reference to changes in the value of designated securities, commodities, currencies, indices, or other assets or instruments (each a, “Valuation Instrument”). Hybrid instruments can take on many forms including, but not limited to, the following forms. First, a common form of a hybrid instrument combines elements of a derivative contract with those of another security (typically a fixed-income security). In this case all or a portion of the interest or principal payable on a hybrid security is determined by reference to changes in the price of a Valuation Instrument. Second, hybrid instruments may include convertible securities with conversion terms related to a Valuation Instrument.

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Depending on the type and terms of the hybrid instrument, its risks may reflect a combination of the risks of investing in securities, currencies and derivative contracts. Thus, an investment in a hybrid instrument may entail significant risks in addition to those associated with traditional securities or the Valuation Instrument. Hybrid instruments are also potentially more volatile than traditional securities or the Valuation Instrument. Moreover, depending on the structure of the particular hybrid, it may expose the Fund to leverage risks or carry liquidity risks.

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ASSET SEGREGATION

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In order to secure its obligations in connection with derivative contracts or special transactions, the Fund will either own the underlying assets, enter into offsetting transactions or set aside cash or readily marketable securities. This requirement may cause the Fund to miss favorable trading opportunities, due to a lack of sufficient cash or readily marketable securities. This requirement may also cause the Fund to realize losses on offsetting or terminated derivative contracts or special transactions.

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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 Service Rating Organizations (NRSROs). For example, Standard & Poor’s, a rating service, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on their assessment of the likelihood of the issuer’s inability to pay interest or principal (default) when due on each security. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely upon the Adviser’s credit assessment that the security is comparable to investment grade.

What are the Specific Risks of Investing in the Fund?

CURRENCY RISKS

Exchange rates for currencies fluctuate daily. Foreign securities are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the value of its Shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar. The combination of currency risk and market risks tends to make securities traded in foreign markets more volatile than securities traded exclusively in the United States.

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INTEREST RATE RISKS

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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.

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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.

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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 Investors Service. 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.

After purchase by the Fund, a security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require a sale of such security by the Fund. The Adviser will consider such an event in its determination of whether the Fund should continue to hold the security.

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.

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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.

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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. Foreign financial markets may also have fewer investor protections. Securities in foreign markets may also be subject to taxation policies that reduce returns for U.S. investors.

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.

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 U.S. companies by market analysts and the financial press. In addition, foreign countries may lack financial controls and 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.

Some countries are less well developed, overly reliant on particular industries, and more vulnerable to the cyclical nature of international trade. Some countries have histories of hyperinflation and currency devaluations versus the dollar (which may adversely affect returns to U.S. investors) and may be overly dependent on foreign capital.

LIQUIDITY RISKS

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Trading opportunities are more limited for fixed-income securities that have not received any credit ratings, have received ratings below investment-grade or are not widely held.

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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.

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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.

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

RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS

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The Fund’s use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts and hybrid instruments in which the Fund invests may not be correlated with changes in the value of the underlying Reference or Valuation Instruments or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivative contracts and hybrid instruments may be erroneously priced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Fourth, derivative contracts and hybrid instruments may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Fifth, a common provision in over-the-counter (OTC) derivative contracts permits the counterparty to terminate any such contract between it and the Fund, if the value of the Fund’s total net assets declines below a specified level over a given time period. Factors that may contribute to such a decline (which usually must be substantial) include significant shareholder redemptions and/or a marked decrease in the market value of the Fund’s investments. Any such termination of the Fund’s OTC derivative contracts may adversely affect the Fund (for example, by increasing losses and/or costs, and/or preventing the Fund from fully implementing its investment strategies). Finally, derivative contracts and hybrid instruments may also involve other risks described in this prospectus or in the Fund’s SAI, such as interest rate, credit, currency, liquidity and leverage risks.

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CUSTODIAL SERVICES AND RELATED INVESTMENT COSTS

Custodial services and other costs relating to investment in international securities markets generally are more expensive than in the United States. Such markets have settlement and clearance procedures that differ from those in the United States. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The inability of the Fund to make intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result in losses to the Fund due to a subsequent decline in value of the portfolio security. In addition, security settlement and clearance procedures in some emerging countries may not fully protect the Fund against loss of its assets.

What Do Shares Cost?

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The Fund generally values fixed-income securities according to prices furnished by an independent pricing service, except that fixed-income securities with remaining maturities of less than 60 days at the time of purchase are valued at amortized cost. Prices furnished by an independent pricing service are generally intended to be indicative of the bid prices currently offered to institutional investors for the securities, except that prices for corporate fixed-income securities traded in the United States are generally intended to be indicative of the mean between such bid prices and asked prices.

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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.

If prices are not available from an independent pricing service, securities and derivatives contracts 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 security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund’s Board of Directors (Board). The Fund may use the fair value of a security to calculate its NAV when, for example: (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed: (2) trading in a portfolio security is suspended and not resumed prior to the normal market close; (3) a portfolio security is not traded in significant volume for a substantial period; or (4) the Fund’s Adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund’s NAV is computed. An event is considered significant if there is both an affirmative expectation that the security’s value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For securities normally priced at their last sale price in a foreign market, such events can occur between the close of trading in the foreign market and the close of trading on the NYSE. In such cases, use of fair valuation can reduce an investor’s ability to seek to profit by estimating the Fund’s NAV in advance of the time as of which NAV is calculated.

In some cases, events affecting the issuer of a portfolio security may be considered significant events. Announcements concerning earnings, acquisitions, new products, management changes, litigation developments, a strike or natural disaster affecting the company’s operations or regulatory changes or market developments affecting the issuer’s industry occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE are examples of potentially significant events. For securities of foreign issuers, such events could also include political or other developments affecting the economy or markets in which the issuer conducts its operations or its securities are traded.

There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security’s present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued by an independent pricing service, or based on market quotations.

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

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges
Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	4.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	None	1.00%

1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amount for Systematic Investment Programs (SIP) is $50. Financial intermediaries may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. To maximize your return and minimize the sales charges and marketing fees, purchases of Class B Shares are generally limited to $100,000 and purchases of Class C Shares are generally limited to $1,000,000. Purchases in excess of these limits may be made in Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund. See “Purchase Limits on Class B and Class C Shares” below. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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

3 See “Sales Charge When You Redeem.”

As shown in the table above, each class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses (“expense ratios”), as well as the compensation payable to financial intermediaries, also vary among the classes. Before you decide which class to purchase, you should review the different charges and expenses of each class carefully, in light of your personal circumstances, and consult with your financial intermediary.

Among the important factors to consider are the amount you plan to invest and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares. Among other ways, Class A Shares have a series of “breakpoints,” which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under “Sales Charge When You Purchase.”) On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares do not have front-end sales charges, but do impose a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and comparable to those charged to Class B Shares.

You should also consider that the expense ratio for Class A Shares will be lower than that for Class B (or Class C) Shares. Thus, the fact that no front-end charges are ever imposed on purchases of Class B Shares and Class C Shares does not always make them preferable to Class A Shares.

SALES CHARGE WHEN YOU PURCHASE

The following tables list the sales charges which will be applied to your Share purchase, subject to the breeakpoint discounts indicated in the tables and described below.

Class A Shares:

Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV

Less than $100,000	4.50%	4.71%

$100,000 but less than $250,000	3.75%	3.90%

$250,000 but less than $500,000	2.50%	2.56%

$500,000 but less than $1 million	2.00%	2.04%

$1 million or greater¹	0.00%	0.00%

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

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Your investment may qualify for a reduction or elimination of the sales charge, also known as a breakpoint discount. The breakpoint discounts offered by the Fund are indicated in the tables above. You or your financial intermediary must notify the Fund’s Transfer Agent of eligibility for any applicable breakpoint discount at the time of purchase.

In order to receive the applicable breakpoint discount, it may be necessary at the time of purchase for you to inform your financial intermediary or the Transfer Agent of the existence of other accounts in which there are holdings eligible to be aggregated to meet a sales charge breakpoint (“Qualifying Accounts”). Qualifying Accounts mean those Share accounts in the Federated funds held directly or through a financial intermediary or a through a single-participant retirement account by you, your spouse, your parents (if you are under age 21) and/or your children under age 21, which can be linked using tax identification numbers (TINs), social security numbers (SSNs) or broker identification numbers (BINs). Accounts held through 401(k) plans and similar multi-participant retirement plans, or through “Section 529” college savings plans or those accounts which cannot be linked using TINs, SSNs or BINs, are not Qualifying Accounts.

In order to verify your eligibility for a breakpoint discount, you will be required to provide to your financial intermediary or the Transfer Agent certain information on your New Account Form and may be required to provide account statements regarding Qualifying Accounts. If you purchase through a financial intermediary, you may be asked to provide additional information and records as required by the financial intermediary. Failure to provide proper notification or verification of eligibility for a breakpoint discount may result in your not receiving a breakpoint discount to which you are otherwise entitled. Breakpoint discounts apply only to your current purchase and do not apply retroactively to previous purchases. The sales charges applicable to the Shares offered in this prospectus, and the breakpoint discounts offered with respect to such Shares, are described in full in this prospectus. Because the prospectus is available on Federated’s website free of charge, Federated does not disclose this information separately on the website.

Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

purchasing Class A Shares in greater quantities to reduce the applicable sales charge;

Concurrent and Accumulated Purchases

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months (call your financial intermediary or the Fund for more information). The Fund’s custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases.

PURCHASE LIMITS ON CLASS B AND CLASS C SHARES

In order to maximize shareholder returns and minimize sales charges and marketing fees, an investor’s purchases of Class B Shares are generally limited to $100,000 and an investor’s purchases of Class C Shares are generally limited to $1,000,000. In applying the limit, the dollar amount of the current purchase is added to the product obtained by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K shares of any Federated fund currently held in linked Qualifying Accounts. If the sum of these two amounts would equal or exceed the limit, then the current purchase order will not be processed. Instead, the Distributor will attempt to contact the investor or the investor’s financial intermediary to offer the opportunity to convert the order to Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund.

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

within 120 days of redeeming Shares of an equal or greater amount;
through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of a Federated fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);
as a Director, employee or former employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or
pursuant to the exchange privilege.

The sales charge will not be eliminated if you purchase Shares of the Fund through an exchange of shares of Liberty U.S. Government Money Market Trust unless your Liberty shares were acquired through an exchange of shares on which the sales charge had previously been paid.

SALES CHARGE WHEN YOU REDEEM

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

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

Shares that are not subject to a CDSC; and
Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund).

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

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your financial intermediary received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.

Class B Shares:

Shares Held Up To:		CDSC

1 Year		5.50%

2 Years		4.75%

3 Years		4.00%

4 Years		3.00%

5 Years		2.00%

6 Years		1.00%

7 Years or More		0.00%

Class C Shares:

You will pay a 1.00% CDSC if you redeem Shares within 12 months of the purchase date.

If your investment qualifies for a reduction or elimination of the CDSC, you or your financial intermediary must notify the Transfer Agent at the time of redemption. If the Transfer Agent is not notified, the CDSC will apply.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);
representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Directors, employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through a financial intermediary that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); or
which are qualifying redemptions of Class B Shares under a Systematic Withdrawal Program.

How is the Fund Sold?

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

The Fund’s Distributor, Federated Securities Corp., markets the Shares described in this prospectus to investors who wish to spread their investments beyond the United States and are prepared to accept the particular risks associated with these investments, directly or through financial intermediaries. Under the Distributor’s Contract with the Fund, the Distributor offers Shares on a continuous, best-efforts basis. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

Payments to Financial Intermediaries

The Fund and its affiliated service providers may pay fees as described below to financial intermediaries (such as broker-dealers, banks, investment advisers or third-party administrators) whose customers are shareholders of the Fund.

FRONT-END SALES CHARGE REALLOWANCES

The Distributor receives a front-end sales charge on certain Share sales. The Distributor pays a portion of this charge to financial intermediaries that are eligible to receive it (the “Dealer Reallowance”) and retains any remaining portion of the front-end sales charge.

When a financial intermediary’s customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows:

Class A Shares:

Purchase Amount		Dealer Reallowance as a Percentage of Public Offering Price

Less than $100,000		4.00%

$100,000 but less than $250,000		3.25%

$250,000 but less than $500,000		2.25%

$500,000 but less than $1 million		1.80%

$1 million or greater		0.00%

ADVANCE COMMISSIONS

When a financial intermediary’s customer purchases Shares, the financial intermediary may receive an advance commission as follows:

Class A Shares (for purchases over $1 million):

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

First $1 million - $5 million		0.75%

Next $5 million - $20 million		0.50%

Over $20 million		0.25%

Advance commissions are calculated on a year by year basis based on amounts invested during that year. Accordingly, with respect to additional purchase amounts, the advance commission breakpoint resets annually to the first breakpoint on the anniversary of the first purchase.

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

Class B Shares:

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

All Purchase Amounts		Up to 5.50%

Class C Shares:

All Purchase Amounts		1.00%

RULE 12b-1 FEES

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees of up to 0.25% for Class A Shares, and 0.75% for Class B Shares and C Shares, of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund’s Class A Shares, Class B Shares and Class C Shares. When the Distributor receives Rule 12b-1 Fees, it may pay some or all of them to financial intermediaries whose customers purchase Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.

SERVICE FEES

The Fund may pay Service Fees of up to 0.25% of average net assets to financial intermediaries or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated, for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial intermediaries directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial intermediaries. If a financial intermediary receives Service Fees on an account, it is not eligible to also receive Account Administration Fees on that same account.

ACCOUNT ADMINISTRATION FEES

The Fund may pay Account Administration Fees of up to 0.25% of average net assets to banks that are not registered as broker-dealers or investment advisers for providing administrative services to the Funds and shareholders. If a financial intermediary receives Account Administration Fees on an account, it is not eligible to also receive Service Fees or Recordkeeping Fees on that same account.

RECORDKEEPING FEES

The Fund may pay Recordkeeping Fees on an average net assets basis or on a per account per year basis to financial intermediaries for providing recordkeeping services to the Funds and shareholders. If a financial intermediary receives Recordkeeping Fees on an account, it is not eligible to also receive Account Administration Fees or Networking Fees on that same account.

NETWORKING FEES

The Fund may reimburse Networking Fees on a per account per year basis to financial intermediaries for providing administrative services to the Funds and shareholders on certain non-omnibus accounts. If a financial intermediary receives Networking Fees on an account, it is not eligible to also receive Recordkeeping Fees on that same account.

ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

The Distributor may pay out of its own resources amounts (including items of material value) to certain financial intermediaries that support the sale of Shares or provide services to Fund shareholders. The amounts of these payments could be significant, and may create an incentive for the financial intermediary or its employees or associated persons to recommend or sell Shares of the Fund to you. In some cases, such payments may be made by or funded from the resources of companies affiliated with the Distributor (including the Adviser). These payments are not reflected in the fees and expenses listed in the fee table section of the Fund’s prospectus and described above because they are not paid by the Fund.

These payments are negotiated and may be based on such factors as the number or value of Shares that the financial intermediary sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial intermediary. These payments may be in addition to payments made by the Fund to the financial intermediary under a Rule 12b-1 Plan and/or Service Fees arrangement. In connection with these payments, the financial intermediary may elevate the prominence or profile of the Fund and/or other Federated funds within the financial intermediary’s organization by, for example, placement on a list of preferred or recommended funds, and/or granting the Distributor preferential or enhanced opportunities to promote the funds in various ways within the financial intermediary’s organization. You can ask your financial intermediary for information about any payments it receives from the Distributor or the Fund and any services provided.

How to Purchase Shares

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

THROUGH A FINANCIAL INTERMEDIARY

Establish an account with the financial intermediary; and
Submit your purchase order to the financial intermediary before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive the next calculated NAV if the financial intermediary forwards the order to the Fund on the same day and the Fund receives payment within three business days. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Financial intermediaries should send payments according to the instructions in the sections “By Wire” or “By Check.”

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or State Street Bank and Trust Company, the Fund’s transfer agent.

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

By Wire

Send your wire to:

State Street Bank and Trust Company Boston, MA Dollar Amount of Wire ABA Number 011000028 Attention: EDGEWIRE Wire Order Number, Dealer Number or Group Number Nominee/Institution Name Fund Name and Number and Account Number

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

By Check

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

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

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

The Federated Funds 30 Dan Road Canton, MA 02021

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH AN EXCHANGE

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

BY SYSTEMATIC INVESTMENT PROGRAM

Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the SIP section of the New Account Form or by contacting the Fund or your financial intermediary.

BY AUTOMATED CLEARING HOUSE (ACH)

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

RETIREMENT INVESTMENTS

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

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

through a financial intermediary if you purchased Shares through a financial intermediary; or
directly from the Fund if you purchased Shares directly from the Fund.

Shares of the Fund may be redeemed for cash or exchanged for shares of the same class of other Federated funds on days on which the Fund computes its NAV. Redemption requests may be made by telephone or in writing.

THROUGH A FINANCIAL INTERMEDIARY

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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund
at 1-800-341-7400.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

You may redeem or exchange Shares by sending a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 30 Dan Road Canton, MA 02021

All requests must include:

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

Call your financial intermediary or the Fund if you need special instructions.

Signature Guarantees

Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

your redemption will be sent to an address other than the address of record;
your redemption will be sent to an address of record that was changed within the last 30 days;
a redemption is payable to someone other than the shareholder(s) of record; or
if exchanging (transferring) into another fund with a different shareholder registration.

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

PAYMENT METHODS FOR REDEMPTIONS

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

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear (as discussed below);
during periods of market volatility;
when a shareholder’s trade activity or amount adversely impacts the Fund’s ability to manage its assets; or
during any period when the Federal Reserve wire or applicable Federal Reserve banks are closed, other than customary weekend and holiday closings.

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If you request a redemption of Shares recently purchased by check (including a cashier’s check or certified check), money order, bank draft or ACH, your redemption proceeds may not be made available up to seven calendar days to allow the Fund to collect payment on the instrument used to purchase such Shares. If the purchase instrument does not clear, your purchase order will be canceled and you will be responsible for any losses incurred by the Fund as a result of your canceled order.

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In addition, the right of redemption may be suspended, or the payment of proceeds may be delayed, during any period:

when the NYSE is closed, other than customary weekend and holiday closings;
when trading on the NYSE is restricted, as determined by the SEC; or
in which an emergency exists, as determined by the SEC, so that disposal of the Fund’s investments or determination of its NAV is not reasonably practicable.

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

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

EXCHANGE PRIVILEGE

You may exchange Shares of the Fund into shares of the same class of another Federated fund. To do this, you must:

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

The Fund may modify or terminate the exchange privilege at any time. In addition, the Fund may terminate your exchange privilege if your exchange activity is found to be excessive under the Fund’s frequent trading policies. See “Account and Share Information--Frequent Trading Policies.”

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your financial intermediary or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income.

Generally, it is not advisable to continue to purchase Shares subject to a sales charge while redeeming Shares using this program.

Systematic Withdrawal Program (SWP) On Class B Shares

You will not be charged a CDSC on SWP redemptions if:

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

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

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

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

In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments. Dividends may also be reinvested without sales charges in shares of any class of any other Federated fund of which you are already a shareholder.

If you have elected to receive dividends and/or capital gain distributions in cash, and your check is returned by the postal or other delivery service as “undeliverable,” or you do not respond to mailings from Federated with regard to uncashed distribution checks, your distribution option will automatically be converted to having all dividends and capital gains reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution checks.

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

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

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

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

FREQUENT TRADING POLICIES

Frequent or short-term trading into and out of the Fund can have adverse consequences for the Fund and shareholders who use the Fund as a long-term investment vehicle. Such trading in significant amounts can disrupt the Fund’s investment strategies (e.g., by requiring it to sell investments at inopportune times or maintain excessive short-term or cash positions to support redemptions), increase brokerage and administrative costs and affect the timing and amount of taxable gains distributed by the Fund. Investors engaged in such trading may also seek to profit by anticipating changes in the Fund’s NAV in advance of the time as of which NAV is calculated.

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. The Fund’s fair valuation procedures are intended in part to discourage short-term trading strategies by reducing the potential for these strategies to succeed. See “What Do Shares Cost?” The Fund also monitors trading in Fund Shares in an effort to identify disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of 12 months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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The Fund’s frequent trading restrictions do not apply to purchases and sales of Fund Shares by other Federated funds. These funds impose the same frequent trading restrictions as the Fund at their shareholder level. In addition, allocation changes of the investing Federated fund are monitored, and the managers of the recipient fund must determine that there is no disruption to their management activity. The intent of this exception is to allow investing fund managers to accommodate cash flows that result from non-abusive trading in the investing fund, without being stopped from such trading because the aggregate of such trades exceeds the monitoring limits. Nonetheless, as with any trading in Fund Shares, purchases and redemptions of Fund Shares by other Federated funds could adversely affect the management of the Fund’s portfolio and its performance.

The Fund’s objective is that its restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

PORTFOLIO HOLDINGS INFORMATION

Information concerning the Fund’s portfolio holdings is available in the “Products” section of Federated’s website at FederatedInvestors.com. A complete listing of the Fund’s portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include identification of the Fund’s top ten holdings, recent purchase and sale transactions and percentage breakdowns of the portfolio by sector and geographic region.

To access this information from the “Products” section of the website, click on “Portfolio Holdings” and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the “Products” section, and from the Fund’s page click on the “Portfolio Holdings” or “Composition” link. A user is required to register on the website the first time the user accesses this information.

You may also access from the “Products” section of the website portfolio information as of the end of the Fund’s fiscal quarters. The Fund’s annual and semi-annual reports, which contain complete listings of the Fund’s portfolio holdings as of the end of the Fund’s second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on “Prospectuses and Regulatory Reports” and selecting the link to the appropriate PDF. Complete listings of the Fund’s portfolio holdings as of the end of the Fund’s first and third fiscal quarters may be accessed by selecting “Portfolio Holdings” from the “Products” section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC’s website at www.sec.gov.

Who Manages the Fund?

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The Board governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund’s assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

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The Adviser and other subsidiaries of Federated advise approximately 148 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $237 billion in assets as of December 31, 2006. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1,243 employees. Federated provides investment products to more than 5,500 investment professionals and institutions.

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PORTFOLIO MANAGEMENT INFORMATION

Ihab Salib

Ihab Salib has been a Portfolio Manager of the Fund since July 2002. Mr. Salib joined Federated in April 1999 as a Senior Fixed Income Trader/Assistant Vice President of the Fund’s Adviser. In July 2000, he was named a Vice President of the Fund’s Adviser. He has served as a portfolio manager since January 2002. From January 1994 through March 1999, Mr. Salib was employed as a Senior Global Fixed Income Analyst with UBS Brinson, Inc. Mr. Salib received his B.A. with a major in Economics from Stony Brook University.

The Fund’s SAI provides additional information about the Portfolio Managers’ compensation, management of other accounts, and ownership of securities in the Fund.

ADVISORY FEES

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

A discussion of the Board’s review of the Fund’s investment advisory contract is available in the Fund’s Annual Report dated November 30, 2006.

Legal Proceedings

Since October 2003, Federated and related entities (collectively, “Federated”), and various Federated funds (“Funds”), have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (“NYAG”), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. Specifically, the SEC and NYAG settled proceedings against three Federated subsidiaries involving undisclosed market timing arrangements and late trading. The SEC made findings: that Federated Investment Management Company (“FIMC”), an SEC-registered investment adviser to various Funds, and Federated Securities Corp., an SEC-registered broker-dealer and distributor for the Funds, violated provisions of the Investment Advisers Act and Investment Company Act by approving, but not disclosing, three market timing arrangements, or the associated conflict of interest between FIMC and the funds involved in the arrangements, either to other fund shareholders or to the funds’ board; and that Federated Shareholder Services Company, formerly an SEC-registered transfer agent, failed to prevent a customer and a Federated employee from late trading in violation of provisions of the Investment Company Act. The NYAG found that such conduct violated provisions of New York State law. Federated entered into the settlements without admitting or denying the regulators’ findings. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless: (i) at least 75% of the fund’s directors are independent of Federated; (ii) the chairman of each such fund is independent of Federated; (iii) no action may be taken by the fund’s board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively; and (iv) the fund appoints a “senior officer” who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated’s announcement which, along with previous press releases and related communications on those matters, is available in the “About Us” section of Federated’s website at FederatedInvestors.com.

Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees.

The Board of the Funds has retained the law firm of Dickstein Shapiro LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

Financial Information

FINANCIAL HIGHLIGHTS

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

This information has been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report, along with the Fund’s audited financial statements, is included in the Annual Report.

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Financial Highlights -- Class A Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006			2005			2004			2003			2002

Net Asset Value, Beginning of Period	$10.86			$12.63			$11.76			$10.06			$8.97
Income From Investment Operations:
Net investment income	0.21	¹		0.24	¹		0.27	¹		0.31	¹		0.30	¹
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.51			(1.30	)		1.36			1.93			0.79

TOTAL FROM INVESTMENT OPERATIONS	0.72			(1.06	)		1.63			2.24			1.09

Less Distributions:
Distributions from net investment income	(0.46	)		(0.71	)		(0.76	)		(0.54	)		--

Net Asset Value, End of Period	$11.12			$10.86			$12.63			$11.76			$10.06

Total Return²	6.85	%		(8.88	)%		14.59	%		23.25	%		12.15	%


Ratios to Average Net Assets:

Net expenses	0.90	%		0.81	%		0.90	%		1.25	%		1.73	%

Net investment income	1.93	%		2.05	%		2.36	%		2.80	%		3.27	%

Expense waiver/reimbursement³	0.75	%		0.76	%		0.78	%		0.64	%		0.55	%

Supplemental Data:

Net assets, end of period (000 omitted)	$119,489		$118,261			$101,956			$88,753			$33,663

Portfolio turnover	95	%		76	%		80	%		126	%		208	%

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1 Per share numbers have been calculated using the average shares method.

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2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable. Total returns for periods of less than one year, if any, are not annualized.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated November 30, 2006, which can be obtained free of charge.

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Financial Highlights -- Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006			2005			2004			2003			2002

Net Asset Value, Beginning of Period	$10.58			$12.32			$11.51			$9.86			$8.86
Income From Investment Operations:
Net investment income	0.13	¹		0.14	¹		0.19	¹		0.23	¹		0.24	¹
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.49			(1.26	)		1.32			1.90			0.76

TOTAL FROM INVESTMENT OPERATIONS	0.62			(1.12	)		1.51			2.13			1.00

Less Distributions:
Distributions from net investment income	(0.36	)		(0.62	)		(0.70	)		(0.48	)		--

Net Asset Value, End of Period	$10.84			$10.58			$12.32			$11.51			$9.86

Total Return²	6.02	%		(9.60	)%		13.80	%		22.43	%		11.29	%


Ratios to Average Net Assets:

Net expenses	1.62	%		1.62	%		1.62	%		1.97	%		2.45	%

Net investment income	1.21	%		1.24	%		1.64	%		2.09	%		2.58	%

Expense waiver/reimbursement³	0.58	%		0.50	%		0.56	%		0.42	%		0.33	%

Supplemental Data:

Net assets, end of period (000 omitted)	$11,529		$14,326			$17,727			$16,051			$9,433

Portfolio turnover	95	%		76	%		80	%		126	%		208	%

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1 Per share numbers have been calculated using the average shares method.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated November 30, 2006, which can be obtained free of charge.

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Financial Highlights -- Class C Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006		2005		2004		2003		2002

Net Asset Value, Beginning of Period	$10.54		$12.29		$11.50		$9.86		$8.86
Income From Investment Operations:
Net investment income	0.13	¹	0.14	¹	0.18	¹	0.23	¹	0.24	¹
Net realized and unrealized gain (loss) on investments, options and foreign currency transactions	0.49		(1.26	)	1.32		1.90		0.76

TOTAL FROM INVESTMENT OPERATIONS	0.62		(1.12	)	1.50		2.13		1.00

Less Distributions:
Distributions from net investment income	(0.37	)	(0.63	)	(0.71	)	(0.49	)	--

Net Asset Value, End of Period	$10.79		$10.54		$12.29		$11.50		$9.86

Total Return²	5.97	%	(9.60	)%	13.74	%	22.51	%	11.29	%


Ratios to Average Net Assets:

Net expenses	1.62	%	1.62	%	1.62	%	1.97	%	2.45	%

Net investment income	1.21	%	1.24	%	1.64	%	2.10	%	2.57	%

Expense waiver/reimbursement³	0.58	%	0.50	%	0.56	%	0.42	%	0.33	%

Supplemental Data:

Net assets, end of period (000 omitted)	$31,149		$36,432		$36,885		$23,051		$5,841

Portfolio turnover	95	%	76	%	80	%	126	%	208	%

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1 Per share numbers have been calculated using the average shares method.

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

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Further information about the Fund’s performance is contained in the Fund’s Annual Report, dated November 30, 2006, which can be obtained free of charge.

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Appendix A: Hypothetical Investment and Expense Information

The following charts provide additional hypothetical information about the effect of the Fund’s expenses, including investment advisory fees and other Fund costs, on the Fund’s assumed returns over a 10-year period. Each chart shows the estimated expenses that would be incurred in respect of a hypothetical investment of $10,000, assuming a 5% return each year, and no redemption of Shares. Each chart also assumes that the Fund’s annual expense ratio stays the same throughout the 10-year period (except for Class B Shares, which convert to Class A Shares after you have held them for eight years) and that all dividends and distributions are reinvested. The annual expense ratio used in each chart is the same as stated in the “Fees and Expenses” table of this prospectus (and thus may not reflect any fee waiver or expense reimbursement currently in effect). The maximum amount of any sales charge that might be imposed on the purchase of Shares (and deducted from the hypothetical initial investment of $10,000; the “Front-End Sales Charge”) is reflected in the “Hypothetical Expenses” column. The hypothetical investment information does not reflect the effect of charges (if any) normally applicable to redemptions of Shares (e.g., deferred sales charges, redemption fees). Mutual fund returns, as well as fees and expenses, may fluctuate over time, and your actual investment returns and total expenses may be higher or lower than those shown below.

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FEDERATED INTERNATIONAL BOND FUND -- CLASS A SHARES
ANNUAL EXPENSE RATIO: 1.70%
MAXIMUM FRONT-END SALES CHARGE: 4.50%

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Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$477.50	$10,027.50	$615.03	$9,865.15

2	$9,865.15	$493.26	$10,358.41	$170.47	$10,190.70

3	$10,190.70	$509.54	$10,700.24	$176.10	$10,526.99

4	$10,526.99	$526.35	$11,053.34	$181.91	$10,874.38

5	$10,874.38	$543.72	$11,418.10	$187.91	$11,233.23

6	$11,233.23	$561.66	$11,794.89	$194.12	$11,603.93

7	$11,603.93	$580.20	$12,184.13	$200.52	$11,986.86

8	$11,986.86	$599.34	$12,586.20	$207.14	$12,382.43

9	$12,382.43	$619.12	$13,001.55	$213.97	$12,791.05

10	$12,791.05	$639.55	$13,430.60	$221.04	$13,213.15

Cumulative		$5,550.24		$2,368.21

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FEDERATED INTERNATIONAL BOND FUND -- CLASS B SHARES
ANNUAL EXPENSE RATIO: 2.20%

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Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$500.00	$10,500.00	$223.08	$10,280.00

2	$10,280.00	$514.00	$10,794.00	$229.33	$10,567.84

3	$10,567.84	$528.39	$11,096.23	$235.75	$10,863.74

4	$10,863.74	$543.19	$11,406.93	$242.35	$11,167.92

5	$11,167.92	$558.40	$11,726.32	$249.13	$11,480.62

6	$11,480.62	$574.03	$12,054.65	$256.11	$11,802.08

7	$11,802.08	$590.10	$12,392.18	$263.28	$12,132.54

8	$12,132.54	$606.63	$12,739.17	$270.65	$12,472.25

Converts from Class B to Class A			Annual Expense Ratio: 1.70%

9	$12,472.25	$623.61	$13,095.86	$215.53	$12,883.83

10	$12,883.83	$644.19	$13,528.02	$222.64	$13,309.00

Cumulative		$5,682.54		$2,407.85

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FEDERATED INTERNATIONAL BOND FUND -- CLASS C SHARES
ANNUAL EXPENSE RATIO: 2.20%
MAXIMUM FRONT-END SALES CHARGE: NONE

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Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$500.00	$10,500.00	$223.08	$10,280.00

2	$10,280.00	$514.00	$10,794.00	$229.33	$10,567.84

3	$10,567.84	$528.39	$11,096.23	$235.75	$10,863.74

4	$10,863.74	$543.19	$11,406.93	$242.35	$11,167.92

5	$11,167.92	$558.40	$11,726.32	$249.13	$11,480.62

6	$11,480.62	$574.03	$12,054.65	$256.11	$11,802.08

7	$11,802.08	$590.10	$12,392.18	$263.28	$12,132.54

8	$12,132.54	$606.63	$12,739.17	$270.65	$12,472.25

9	$12,472.25	$623.61	$13,095.86	$278.23	$12,821.47

10	$12,821.47	$641.07	$13,462.54	$286.02	$13,180.47

Cumulative		$5,679.42		$2,533.93

</R>
<R>

A Statement of Additional Information (SAI) dated February 1, 2007, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund’s SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report’s Management’s Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. The SAI contains a description of the Fund’s policies and procedures with respect to the disclosure of its portfolio securities. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your financial intermediary or the Fund at 1-800-341-7400.

</R>

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated’s website at FederatedInvestors.com.

You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC’s Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC’s website at www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC’s Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room’s operations and copying fees.

Federated Investors
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Investment Company Act File No. 811-3984

Federated is a registered mark of Federated Investors, Inc.
2007 © Federated Investors, Inc.

Cusip 31420G408
Cusip 31420G507
Cusip 31420G606

G00494-02-ABC (1/07)

FEDERATED INTERNATIONAL BOND FUND

A PORTFOLIO OF FEDERATED INTERNATIONAL SERIES, INC.

STATEMENT OF ADDITIONAL INFORMATION

<R>

FEBRUARY 1, 2007

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated International Bond Fund
(Fund), dated February 1, 2007.

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

</R>

CONTENTS
How is the Fund Organized?.............
Securities in Which the Fund Invests...
What Do Shares Cost?................
How is the Fund Sold?..................
Exchanging Securities for Shares.......
Subaccounting Services.................
Redemption in Kind.....................
Account and Share Information..........
Tax Information........................
Who Manages and Provides Services to
the Fund?..............................
How Does the Fund Measure Performance?.
Who is Federated Investors, Inc.?......
Financial Information..................
Investment Ratings.....................
Addresses..............................
Appendix...............................

- 1 -

HOW IS THE FUND ORGANIZED?

The Fund is a non-diversified portfolio of Federated International Series, Inc.
(Corporation). The Corporation is an open-end, management investment company
that was established under the laws of the State of Maryland on March 9, 1984.
The Corporation may offer separate series of shares representing interests in
separate portfolios of securities. The Corporation changed its name from
International Series, Inc. to Federated International Series, Inc. on January
19, 2000. On September 18, 2000, the Fund changed its name from Federated
International Income Fund to Federated International Bond Fund.

The Board of Directors (Board) has established three classes of shares of the
Fund, known as Class A Shares, Class B Shares and Class C Shares (Shares). This
SAI relates to all classes of Shares. The Fund's investment adviser is Federated
Investment Management Company (Adviser).

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

HEDGING
The Fund may invest in non-U.S. dollar denominated debt issued by corporations
domiciled in the United States.
While the Fund does not intend to hedge its entire foreign currency exposure
into U.S. dollars, it reserves the right to hedge any portion of its portfolio
in the future. Hedging transactions are intended to reduce specific risks. For
example, to protect the Fund against circumstances that would normally cause the
Fund's portfolio securities to decline in value, the Fund may buy or sell a
derivative contract that would normally increase in value under the same
circumstances. The Fund may attempt to lower the cost of hedging by entering
into transactions that provide only limited protection, including transactions
that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts
that cover a narrow range of circumstances; or (3) involve the sale of
derivatives contracts with different terms. Consequently, hedging transactions
will not eliminate risk even if they work as intended. In addition, hedging
strategies are not always successful, and could result in increased expenses and
losses to the Fund.

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.

Yields on short-, intermediate-, and long-term securities are dependent on a
variety of factors, including the general conditions of the money, bond and
foreign exchange markets, the size of a particular offering, the maturing of the
obligation, and the rating of the issue. Debt securities with longer maturities
are generally subject to potentially greater capital appreciation and depre-
ciation than obligations with shorter maturities and lower yields.

The following describes additional 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 (GSE) acting under federal authority. Some GSE
securities are supported by the full faith and credit of the United States.
These include the Government National Mortgage Association, Small Business
Administration, Farm Credit System Financial Assistance Corporation, Farmer's
Home Administration, Federal Financing Bank, General Services Administration,
Department of Housing and Urban Development, Export-Import Bank, Overseas
Private Investment Corporation, and Washington Metropolitan Area Transit
Authority Bonds.

Other GSE securities receive support through federal subsidies, loans or other
benefits. For example, the U.S. Treasury is authorized to purchase specified
amounts of securities issued by (or otherwise make funds available to) the
Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, and Tennessee Valley Authority in support of such
obligations.

A few GSE securities have no explicit financial support, but are regarded as
having implied support because the federal government sponsors their activities.
These include the Farm Credit System, Financing Corporation, and Resolution
Funding Corporation.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

A Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency.

Although such a guarantee protects against credit risks, it does not reduce
market and prepayment risks.

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 also 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.

MORTGAGE BACKED SECURITIES
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.
Interests in pools of adjustable rate mortgages are known as ARMs.
Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are pass-
through certificates. An issuer of pass-through certificates gathers monthly
payments from an underlying pool of mortgages. Then, the issuer deducts its fees
and expenses and passes the balance of the payments onto the certificate holders
once a month. Holders of pass-through certificates receive a pro rata share of
all payments and prepayments from the underlying mortgages. As a result, the
holders assume all the prepayment risks of the underlying mortgages.

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. CMOs are offered in a
variety of structures. For example, 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.

The degree of increased or decreased prepayment risks depends upon the structure
of the CMOs. Certain CMO structures are among the most volatile investment grade
fixed income securities currently traded in the United States. However, the
actual returns on any type of mortgage backed security depends upon the per-
formance of the underlying pool of mortgages, which no one can predict and will
vary among pools.

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

ZERO COUPON SECURITIES
Zero coupon securities do not pay interest or principal until final maturity
unlike debt securities that provide periodic payments of interest (referred to
as a coupon payment). Investors buy zero coupon securities at a price below the
amount payable at maturity. The difference between the purchase price and the
amount paid at maturity represents interest on the zero coupon security.
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.

BANK INSTRUMENTS
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include, but are not limited to, 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.
<R>

DERIVATIVE CONTRACTS
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated securities, commodities, currencies,
indices, or other assets or instruments including other derivative contracts,
(each a "Reference Instrument" and collectively, "Reference Instruments"). Each
party to a derivative contract is referred to as a counterparty. Some
derivative contracts require payments relating to an actual, future trade
involving the Reference Instrument. These types of derivatives are frequently
referred to as "physically settled" derivatives. Other derivative contracts
require payments relating to the income or returns from, or changes in the
market value of, a Reference Instrument. These types of derivatives are known
as "cash settled" derivatives, since they require cash payments in lieu of
delivery of the Reference Instrument.

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 on how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the Reference Instrument,
derivative contracts may increase or decrease the Fund's exposure to the risks
of the Reference Instrument, 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, including
combinations thereof:

CURRENCY FORWARD CONTRACT
A currency forward contract is an obligation to purchase or sell a specific
currency at a future date, at a price set at the time of the contract and for a
period agreed upon by the parties which may be either a window of time or a
fixed number of days from the date of the contract. Forward currency contracts
are highly volatile, with a relatively small price movement potentially
resulting in substantial gains or losses to the Fund. Additionally, the Fund may
lose money on forward currency transactions if changes in currency rates do not
occur as anticipated or if the Fund's counterparty to the contract were to
default. Currency forward contracts are OTC derivatives.

OPTION CONTRACTS

Option contracts (also called "options") are rights to buy or sell a Reference
Instrument for a specified price (the exercise price) during, or at the end of,
a specified period. The seller (or 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. Options can trade on exchanges or in the OTC
market and may be bought or sold on a wide variety of Reference Instruments.
Options that are written on futures contracts will be subject to margin
requirements similar to those applied to futures contracts. The Fund may buy or
sell options on a Reference Instrument if it is permitted to own, invest, or
otherwise have economic exposure to that instrument. The Fund is not required
to own a Reference Instrument, in order to buy or write an option on that
Reference Instrument.

The Fund may buy and/or sell the following types of options:

CALL OPTIONS
A call option gives the holder (buyer) the right to buy the Reference Instrument
from the seller (writer) of the option. The Fund may use call options in the
following ways:

{circle}Buy call options on a Reference Instrument in anticipation of an
increase in the value of the Reference Instrument; and

{circle}Write call options on a Reference Instrument to generate income from
premiums, and in anticipation of a decrease or only limited increase in the
value of the Reference Instrument. If the Fund writes a call option on a
Reference Instrument that it owns and that call option is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
Reference Instrument over the exercise price plus the premium received.

PUT OPTIONS
A put option gives the holder the right to sell the Reference Instrument to the
writer of the option. The Fund may use put options in the following ways:

{circle}Buy put options on a Reference Instrument in anticipation of a decrease
in the value of the Reference Instrument; and

{circle}Write put options on a Reference Instrument to generate income from
premiums, and in anticipation of an increase or only limited decrease in the
value of the Reference Instrument. In writing puts, there is a risk that the
Fund may be required to take delivery of the Reference Instrument when its
current market price is lower than the exercise price.

The Fund may also buy or write options, as needed, to close out existing option
positions.

Finally, the Fund may enter into combinations of options contracts in an attempt
to benefit from changes in the prices of those options contracts (without regard
to changes in the value of the Reference Instrument).

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 (commonly referred to as a "notional principal amount") 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 London Interbank
Offered Rate (LIBOR) swap would require one party to pay the equivalent of the
London Interbank Offered 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.

CREDIT DEFAULT SWAPS
A credit default swap (CDS) is an agreement between two parties whereby one
party (the "Protection Buyer") agrees to make payments over the term of the CDS
to the other party (the "Protection Seller"), provided that no designated event
of default, restructuring or other credit related event (each a "Credit Event")
occurs with respect to Reference Instrument that is usually a particular bond or
the unsecured credit of an issuer, in general (the "Reference Obligation"). Many
CDS are physically settled, which means that if a Credit Event occurs, the
Protection Seller must pay the Protection Buyer the full notional value, or "par
value," of the Reference Obligation in exchange for delivery by the Protection
Buyer of the Reference Obligation or another similar obligation issued by the
issuer of the Reference Obligation (the "Deliverable Obligation"). The
Counterparties agree to the characteristics of the Deliverable Obligation at the
time that they enter into the CDS. Alternately, a CDS can be "cash settled,"
which means that upon the occurrence of a Credit Event, the Protection Buyer
will receive a payment from the Protection Seller equal to the difference
between the par amount of the Reference Obligation and its market value at the
time of the Credit Event. The Fund may be either the Protection Buyer or the
Protection Seller in a CDS. If the Fund is a Protection Buyer and no Credit
Event occurs, the Fund will lose its entire investment in the CDS (i.e., an
amount equal to the payments made to the Protection Seller over the term of the
CDS). However, if a Credit Event occurs, the Fund (as Protection Buyer) will
deliver the Deliverable Obligation and receive a payment equal to the full
notional value of the Reference Obligation, even though the Reference Obligation
may have little or no value. If the Fund is the Protection Seller and no Credit
Event occurs, the Fund will receive a fixed rate of income throughout the term
of the CDS. However, if a Credit Event occurs, the Fund (as Protection Seller)
will pay the Protection Buyer the full notional value of the Reference
Obligation and receive the Deliverable Obligation from the Protection Buyer. A
CDS may involve greater risks than if the Fund invested directly in the
Reference Obligation. For example, a CDS may increase credit risk since the Fund
has exposure to both the issuer of the Reference Obligation and the Counterparty
to the CDS.

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.

</R>

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed-upon
time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.

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

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

HYBRID INSTRUMENTS
Hybrid instruments combine elements of two different kinds of underlying
investments. Hybrid instruments can take on many forms including, but not
limited to, the following three forms: First, a common form of a hybrid
instrument combines elements of derivative contracts with those of another
security (typically a fixed-income security). In this case all or a portion of
the interest or principal payable on a hybrid security is determined by
reference to changes in the price of an underlying asset or by reference to
another benchmark (such as interest rates, currency exchange rates or indices).
Secondly, hybrid instruments may include convertible securities with conversion
terms related to an underlying asset or benchmark.
Depending on the type of hybrid instrument the risks of investing in hybrid
instruments may reflect a combination of the risks of investing in securities,
options, futures and currencies, and depend upon the terms of the instrument.
Thus, an investment in a hybrid instrument may entail significant risks in
addition to those associated with traditional fixed-income, equity or
convertible securities. Hybrid instruments are also potentially more volatile
and carry greater interest rate risks than traditional instruments. Moreover,
depending on the structure of the particular hybrid, it may expose the Fund to
leverage risks or carry liquidity risks.
CREDIT LINKED NOTES
A credit linked note ("CLN") is a type of hybrid instrument in which a special
purpose entity issues a structured note (the "Note Issuer") that is intended to
replicate a single bond, a portfolio of bonds, or with respect to the unsecured
credit of an issuer, in general (the "Reference Instrument"). The purchaser of
the CLN (the "Note Purchaser") invests a par amount and receives a payment
during the term of the CLN that equals a fixed or floating rate of interest
equivalent to a high rated funded asset (such as a bank certificate of deposit)
plus an additional premium that relates to taking on the credit risk of the
Reference Instrument. Upon maturity of the CLN, the Note Purchaser will receive
a payment equal to (i) the original par amount paid to the Note Issuer, if there
is neither a designated event of default (an "Event of Default") with respect to
the Reference Instrument nor a restructuring of the issuer of the Reference
Instrument (a "Restructuring Event") or (ii) the value of the Reference
Instrument, if an Event of Default or Restructuring Event has occurred.
Depending upon the terms of the CLN, it is also possible that the Note Purchaser
may be required to take physical delivery of the Reference Instrument in the
event of an Event of Default or a Restructuring Event. Most credit linked notes
use a corporate bond (or a portfolio of corporate bonds) as the Reference
Instrument(s). However, almost any type of fixed income security (including
foreign government securities) or derivative contract (such as a credit default
swap) can be used as the Reference Instrument.

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 risks and
credit risks.

INTER-FUND BORROWING AND LENDING ARRANGEMENTS
The Securities and Exchange Commission (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 Federated
funds, and an inter-fund loan is only made if it benefits each participating
Federated fund. Federated Investors, Inc. (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 Federated 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 Federated fund than market-competitive rates on overnight repurchase
agreements (Repo Rate) and more attractive to the borrowing Federated fund than
the rate of interest that would be charged by an unaffiliated bank for short-
term borrowings (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.
<R>

ASSET SEGREGATION
In accordance with SEC and SEC staff positions regarding the interpretation of
the 1940 Act, with respect to derivatives that create a future payment
obligation of the Fund, the Fund must "set aside" (referred to sometimes as
"asset segregation") liquid assets, or engage in other SEC- or staff-approved
measures, while the derivative contracts are open. For example, with respect to
forwards and futures contracts that are not contractually required to "cash-
settle," the Fund must cover its open positions by setting aside cash or readily
marketable securities equal to the contracts' full, notional value. With respect
to forwards and futures that are contractually required to "cash-settle,"
however, the Fund is permitted to set aside cash or readily marketable
securities in an amount equal to the Fund's daily marked-to-market (net)
obligations, if any (i.e., the Fund's daily net liability, if any), rather than
the notional value.

The Fund will employ another approach to segregating assets to cover options
that it sells. If the Fund sells a call option, the Fund will set aside either
the Reference Instrument subject to the option, cash or readily marketable
securities with a value that equals or exceeds the current market value of the
Reference Instrument. In no event, will the value of the cash or readily
marketable securities set aside by the Fund be less than the exercise price of
the call option. If the Fund sells a put option, the Fund will set aside cash or
readily marketable securities with a value that equals or exceeds the exercise
price of the put option.

The Fund's asset segregation approach for swap agreements varies among different
types of swaps. For example, if the Fund enters into a credit default swap as
the Protection Buyer, then it will set aside cash or readily marketable
securities necessary to meet any accrued payment obligations under the swap. By
comparison, if the Fund enters into a credit default swap as the Protection
Seller, then the Fund will set aside cash or readily marketable securities equal
to the full notional amount of the swap that must be paid upon the occurrence of
a Credit Event. For some other types of swaps, such as interest rate swaps, the
Fund will calculate the obligations of the counterparties to the swap on a net
basis. Consequently, the Fund's current obligation (or rights) under this type
of swap will equal only the net amount to be paid or received under based on the
relative values of the positions held by each counterparty to the swap (the "net
amount"). The net amount currently owed by or to the Fund will be accrued daily
and the Fund will set aside cash or readily marketable securities equal to any
accrued but unpaid net amount owed by the Fund under the swap.

The Fund may reduce the liquid assets segregated to cover obligations under a
derivative contract by entering into an offsetting derivative contract. For
example, if the Fund sells a put option for the same Reference Instrument as a
call option the Fund has sold, and the exercise price of the call option is the
same as or higher than the exercise price of the put option, then the Fund may
net its obligations under the options and set aside cash or readily marketable
securities (including any margin deposited for the options) with a value equal
to the greater of (a) the current market value of the Reference Instrument
deliverable under the call option or (b) the exercise price of the put option.

By setting aside cash or readily marketable securities equal to only its net
obligations under swaps and certain cash-settled derivative contracts, the Fund
will have the ability to employ leverage to a greater extent than if the Fund
were required to segregate cash or readily marketable securities equal to the
full notional value of such contracts. The use of leverage involves certain
risks. See "Risk Factors." Unless the Fund has other cash or readily marketable
securities to set aside, it cannot trade assets set aside in connection with
derivative contracts or special transactions 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. The Fund reserves the right to modify its
asset segregation policies in the future to comply with any changes in the
positions articulated from time to time by the SEC and its staff.

Generally, special transactions do not cash-settle on a net basis. Consequently,
with respect to special transactions, the Fund will set aside cash or readily
marketable securities with a value that equals or exceeds the Fund's
obligations.

</R>

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

CALL RISKS
*Call risk is the possibility that an issuer may redeem a fixed income security
before maturity (a call) at a price below its current market price. An
increase in the likelihood of a call may reduce the security's price.
*If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

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

<R>

RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS
*The Fund's use of derivative contracts and hybrid instruments involves risks
different from, or possibly greater than, the risks associated with investing
directly in securities and other traditional investments. First, changes in
the value of the derivative contracts and hybrid instruments in which the
Fund invests may not be correlated with changes in the value of the
underlying Reference or Valuation Instruments or, if they are correlated, may
move in the opposite direction than originally anticipated. Second, while
some strategies involving derivatives may reduce the risk of loss, they may
also reduce potential gains or, in some cases, result in losses by offsetting
favorable price movements in portfolio holdings. Third, there is a risk that
derivative contracts and hybrid instruments may be erroneously priced or
improperly valued and, as a result, the Fund may need to make increased cash
payments to the counterparty. Fourth, derivative contracts and hybrid
instruments may cause the Fund to realize increased ordinary income or short-
term capital gains (which are treated as ordinary income for Federal income
tax purposes) and, as a result, may increase taxable distributions to
shareholders. Fifth, a common provision in OTC derivative contracts permits
the counterparty to terminate any such contract between it and the Fund, if
the value of the Fund's total net assets declines below a specified level
over a given time period. Factors that may contribute to such a decline
(which usually must be substantial) include significant shareholder
redemptions and/or a marked decrease in the market value of the Fund's
investments. Any such termination of the Fund's OTC derivative contracts may
adversely affect the Fund (for example, by increasing losses and/or costs,
and/or preventing the Fund from fully implementing its investment
strategies). Finally, derivative contracts and hybrid instruments may also
involve other risks described herein or in the Fund's prospectus, such as
interest rate, credit, currency, liquidity and leverage risks.
</R>

FUNDAMENTAL INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain a total return on its assets.
The investment objective may not be changed by the Fund's Board without
shareholder approval.

INVESTMENT LIMITATIONS

BORROWING MONEY AND ISSUING SENIOR SECURITIES
The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the Investment Company Act of 1940 (1940
Act).

INVESTING IN REAL ESTATE
The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.

INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.

UNDERWRITING
The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.

LENDING
The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.

CONCENTRATION
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD AND BY
THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
INVESTMENT COMPANY ACT OF 1940 (1940 ACT). THE FOLLOWING LIMITATIONS, HOWEVER,
MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE
NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.

PURCHASES ON MARGIN
The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities, and further provided that the Fund may make margin deposits in
connection with its use of financial options and futures, forward and spot
currency contracts, swap transactions and other financial contracts or
derivative instruments.

PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.

CONVERTIBLE SECURITIES
The Fund may invest its assets in convertible securities.

INVESTING IN OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including securities of affiliated investment companies, as an efficient means
of carrying out its investment policies and managing its uninvested cash.

In applying the Fund's concentration restriction: (a) utility companies will be
divided according to their services, for example, gas, gas transmission,
electric and telephone will be considered a separate industry; (b) financial
service companies will be classified according to the end users of their
services, for example, automobile finance, bank finance and diversified finance
will each be considered a separate industry; and (c) asset-backed securities
will be classified according to the underlying assets securing such securities.
To conform to the current view of the SEC staff that only domestic bank
instruments may be excluded from industry concentration limitations, as a matter
of non-fundamental policy, the Fund will not exclude foreign bank instruments
from industry concentration limitation tests so long as the policy of the SEC
remains in effect. In addition, investments in bank instruments, and invest-
ments in certain industrial development bonds funded by activities in a single
industry, will be deemed to constitute investment in an industry, except when
held for temporary defensive purposes. Foreign securities will not be excluded
from industry concentration limits. The investment of more than 25% of the value
of the Fund's total assets in any one industry will constitute "concentration."
As a matter of non-fundamental operating policy, for purposes of the commodities
policy, investments in transactions involving futures contracts and options,
forward currency contracts, swap transactions and other financial contracts that
settle by payment of cash are not deemed to be investments in commodities.
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.

PORTFOLIO TURNOVER
<R>Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Adviser
believes it is appropriate to do so in light of the Fund's investment
objectives, without regard to the length of time a particular security may have
been held. The Adviser does not anticipate that portfolio turnover will result
in adverse tax consequences. For the fiscal years ended November 30, 2006 and
2005, the portfolio turnover rates were 95% and 76%, respectively.
</R>

DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

{circle}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;

{circle}for mortgage-backed securities, based on the aggregate investment value
of the projected cash flows to be generated by the security, as furnished by
an independent pricing service;

{circle}for investments in other open-end regulated investment companies, based
on net asset value (NAV);

{circle}for other fixed income securities, according to the prices as furnished
by an independent pricing service, except that fixed income securities with
remaining maturities of less than 60 days at the time of purchase are valued
at amortized cost; and

{circle}for all other securities at fair value as determined in accordance with
procedures established by and under the general supervision of the Board.

<R>

Prices for fixed income securities furnished by a pricing service may be based
on a valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. Such prices (other than prices of
mortgage-backed securities) are generally intended to be indicative of the bid
prices currently offered to institutional investors for the securities,
except that prices for corporate fixed income and asset-backed securities
traded in the United States are generally intended to be indicative of the
mean between such bid prices and asked prices. The Board has approved the use
of such pricing services. A number of pricing services are available, and the
Fund may use various pricing services or discontinue the use of any pricing
service.

</R>

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

TRADING IN FOREIGN SECURITIES

<R>

Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange (NYSE). In computing its net asset value
(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.

</R>

WHAT DO SHARES COST?

<R>

The Fund's 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.

</R>

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 (CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES)
As a compensation -type plan, the Rule 12b-1 Plan is designed to pay the
Distributor for activities principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses and sales literature to prospective shareholders and financial
intermediaries) and providing incentives to financial intermediaries to sell
Shares. The Plan is also designed to cover the cost of administrative services
performed in conjunction with the sale of Shares, including, but not limited to,
shareholder services, recordkeeping services and educational services, as well
as the costs of implementing and operating the Plan. The Rule 12b-1 Plan allows
the Distributor to contract with financial intermediaries to perform activities
covered by the Plan. The Rule 12b-1 Plan is expected to benefit the Fund in a
number of ways. For example, it is anticipated that the Plan will help the Fund
attract and retain assets, thus providing cash for orderly portfolio management
and Share redemptions and possibly helping to stabilize or reduce other
operating expenses. In addition, the Plan is integral to the multiple class
structure of the Fund, which promotes the sale of Shares by providing a range of
options to investors. The Fund's service providers that receive asset-based fees
also benefit from stable or increasing Fund assets.

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

For some classes of Shares, the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the marketing-related expenses the
Distributor has incurred. Therefore, it may take the Distributor a number of
years to recoup these expenses.

Federated and its subsidiaries may benefit from arrangements where the Rule 12b-
1 Plan fees related to Class B Shares may be paid to third parties who have
provided the funds to make advance commission payments to financial
intermediaries.

ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES
The Distributor may pay out of its own resources amounts (including items of
material value) to certain financial intermediaries. In some cases, such
payments may be made by, or funded from the resources of, companies affiliated
with the Distributor (including the Adviser). While National Association of
Securities Dealers (NASD) regulations limit the sales charges that you may bear,
there are no limits with regard to the amounts that the Distributor may pay out
of its own resources. In addition to the payments which are generally described
herein and in the prospectus, the financial intermediary also may receive
payments under the Rule 12b-1 Plan and/or Service Fees. In connection with these
payments, the financial intermediary may elevate the prominence or profile of
the Fund and/or other Federated funds within the financial intermediary's
organization by, for example, placement on a list of preferred or recommended
funds, and/or granting the Distributor preferential or enhanced opportunities to
promote the funds in various ways within the financial intermediary's
organization. You can ask your financial intermediary for information about any
payments it receives from the Distributor or the Federated funds and any
services provided.

The following examples illustrate the types of instances in which the
Distributor may make additional payments to financial intermediaries.

SUPPLEMENTAL PAYMENTS
The Distributor may make supplemental payments to certain financial
intermediaries that are holders or dealers of record for accounts in one or more
of the Federated funds. These payments may be based on such factors as the
number or value of Shares the financial intermediary sells or may sell; the
value of client assets invested; or the type and nature of services or support
furnished by the financial intermediary.

PROCESSING SUPPORT PAYMENTS
The Distributor may make payments to financial intermediaries that sell
Federated fund shares to help offset their costs associated with client account
maintenance support, statement processing and transaction processing. The types
of payments that the Distributor may make under this category include payment of
ticket charges on a per transaction basis; payment of networking fees; and
payment for ancillary services such as setting up funds on the financial
intermediary's mutual fund trading system.

RETIREMENT PLAN PROGRAM SERVICING PAYMENTS
The Distributor may make payments to certain financial intermediaries who sell
Federated fund shares through retirement plan programs. A financial
intermediary may perform retirement plan program services itself or may arrange
with a third party to perform retirement plan program services. In addition to
participant recordkeeping, reporting, or transaction processing, retirement plan
program services may include services rendered to a plan in connection with
fund/investment selection and monitoring; employee enrollment and education;
plan balance rollover or separation, or other similar services.

OTHER BENEFITS TO FINANCIAL INTERMEDIARIES
From time to time, the Distributor, at its expense, may provide additional
compensation to financial intermediaries that sell or arrange for the sale of
Shares. Such compensation may include financial assistance to financial
intermediaries that enable the Distributor to participate in or present at
conferences or seminars, sales or training programs for invited employees,
client and investor events and other financial intermediary-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events,
conferences and programs for employees or associated persons of financial
intermediaries and may pay the travel and lodging expenses of attendees. The
Distributor also may provide, at its expense, meals and entertainment in
conjunction with meetings with financial intermediaries. Other compensation may
be offered to the extent not prohibited by applicable laws, regulations or the
rules of any self-regulatory agency, such as the NASD.

UNDERWRITING COMMISSIONS
<R>

The following chart reflects the total front-end sales charges and contingent
deferred sales charges paid in connection with the sale of Class A Shares, Class
B Shares and Class C Shares of the Fund and the amount retained by the
Distributor for the last three fiscal years ended November 30, 2006:

2006 2005 2004

TOTAL SALES TOTAL SALES TOTAL SALES AMOUNT
CHARGES AMOUNT CHARGES AMOUNT CHARGES RETAINED
RETAINED RETAINED
Class A $218,866 $24,260 $416,361 $43,902 $282,934 $28,646
Shares
Class B $11,097 0 0 0 $15,204 0
Shares
Class C $11,788 $3,146 $31,694 0 $134,583 $3,049
Shares

</R>

EXCHANGING SECURITIES FOR SHARES

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

SUBACCOUNTING SERVICES

Certain financial intermediaries 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. Financial intermediaries 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 financial intermediary 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 1940 Act,
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
<R>

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 January 4, 2007, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class A Shares: NFS LLC, La Crosse, WI, owned
approximately 1,455,861 Shares (13.27)%; DBTCO, Dubuque, IA, owned approximately
1,153,613 Shares (10.52)%; MLPF&S, Jacksonville, FL, owned approximately 861,360
Shares (7.85)%; Citigroup Global Markets, Inc., New York, NY, owned
approximately 714,609 Shares (6.51)% and Pershing LLC, Jersey City, NY, owned
approximately 589,217 Shares (5.37)%.

As of January 4, 2007, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class B Shares: Pershing LLC, Jersey City,
NY, owned approximately 129,527 Shares (12.82)%; Citigroup Global Markets, Inc.,
New York, NY, owned approximately 111,781 Shares (11.06)%; MLPF&S, Jacksonville,
FL, owned approximately 85,415 Shares (8.45)% and Edward Jones & Co., Maryland
Hts., MO, owned approximately 74,731 Shares (7.40)%.

As of January 4, 2007, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class C Shares: MLPF&S, Jacksonville, FL,
owned approximately 695,727 Shares (24.33)% and Citigroup Global Markets, Inc.,
New York, NY, 364,309 Shares (12.74)%.

</R>

TAX INFORMATION

FEDERAL INCOME TAX
The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code (Code) applicable to regulated investment companies. If these requirements
are not met, it will not receive special tax treatment and will be subject to
federal corporate 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 carry-forward, which may reduce the taxable
income or gain that the Fund would realize, and to which the shareholder would
be subject, in the future.

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

Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the income generated by the securities
in the portfolio, whereas tax-basis income includes, in addition, 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 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 will
qualify for certain Code provisions that allow its 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
<R>

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. The following tables give information about each Board member and
the senior officers of the Fund. Where required, the tables separately list
Board members who are "interested persons" of the Fund (i.e., "Interested" Board
members) and those who are not (i.e., "Independent" Board members). Unless
otherwise noted, the address of each person listed is Federated Investors Tower,
1001 Liberty Avenue, Pittsburgh, PA. As of December 31, 2006, the Corporation
comprised two portfolios, and the Federated Fund Complex consisted of 45
investment companies (comprising 148 portfolios). Unless otherwise noted, each
Officer is elected annually. Unless otherwise noted, each Board member oversees
all portfolios in the Federated Fund Complex and serves for an indefinite term.

As of January 4, 2006, the Fund's Board and Officers as a group owned less than
1% of each class of the Fund's outstanding Shares.

INTERESTED DIRECTORS BACKGROUND AND COMPENSATION

NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITIONS PRINCIPAL OCCUPATION(S) FOR PAST FIVE YEARS, FROM FUND FROM
HELD WITH OTHER DIRECTORSHIPS HELD AND PREVIOUS POSITION(S) (PAST FISCAL CORPORATION
CORPORATION YEAR) AND
DATE SERVICE FEDERATED
BEGAN FUND COMPLEX
(PAST
CALENDAR
YEAR)
JOHN F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $0 $0
DONAHUE* Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund
Birth Date: Complex's Executive Committee.
July 28,
1924 PREVIOUS POSITIONS: Chairman of the Federated Fund Complex; Trustee, Federated
DIRECTOR Investment Management Company and Chairman and Director, Federated Investment
Began Counseling.
serving:
March 1984

J. PRINCIPAL OCCUPATIONS: Principal Executive Officer and President of the Federated $0 $0
CHRISTOPHER Fund Complex; Director or Trustee of some of the Funds in the Federated Fund
DONAHUE* Complex; President, Chief Executive Officer and Director, Federated Investors,
Birth Date: Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee,
April 11, Federated Investment Counseling; Chairman and Director, Federated Global
1949 Investment Management Corp.; Chairman, Federated Equity Management Company of
PRESIDENT Pennsylvania and Passport Research, Ltd. (Investment advisory subsidiary of
AND DIRECTOR Federated); Trustee, Federated Shareholder Services Company; Director, Federated
Began Services Company.
serving:
January 2000 PREVIOUS POSITIONS: President, Federated Investment Counseling; President and
Chief Executive Officer, Federated Investment Management Company, Federated
Global Investment Management Corp. and Passport Research, Ltd.

LAWRENCE D. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $617.28 $180,000
ELLIS, M.D.* Professor of Medicine, University of Pittsburgh; Medical Director, University of
Birth Date: Pittsburgh Medical Center Downtown; Hematologist, Oncologist and Internist,
October 11, University of Pittsburgh Medical Center.
1932
3471 Fifth OTHER DIRECTORSHIPS HELD: Member, National Board of Trustees, Leukemia Society of
Avenue America.
Suite 1111
Pittsburgh, PREVIOUS POSITIONS: Trustee, University of Pittsburgh; Director, University of
PA Pittsburgh Medical Center.
DIRECTOR
Began
serving:
August 1987

* Family relationships and reasons for "interested" status: John F. Donahue is
the father of J. Christopher Donahue; both are "interested" due to the positions
they hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is
"interested" because his son-in-law is employed by the Fund's principal
underwriter, Federated Securities Corp.

- 2 -

INDEPENDENT DIRECTORS BACKGROUND AND COMPENSATION

NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITIONS PRINCIPAL OCCUPATION(S) FOR PAST FIVE YEARS, FROM FUND FROM
HELD WITH OTHER DIRECTORSHIPS HELD AND PREVIOUS POSITION(S) (PAST FISCAL CORPORATION
CORPORATION YEAR) AND
DATE SERVICE FEDERATED
BEGAN FUND COMPLEX
(PAST
CALENDAR
YEAR)
THOMAS G. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $679.02 $198,000
BIGLEY
Birth Date: OTHER DIRECTORSHIPS HELD: Director, Member of Executive Committee, Children's
February 3, Hospital of Pittsburgh; Director, University of Pittsburgh.
1934
15 Old PREVIOUS POSITION: Senior Partner, Ernst & Young LLP.
Timber Trail
Pittsburgh,
PA
DIRECTOR
Began
serving:
November
1994

JOHN T. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $679.02 $1198,000
CONROY, JR. Chairman of the Board, Investment Properties Corporation; Partner or Trustee in
Birth Date: private real estate ventures in Southwest Florida.
June 23,
1937 PREVIOUS POSITIONS: President, Investment Properties Corporation; Senior Vice
Investment President, John R. Wood and Associates, Inc., Realtors; President, Naples
Properties Property Management, Inc. and Northgate Village Development Corporation.
Corporation
3838 North
Tamiami
Trail
Suite 402
Naples, FL
DIRECTOR
Began
serving:
August 1991

NICHOLAS P. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $679.02 $1198,000
CONSTANTAKIS
Birth Date: OTHER DIRECTORSHIPS HELD: Director and Member of the Audit Committee, Michael
September 3, Baker Corporation (engineering and energy services worldwide).
1939
175 PREVIOUS POSITION: Partner, Andersen Worldwide SC.
Woodshire
Drive
Pittsburgh,
PA
DIRECTOR
Began
serving:
January 2000

JOHN F. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex; $617.28 $180,000
CUNNINGHAM Director, WinsorTech.
Birth Date:
March 5, OTHER DIRECTORSHIPS HELD: Chairman, President and Chief Executive Officer,
1943 Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston
353 El College.
Brillo Way
Palm Beach, PREVIOUS POSITIONS: Director, Redgate Communications and EMC Corporation
FL (computer storage systems); Chairman of the Board and Chief Executive Officer,
DIRECTOR Computer Consoles, Inc.; President and Chief Operating Officer, Wang
Began Laboratories; Director, First National Bank of Boston; Director, Apollo Computer,
serving: Inc.
January 2000

PETER E. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $617.28 $180,000
MADDEN
Birth Date: OTHER DIRECTORSHIPS HELD: Board of Overseers, Babson College.
March 16,
1942 PREVIOUS POSITIONS: Representative, Commonwealth of Massachusetts General Court;
One Royal President, State Street Bank and Trust Company and State Street Corporation
Palm Way (retired); Director, VISA USA and VISA International; Chairman and Director,
100 Royal Massachusetts Bankers Association; Director, Depository Trust Corporation;
Palm Way Director, The Boston Stock Exchange.
Palm Beach,
FL
DIRECTOR
Began
serving:
August 1991

CHARLES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $679.02 $198,000
MANSFIELD, Management Consultant.
JR.
Birth Date: PREVIOUS POSITIONS: Chief Executive Officer, PBTC International Bank; Partner,
April 10, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail
1945 Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA
80 South (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of
Road Banking and Finance, Frank G. Zarb School of Business, Hofstra University;
Westhampton Executive Vice President DVC Group, Inc. (marketing, communications and
Beach, NY technology).
DIRECTOR
Began
serving:
January 1999

JOHN E. PRINCIPAL OCCUPATIONS: Director or Trustee, and Chairman of the Board of $801.99 $234,000
MURRAY, JR., Directors or Trustees, of the Federated Fund Complex; Chancellor and Law
J.D., S.J.D. Professor, Duquesne University; Partner, Murray, Hogue & Lannis.
Birth Date:
December 20, OTHER DIRECTORSHIPS HELD: Director, Michael Baker Corp. (engineering,
1932 construction, operations and technical services).
Chancellor,
Duquesne PREVIOUS POSITIONS: President, Duquesne University; Dean and Professor of Law,
University University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
Pittsburgh, University School of Law.
PA
DIRECTOR
Began
serving:
February
1995

THOMAS M. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $154.93 $45,000
O'NEILL Managing Director and Partner, Navigator Management Company, L.P. (investment and
Birth Date: strategic consulting).
June 14,
1951 OTHER DIRECTORSHIPS HELD: Director, Midway Pacific (lumber); Board of Overseers,
95 Standish Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College.
Street
P.O. Box PREVIOUS POSITIONS: Chief Executive Officer and President, Managing Director and
2779 Chief Investment Officer, Fleet Investment Advisors; President and Chief
Duxbury, MA Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman,
DIRECTOR Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam
Began Companies, Boston, MA; and Credit Analyst and Lending Officer, Fleet Bank.
serving:
October 2006
MARJORIE P. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; Public $617.28 $180,000
SMUTS Relations/Marketing Consultant/Conference Coordinator.
Birth Date:
June 21, PREVIOUS POSITIONS: National Spokesperson, Aluminum Company of America;
1935 television producer; President, Marj Palmer Assoc.; Owner, Scandia Bord.
4905 Bayard
Street
Pittsburgh,
PA
DIRECTOR
Began
serving:
March 1984

JOHN S. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $617.28 $180,000
WALSH President and Director, Heat Wagon, Inc. (manufacturer of construction temporary
Birth Date: heaters); President and Director, Manufacturers Products, Inc. (distributor of
November 28, portable construction heaters); President, Portable Heater Parts, a division of
1957 Manufacturers Products, Inc.
2604 William
Drive PREVIOUS POSITION: Vice President, Walsh & Kelly, Inc.
Valparaiso,
IN
DIRECTOR
Began
serving:
January 1999
JAMES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; Vice $459.38 $134,415.99
WILL Chancellor and President, Saint Vincent College.
Birth Date:
October 12, OTHER DIRECTORSHIPS HELD: Alleghany Corporation.
1938
Saint PREVIOUS POSITIONS: Chairman, President and Chief Executive Officer, Armco, Inc.;
Vincent President and Chief Executive Officer, Cyclops Industries; President and Chief
College Operating Officer, Kaiser Steel Corporation.
Latrobe, PA
DIRECTOR
Began
serving:
March 2006

OFFICERS**

NAME
BIRTH DATE
ADDRESS
POSITIONS
HELD WITH PRINCIPAL OCCUPATION(S) AND PREVIOUS POSITION(S)
CORPORATION
DATE
SERVICE
BEGAN
JOHN W. PRINCIPAL OCCUPATIONS: Executive Vice President and Secretary of the Federated Fund Complex; Vice Chairman, Executive
MCGONIGLE Vice President, Secretary and Director, Federated Investors, Inc.
Birth Date:
October 26, PREVIOUS POSITIONS: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director,
1938 Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp.
EXECUTIVE
VICE
PRESIDENT
AND
SECRETARY
Began
serving:
March 1984

RICHARD A. PRINCIPAL OCCUPATIONS: Principal Financial Officer and Treasurer of the Federated Fund Complex; Senior Vice President,
NOVAK Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services,
Birth Date: Inc. and Southpointe Distribution Services, Inc.
December
25, 1963 PREVIOUS POSITIONS: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held
TREASURER various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co.
Began
serving:
January
2006

RICHARD B. PRINCIPAL OCCUPATIONS: Vice Chairman or Vice President of some of the Funds in the Federated Fund Complex; Vice
FISHER Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp.
Birth Date:
May 17, PREVIOUS POSITIONS: President and Director or Trustee of some of the Funds in the Federated Fund Complex; Executive Vice
1923 President, Federated Investors, Inc. and Director and Chief Executive Officer, Federated Securities Corp.
VICE
PRESIDENT
Began
serving:
March 1984

BRIAN P. PRINCIPAL OCCUPATIONS: Senior Vice President and Chief Compliance Officer of the Federated Fund Complex; Vice President
BOUDA and Chief Compliance Officer of Federated Investors, Inc.; and Chief Compliance Officer of its subsidiaries. Mr. Bouda
Birth Date: joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin.
February
28, 1947
SENIOR VICE
PRESIDENT
Began
serving:
January
2006

STEPHEN F. PRINCIPAL OCCUPATIONS: Chief Investment Officer of this Fund and various other Funds in the Federated Fund Complex;
AUTH Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated
Birth Date: Equity Management Company of Pennsylvania.
September
3, 1956 PREVIOUS POSITIONS: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd.
CHIEF (Investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division;
INVESTMENT Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and
OFFICER Portfolio Manager, Prudential Investments.
Began
serving:
January
2003
IHAB SALIB PRINCIPAL OCCUPATIONS: Mr. Salib joined Federated in April 1999 as a Senior Fixed Income Trader/Assistant Vice President
Birth Date: of the Fund's Adviser. In July 2000, he was named a Vice President of the Fund's Adviser. He has served as a Portfolio
December Manager since January 2002. From January 1994 through March 1999, Mr. Salib was employed as a Senior Global Fixed
14, 1964 Income Analyst with UBS Brinson, Inc. Mr. Salib received his B.A. with a major in economics from Stony Brook
VICE University.
PRESIDENT
Began
serving:
May 2006

In addition, the Fund has appointed an Anti-Money Laundering Compliance Officer.

COMMITTEES OF THE BOARD
MEETINGS
BOARD COMMITTEE HELD
COMMITTEE MEMBERS COMMITTEE FUNCTIONS DURING
LAST
FISCAL
YEAR

EXECUTIVE John F. In between meetings of the full Board, the Executive Committee generally may exercise Two
Donahue all the powers of the full Board in the management and direction of the business and
John E. conduct of the affairs of the Corporation in such manner as the Executive Committee
Murray, Jr., shall deem to be in the best interests of the Corporation. However, the Executive
J.D., S.J.D. Committee cannot elect or remove Board members, increase or decrease the number of
John S. Directors, elect or remove any Officer, declare dividends, issue shares or recommend
Walsh to shareholders any action requiring shareholder approval.

AUDIT Thomas G. The purposes of the Audit Committee are to oversee the accounting and financial Nine
Bigley reporting process of the Fund, the Fund`s internal control over financial reporting,
John T. and the quality, integrity and independent audit of the Fund`s financial statements.
Conroy, Jr. The Committee also oversees or assists the Board with the oversight of compliance with
Nicholas P. legal requirements relating to those matters, approves the engagement and reviews the
Constantakis qualifications, independence and performance of the Fund`s independent registered
Charles F. public accounting firm, acts as a liaison between the independent registered public
Mansfield, accounting firm and the Board and reviews the Fund`s internal audit function.
Jr.

NOMINATING Thomas G. The Nominating Committee, whose members consist of all Independent Directors, selects One
Bigley and nominates persons for election to the Fund`s Board when vacancies occur. The
John T. Committee will consider candidates recommended by shareholders, Independent Directors,
Conroy, Jr. officers or employees of any of the Fund`s agents or service providers and counsel to
Nicholas P. the Fund. Any shareholder who desires to have an individual considered for nomination
Constantakis by the Committee must submit a recommendation in writing to the Secretary of the Fund,
John F. at the Fund's address appearing on the back cover of this Statement of Additional
Cunningham Information. The recommendation should include the name and address of both the
Peter E. shareholder and the candidate and detailed information concerning the candidate's
Madden qualifications and experience. In identifying and evaluating candidates for
Charles F. consideration, the Committee shall consider such factors as it deems appropriate.
Mansfield, Those factors will ordinarily include: integrity, intelligence, collegiality,
Jr. judgment, diversity, skill, business and other experience, qualification as an
John E. "Independent Director," the existence of material relationships which may create the
Murray, Jr. appearance of a lack of independence, financial or accounting knowledge and
Thomas M. experience, and dedication and willingness to devote the time and attention necessary
O'Neill to fulfill Board responsibilities.
Marjorie P.
Smuts
John S.
Walsh
James F.
Will

BOARD OWNERSHIP OF SHARES IN THE FUND AND IN THE FEDERATED FAMILY OF INVESTMENT
COMPANIES AS OF DECEMBER 31, 2006

AGGREGATE
DOLLAR RANGE OF DOLLAR RANGE OF
SHARES OWNED SHARES OWNED IN
INTERESTED IN FEDERATED INTERNATIONAL BOND FUND FEDERATED FAMILY OF
BOARD MEMBER NAME INVESTMENT COMPANIES

John F. Donahue $50,001-$100,000 Over $100,000
J. Christopher Donahue Over $100,000 Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

INDEPENDENT
BOARD MEMBER NAME
Thomas G. Bigley None Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis None Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, Jr. None Over $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Thomas M. O'Neill None Over $100,000
Marjorie P. Smuts None Over $100,000
John S. Walsh None Over $100,000
James F. Will None None

</R>

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.

PORTFOLIO MANAGER INFORMATION
<R>

The following information about the Fund's portfolio manager is provided as of
the end of the fund's most recently completed fiscal year.

OTHER ACCOUNTS TOTAL NUMBER OF OTHER ACCOUNTS MANAGED TOTAL NUMBER OF OTHER ACCOUNTS MANAGED / TOTAL ASSETS SUBJECT TO
MANAGED / TOTAL ASSETS* PERFORMANCE-BASED FEES
BY IHAB SALIB

Registered 3 Funds / $606.09 million 0
Investment
Companies
Other Pooled 5 Portfolios / $500.47 million 0
Investment
Vehicles
Other Accounts 0 4 accounts / $1,182.37 million

*None of the Accounts has an advisory fee that is based on the performance of
the account.
Dollar value range of shares owned in the Fund: none.

Ihab Salib is paid a fixed base salary and a variable annual incentive. Base
salary is determined within a market competitive position-specific salary range,
based on the portfolio manager's experience and performance. The annual
incentive amount is determined based on multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction
and Service, and Financial Success. The total Balanced Scorecard "score" is
applied against an annual incentive opportunity that is competitive in the
market for this portfolio manager role to determine the annual incentive
payment.

IPP is measured on a rolling 1, 3, and 5 calendar year pre-tax total return
basis vs. the Fund's benchmark (i.e. J.P. Morgan Government Bond Index X US) and
on a rolling 3 and 5 calendar year pre-tax gross return basis vs. the Fund's
designated peer group of comparable accounts. Performance periods are adjusted
if a portfolio manager has been managing an account for less than five years;
accounts with less than one-year of performance history under a portfolio
manager may be excluded. As noted above, Mr. Salib is also the portfolio
manager for other accounts in addition to the Fund. Such other accounts may
have different benchmarks and IPP measurements. IPP is calculated with an equal
weighting of all accounts managed. In his role as Head of the International
Bond Group, Mr. Salib has oversight responsibility for other portfolios that he
does not personally manage. A portion of the IPP score is determined by the
investment performance of these other portfolios vs. product specific benchmarks
and peer groups. In addition, Mr. Salib serves on one or more Investment Teams
that establish guidelines on various performance drivers (e.g., currency,
duration, sector, volatility, and/or yield curve) for taxable fixed income
funds. A portion of the IPP score is based on Federated's senior management's
assessment of team contributions.

Leadership/Teamwork/Communication is assessed by Federated's management.

Client Satisfaction and Service is assessed by Federated's senior management
based on the quality, amount and effectiveness of client support, with input
from sales management.

The Financial Success category is designed to tie the portfolio manager's bonus,
in part, to Federated's overall financial health, and any awards are predicated
on Federated's attainment of specified financial targets. Senior management
determines individual Financial Success scores on a discretionary basis,
considering overall contributions, including factors not fully reflected in the
other Balanced Scorecard categories.

As a general matter, certain conflicts of interest may arise in connection with
a portfolio manager's management of a fund's investments, on the one hand, and
the investments of other accounts for which the portfolio manager is
responsible, on the other. For example, it is possible that the various
accounts managed could have different investment strategies that, at times,
might conflict with one another to the possible detriment of the Fund.
Alternatively, to the extent that the same investment opportunities might be
desirable for more than one account, possible conflicts could arise in
determining how to allocate them. Other potential conflicts might include
conflicts created by specific portfolio manager compensation arrangements, and
conflicts relating to selection of brokers or dealers to execute fund portfolio
trades and/or specific uses of commissions from Fund portfolio trades (for
example, research, or "soft dollars"). The Adviser has structured the portfolio
managers' compensation in a manner, and the Fund has adopted policies and
procedures, reasonably designed to safeguard the Fund from being negatively
affected as a result of any such potential conflict.

</R>

SERVICES AGREEMENT
Federated Advisory Services Company, an affiliate of the Adviser, provides
certain support services to the Adviser. The fee for these services is paid by
the Adviser and not by the Fund.

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

CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING

As required by SEC rules, the Fund, its Adviser, and its Distributor have
adopted codes of ethics. These codes govern securities trading activities of
investment personnel, Fund Directors, and certain other employees. Although
they do permit these people to trade in securities, including those that the
Fund could buy, as well as Shares of the Fund, they also contain significant
safeguards designed to protect the Fund and its shareholders from abuses in this
area, such as requirements to obtain prior approval for, and to report,
particular transactions.

VOTING PROXIES ON FUND PORTFOLIO SECURITIES
The Board has delegated to the Adviser authority to vote proxies on the
securities held in the Fund's portfolio. The Board has also approved the
Adviser's policies and procedures for voting the proxies, which are described
below.

PROXY VOTING POLICIES
The Adviser's general policy is to cast proxy votes in favor of proposals that
the Adviser anticipates will enhance the long-term value of the securities being
voted. Generally, this will mean voting for proposals that the Adviser believes
will: improve the management of a company; increase the rights or preferences of
the voted securities; and/or increase the chance that a premium offer would be
made for the company or for the voted securities.

The following examples illustrate how these general policies may apply to
proposals submitted by a company's board of directors. However, whether the
Adviser supports or opposes a proposal will always depend on the specific
circumstances described in the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for
proposals to: require independent tabulation of proxies and/or confidential
voting by shareholders; reorganize in another jurisdiction (unless it would
reduce the rights or preferences of the securities being voted); and repeal a
shareholder rights plan (also known as a "poison pill"). The Adviser will
generally vote against the adoption of such a plan (unless the plan is designed
to facilitate, rather than prevent, unsolicited offers for the company).

On matters of capital structure, generally the Adviser will vote: against
proposals to authorize or issue shares that are senior in priority or voting
rights to the securities being voted; for proposals to grant preemptive rights
to the securities being voted; and against proposals to eliminate such
preemptive rights.

On matters relating to management compensation, generally the Adviser will vote:
for stock incentive plans that align the recipients' interests with the
interests of shareholders without creating undue dilution; and against proposals
that would permit the amendment or replacement of outstanding stock incentives
with new stock incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies
relating to proposed mergers, capital reorganizations, and similar transactions
in accordance with the general policy, based upon its analysis of the proposed
transaction. The Adviser will vote proxies in contested elections of directors
in accordance with the general policy, based upon its analysis of the opposing
slates and their respective proposed business strategies. Some transactions may
also involve proposed changes to the company's corporate governance, capital
structure or management compensation. The Adviser will vote on such changes
based on its evaluation of the proposed transaction or contested election. In
these circumstances, the Adviser may vote in a manner contrary to the general
practice for similar proposals made outside the context of such a proposed
transaction or change in the board. For example, if the Adviser decides to vote
against a proposed transaction, it may vote for anti-takeover measures
reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without
the favorable recommendation of a company's board. The Adviser believes that a
company's board should manage its business and policies, and that shareholders
who seek specific changes should strive to convince the board of their merits or
seek direct representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting. For example, if a foreign
market requires shareholders casting proxies to retain the voted shares until
the meeting date (thereby rendering the shares "illiquid" for some period of
time), the Adviser will not vote proxies for such shares.

PROXY VOTING PROCEDURES
<R>

The Adviser has established a Proxy Voting Committee (Proxy Committee), to
exercise all voting discretion granted to the Adviser by the Board in accordance
with the proxy voting policies. The Adviser has hired Institutional Shareholder
Services (ISS) to obtain, vote, and record proxies in accordance with the Proxy
Committee's directions. The Proxy Committee directs ISS by means of Proxy
Voting Guidelines, and ISS may vote any proxy as directed in the Proxy Voting
Guidelines without further direction from the Proxy Committee (and may make any
determinations required to implement the Proxy Voting Guidelines). However, if
the Proxy Voting Guidelines require case-by-case direction for a proposal, ISS
will provide the Proxy Committee with all information that it has obtained
regarding the proposal and the Proxy Committee will provide specific direction
to ISS. The Adviser's proxy voting procedures generally permit the Proxy
Committee to amend the Proxy Voting Guidelines, or override the directions
provided in such Guidelines, whenever necessary to comply with the proxy voting
policies.

</R>

CONFLICTS OF INTEREST
The Adviser has adopted procedures to address situations where a matter on which
a proxy is sought may present a potential conflict between the interests of the
Fund (and its shareholders) and those of the Adviser or Distributor. This may
occur where a significant business relationship exists between the Adviser (or
its affiliates) and a company involved with a proxy vote. A company that is a
proponent, opponent, or the subject of a proxy vote, and which to the knowledge
of the Proxy Committee has this type of significant business relationship, is
referred to as an "Interested Company."

The Adviser has implemented the following procedures in order to avoid concerns
that the conflicting interests of the Adviser have influenced proxy votes. Any
employee of the Adviser who is contacted by an Interested Company regarding
proxies to be voted by the Adviser must refer the Interested Company to a member
of the Proxy Committee, and must inform the Interested Company that the Proxy
Committee has exclusive authority to determine how the Adviser will vote. Any
Proxy Committee member contacted by an Interested Company must report it to the
full Proxy Committee and provide a written summary of the communication. Under
no circumstances will the Proxy Committee or any member of the Proxy Committee
make a commitment to an Interested Company regarding the voting of proxies or
disclose to an Interested Company how the Proxy Committee has directed such
proxies to be voted. If the Proxy Voting Guidelines already provide specific
direction on the proposal in question, the Proxy Committee shall not alter or
amend such directions. If the Proxy Voting Guidelines require the Proxy
Committee to provide further direction, the Proxy Committee shall do so in
accordance with the proxy voting policies, without regard for the interests of
the Adviser with respect to the Interested Company. If the Proxy Committee
provides any direction as to the voting of proxies relating to a proposal
affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and
why, the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or
an affiliate) acts as an investment adviser, the Proxy Committee will vote the
Fund's proxies in the same proportion as the votes cast by shareholders who are
not clients of the Adviser at any shareholders' meeting called by such
investment company, unless otherwise directed by the Board.

PROXY VOTING REPORT
A report on "Form N-PX" of how the Fund voted any proxies during the most recent
12-month period ended June 30 is available through Federated's website. Go to
FederatedInvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX. Form N-PX
filings are also available at the SEC's website at www.sec.gov.

PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund's portfolio holdings is available in the
"Products" section of Federated's website at FederatedInvestors.com. A complete
listing of the Fund's portfolio holdings as of the end of each calendar quarter
is posted on the website 30 days (or the next business day) after the end of the
quarter and remains posted until replaced by the information for the succeeding
quarter. Summary portfolio composition information as of the close of each month
(except for recent purchase and sale transaction information, which is updated
quarterly) is posted on the website 15 days (or the next business day) after
month-end and remains until replaced by the information for the succeeding
month. The summary portfolio composition information may include identification
of the Fund's top ten holdings, recent purchase and sale transactions and
percentage breakdowns of the portfolio by sector and geographic region.

To access this information from the "Products" section of the website, click on
"Portfolio Holdings" and select the appropriate link opposite the name of the
Fund, or select the name of the Fund from the menus on the "Products" section,
and from the Fund's page click on the "Portfolio Holdings" or "Composition"
link. A user is required to register on the website the first time the user
accesses this information.

You may also access from the "Products" section of the website portfolio
information as of the end of the Fund's fiscal quarters. The Fund's annual and
semiannual reports, which contain complete listings of the Fund's portfolio
holdings as of the end of the Fund's second and fourth fiscal quarters, may be
accessed by selecting the name of the Fund, clicking on "Prospectuses and
Regulatory Reports" and selecting the link to the appropriate PDF. Complete
listings of the Fund's portfolio holdings as of the end of the Fund's first and
third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the
"Products" section and then selecting the appropriate link opposite the name of
the Fund. Fiscal quarter information is made available on the website within 70
days after the end of the fiscal quarter. This information is also available in
reports filed with the SEC at the SEC's website at www.sec.gov.

The disclosure policy of the Fund and the Adviser prohibits the disclosure of
portfolio holdings information to any investor or intermediary before the same
information is made available to other investors. Employees of the Adviser or
its affiliates who have access to nonpublic information concerning the Fund's
portfolio holdings are prohibited from trading securities on the basis of this
information. Such persons must report all personal securities trades and obtain
pre-clearance for all personal securities trades other than mutual fund shares.

Firms that provide administrative, custody, financial, accounting, legal or
other services to the Fund may receive nonpublic information about Fund
portfolio holdings for purposes relating to their services. The Fund may also
provide portfolio holdings information to publications that rate, rank or
otherwise categorize investment companies. Traders or portfolio managers may
provide "interest" lists to facilitate portfolio trading if the list reflects
only that subset of the portfolio for which the trader or portfolio manager is
seeking market interest. A list of service providers, publications and other
third parties who may receive nonpublic portfolio holdings information appears
in the Appendix to this SAI.

The furnishing of nonpublic portfolio holdings information to any third party
(other than authorized governmental or regulatory personnel) requires the prior
approval of the President of the Adviser and of the Chief Compliance Officer of
the Fund. The President of the Adviser and the Chief Compliance Officer will
approve the furnishing of nonpublic portfolio holdings information to a third
party only if they consider the furnishing of such information to be in the best
interests of the Fund and its shareholders. In that regard, and to address
possible conflicts between the interests of Fund shareholders and those of the
Adviser and its affiliates, the following procedures apply. No consideration
may be received by the Fund, the Adviser, any affiliate of the Adviser or any of
their employees in connection with the disclosure of portfolio holdings
information. Before information is furnished, the third party must sign a
written agreement that it will safeguard the confidentiality of the information,
will use it only for the purposes for which it is furnished and will not use it
in connection with the trading of any security. Persons approved to receive
nonpublic portfolio holdings information will receive it as often as necessary
for the purpose for which it is provided. Such information may be furnished as
frequently as daily and often with no time lag between the date of the
information and the date it is furnished. The Board receives and reviews
annually a list of the persons who receive nonpublic portfolio holdings
information and the purposes for which it is furnished.

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 Administrative Services (FAS), a subsidiary of Federated, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. FAS provides these at the
following annual rates, based on the average aggregate daily net assets of the
Fund and most of the other Federated funds:

AVERAGE AGGREGATE DAILY
MAXIMUM ADMINISTRATIVE FEE NET ASSETS OF THE FEDERATED FUNDS
0.150 of 1% on the first $5 billion
0.125 of 1% on the next $5 billion
0.100 of 1% on the next $10 billion
0.075 of 1% on assets over $20 billion
The administrative fee received during any fiscal year shall be at least
$150,000 per portfolio and $40,000 per each additional class of Shares. FAS may
voluntarily waive a portion of its fee and may reimburse the Fund for expenses.

FAS 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
State Street Bank and Trust Company, the Fund's registered transfer agent,
maintains all necessary shareholder records.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Ernst & Young
LLP, conducts its audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require it to plan and perform
its audits to provide reasonable assurance about whether the Fund's financial
statements and financial highlights are free of material misstatement.

<R>

FEES PAID BY THE FUND FOR SERVICES
FOR THE YEAR ENDED NOVEMBER 30 2006 2005 2004
Advisory Fee Earned $1,209,569 $1,334,939 $1,056,422
------------
Advisory Fee Reduction $889,999 $844,583 $740,516
----------------
Advisory Fee Reimbursement $0 0 2
------------
Brokerage Commissions $0 - 186,411
------------
Administrative Fee $186,612 $186,779 $1,056,422
------------
12B-1 FEE:
Class A Shares $89,185 -- --
Class B Shares $93,254 -- --
Class C Shares $251,893 -- --
SHAREHOLDER SERVICES FEE:
Class A Shares $233,483 -- --
Class B Shares $31,085 -- --
Class C Shares $83,499 -- --
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.

</R>

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.

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

Share performance fluctuates on a daily basis largely because net earnings
and/or the value of portfolio holdings 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
<R>

Total returns are given for the one-year, five-year and ten-year periods ended
November 30, 2006.

Yield is given for the 30-day period ended November 30, 2006.

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS

CLASS A SHARES:
Total Return
Before Taxes N/A 2.06% 8.06% 2.90%
After Taxes on Distributions N/A 0.57% 6.41% 1.40%
After Taxes on Distributions and Sale of Shares
N/A 1.30% 5.96% 1.53%
Yield 1.84% N/A N/A N/A

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS

CLASS B SHARES:
Total Return
Before Taxes N/A 0.52% 7.95% 2.78%
After Taxes on Distributions N/A (0.73)% 6.46% 1.43%
After Taxes on Distributions and Sale of Shares
N/A 0.31% 5.97% 1.53%
Yield 1.23% N/A N/A N/A

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
CLASS C SHARES:
Total Return
Before Taxes N/A 4.97% 8.24% 2.61%
After Taxes on Distributions N/A 3.71% 6.73% 1.29%
After Taxes on Distributions and Sale of Shares
N/A 3.20% 6.22% 1.40%
Yield 1.21% N/A N/A N/A

</R>

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 $10,000 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 $10,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions. Total returns after taxes are calculated in a
similar manner, but reflect additional standard assumptions required by the SEC.

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 financial intermediaries charge fees in connection with services
provided in conjunction with an investment in Shares, the Share performance is
lower for shareholders paying those fees.

WHO IS FEDERATED INVESTORS, INC.?

Federated and its subsidiaries are dedicated to providing you with world-class
investment management. With offices in Pittsburgh, New York City and Frankfurt,
Federated is a firm with independent research, product breadth and industry
standing.

Federated seeks to achieve superior and sustainable investment performance for a
broad array of global clients through a disciplined investment process and an
information advantage created by proprietary fundamental research. Federated is
distinctive in our disciplined process that integrates proprietary research with
trading and portfolio management.

<R>

FEDERATED FUNDS OVERVIEW

EQUITIES
As of December 31, 2006, Federated managed 48 equity funds totaling
approximately $28.7 billion in assets across growth, value, equity income,
international, index and sector allocation styles.

TAXABLE FIXED-INCOME
As of December 31, 2006, Federated managed 35 taxable bond funds including:
high-yield, multi-sector, mortgage-backed, U.S. government, U.S. corporate and
international, with assets approximating $15.2 billion.

TAX FREE FIXED-INCOME
As of December 31, 2006, Federated managed 14 municipal bond funds with
approximately $2.9 billion in assets and 22 municipal money market funds with
approximately $27.6 billion in total assets.

MONEY MARKET FUNDS
As of December 31, 2006, Federated managed $155.2 billion in assets across 51
money market funds, including 17 government, 11 prime, 22 municipal and 1 euro-
denominated with assets approximating $63.5 billion, $64.0 billion, $27.6
billion and $82.9 million.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: Stephen F. Auth, CFA, for Global
Equity; Robert J. Ostrowski, CFA, for Taxable Fixed-Income; Mary Jo Ochson, CFA,
for Tax Free Fixed-Income; and Deborah A. Cunningham, CFA, for Money Market
Funds.

</R>

FINANCIAL INFORMATION

<R>

The Financial Statements for the Fund for the fiscal year ended November 30,
2006 are incorporated herein by reference to the Annual Report to Shareholders
of Federated International Bond Fund dated November 30, 2006.

</R>

<R>

INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.

D--In payment default. The 'D' rating category is used when payments on a
financial commitment are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
a financial commitment are jeopardized.

MOODY'S INVESTORS SERVICE LONG-TERM DEBT RATINGS
AAA-- Bonds and preferred stock 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 and preferred stock 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 risk appear somewhat larger than
the Aaa securities.

A-- Bonds and preferred stock 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 some time in the future.

BAA-Bonds and preferred stock 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 and preferred stock which are rated 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 and preferred stock 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 and preferred stock 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 and preferred stock which are rated Ca are highly speculative and are
likely in, or very near, default, with some prospect of recovery of principal
and interest.

C-Bonds and preferred stock which are rated C are the lowest rated class of
bonds and are typically in default, with little prospect for recovery of
principal or interest.

NR--Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.

NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AAA by S&P or Aaa by Moody's.

NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AA by S&P or Aa by Moody's.

NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt rated
A by S&P or Moody's.

FITCH RATINGS LONG-TERM DEBT RATING DEFINITIONS
AAA--HIGHEST CREDIT QUALITY. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA--VERY HIGH CREDIT QUALITY. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A--HIGH CREDIT QUALITY. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--GOOD CREDIT QUALITY. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--SPECULATIVE. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B--HIGHLY SPECULATIVE. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favourable business and economic environment.

MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of 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-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

FITCH RATINGS COMMERCIAL PAPER RATING DEFINITIONS
F-1--Indicates the strongest capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Under their
national rating scale, this rating is assigned to the "best" credit risk
relative to all others in the same country and is normally assigned to all
financial commitments issued or guaranteed by the sovereign state. Where the
credit risk is particularly strong, a "+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. However,
the margin of safety is not as great as in the case of the higher ratings.

A.M. BEST LONG-TERM DEBT RATINGS
An A.M. Best Long-Term Debt Rating (issue credit rating) is an opinion as to the
issuer's ability to meet its financial obligations to security holders when due.
These ratings are assigned to debt and preferred stock issues.

AAA-EXCEPTIONAL. Assigned to issues where the issuer has, in A.M. Best's
opinion, an exceptional ability to meet the terms of the obligation.

AA-VERY STRONG. Assigned to issues where the issuer has, in A.M. Best's
opinion, a very strong ability to meet the terms of the obligation.

A-STRONG. Assigned to issues where the issuer has, in A.M. Best's opinion, a
strong ability to meet the terms of the obligation.

BBB-ADEQUATE. Assigned to issues where the issuer has, in A.M. Best's opinion,
an adequate ability to meet the terms of the obligation; however, is more
susceptible to changes in economic or other conditions.

BB-SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's
opinion, speculative credit characteristics, generally due to a moderate margin
of principal and interest payment protection and vulnerability to economic
changes. .

B-VERY SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's
opinion, very speculative credit characteristics, generally due to a modest
margin of principal and interest payment protection and extreme vulnerability to
economic changes. .

CCC, CC, C-EXTREMELY SPECULATIVE. Assigned to issues where the issuer has, in
A.M. Best's opinion, extremely speculative credit characteristics, generally due
to a minimal margin of principal and interest payment protection and/or limited
ability to withstand adverse changes in economic or other conditions.

D-IN DEFAULT. In default on payment of principal, interest or other terms and
conditions. The rating also is utilized when a bankruptcy petition, or similar
action, has been filed.

Ratings from "aa" to "ccc" may be enhanced with a "+" (plus) or "-" (minus) to
indicate whether credit quality is near the top or bottom of a category. A
company's Long-Term Credit Rating also may be assigned an Under Review modifier
("u") that generally is event-driven (positive, negative or developing) and
indicates that the company's A.M. Best Rating opinion is under review and may be
subject to near-term change. Ratings prefixed with an ("i") denote indicative
ratings. Ratings may also be assigned a Public Data modifier ("pd") which
indicates that a company does not subscribe to A.M. Best's interactive rating
process.

A.M. BEST SHORT-TERM DEBT RATINGS
An A.M. Best Short-Term Debt Rating (issue credit rating) is an opinion as to
the issuer's ability to meet its obligations having maturities generally less
than one year, such as commercial paper.

AMB-1+ -STRONGEST. Assigned to issues where the issuer has, in A.M. Best's
opinion, the strongest ability to repay short-term debt obligations.

AMB-1 -OUTSTANDING. Assigned to issues where the issuer has, in A.M. Best's
opinion, an outstanding ability to repay short-term debt obligations.

AMB-2 -SATISFACTORY. Assigned to issues where the issuer has, in A.M. Best's
opinion, a satisfactory ability to repay short-term debt obligations.

AMB-3 -ADEQUATE. Assigned to issues where the issuer has, in A.M. Best's
opinion, an adequate ability to repay short-term debt obligations; however,
adverse economic conditions will likely lead to a reduced capacity to meet its
financial commitments on short-term debt obligations.

AMB-4 -SPECULATIVE. Assigned to issues where the issuer has, in A.M. Best's
opinion, speculative credit characteristics and is vulnerable to economic or
other external changes, which could have a marked impact on the company's
ability to meet its commitments on short-term debt obligations.

D-IN DEFAULT. In default on payment of principal, interest or other terms and
conditions. The rating also is utilized when a bankruptcy petition, or similar
action, has been filed.

A company's Short-Term Credit Rating also may be assigned an Under Review
modifier ("u") that generally is event-driven (positive, negative or developing)
and indicates that the company's A.M. Best Rating opinion is under review and
may be subject to near-term change. Ratings prefixed with an ("i") denote
indicative ratings.

A.M. BEST RATING OUTLOOK
A.M. Best Credit Ratings (aaa to c) are assigned a Rating Outlook that indicates
the potential direction of a company's rating for an intermediate period,
generally defined as the next 12 to 36 months. Public Data Ratings are not
assigned an Outlook. Ratings Outlooks are as follows:

POSITIVE-Indicates a company's financial/market trends are favorable, relative
to its current rating level, and if continued, the company has a good
possibility of having its rating upgraded.

NEGATIVE-Indicates a company is experiencing unfavorable financial/market
trends, relative to its current rating level, and if continued, the company has
a good possibility of having its rating downgraded.

STABLE-Indicates a company is experiencing stable financial/market trends and
that there is a low likelihood that its rating will change in the near term.

</R>

- 3 -

ADDRESSES

FEDERATED INTERNATIONAL BOND FUND

Class A Shares

Class B Shares

Class C Shares

Federated Investors Funds

5800 Corporate Drive

Pittsburgh, PA 15237-7000

DISTRIBUTOR
Federated Securities Corp.

Federated Investors Tower

1001 Liberty Avenue

Pittsburgh, PA 15222-3779

INVESTMENT ADVISER
Federated Investment Management Company

Federated Investors Tower

1001 Liberty Avenue

Pittsburgh, PA 15222-3779

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company

P.O. Box 8600

Boston, MA 02266-8600

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP

200 Clarendon Street

Boston, MA 02116-5072

- 4 -

APPENDIX

<R>

The following is a list of persons other than the Adviser and its affiliates
that may receive nonpublic portfolio holdings information concerning the Fund:

CUSTODIAN
State Street Bank and Trust Company

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP

LEGAL COUNSEL
Dickstein Shapiro LLP
Reed Smith LLP

SERVICE PROVIDERS
Bloomberg
Investor Responsibility Research Center
Wilshire Associates, Inc.

SECURITY PRICING SERVICES
Reuters
Standard & Poor's
FT Interactive Data
Bear Sterns

RATINGS AGENCIES
S&P

PERFORMANCE REPORTING/PUBLICATIONS
Fidelity-Strategic Adviser
Lipper
Morgan Stanley Capital International, Inc.
Morningstar
NASDAQ
Value Line
Wiesenberger/Thomson Financial

OTHER
Investment Company Institute
Astec Consulting Group, Inc.
</R>

Endnotes

<R>
</R>
Federated International Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

Federated Securities Corp., Distributor

1051602B (2/07)

Federated is a registered mark
of Federated Investors, Inc.
2007 {copyright}Federated Investors, Inc.

Federated Investors
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated International Equity Fund

A Portfolio of Federated International Series, Inc.

PROSPECTUS

<R>

February 1, 2007

</R>

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking to obtain a total return on its assets by investing primarily in equity securities of companies based outside of the United States.

Not FDIC Insured * May Lose Value * No Bank Guarantee

Risk/Return Summary		1
What are the Fund’s Fees and Expenses?		5
What are the Fund’s Investment Strategies?		6
What are the Principal Securities in Which the Fund Invests?		8
What are the Specific Risks of Investing in the Fund?		13
What Do Shares Cost?		17
How is the Fund Sold?		26
Payments to Financial Intermediaries		26
How to Purchase Shares		29
How to Redeem and Exchange Shares		31
Account and Share Information		36
Who Manages the Fund?		40
Legal Proceedings		42
Financial Information		43
Appendix A: Hypothetical Investment and Expense Information		47

Risk/Return Summary

WHAT IS THE FUND’S INVESTMENT OBJECTIVE?

The Fund’s investment objective is to obtain a total return on its assets. The Fund’s total return will consist of two components: (1) changes in the market value of its portfolio securities (both realized and unrealized appreciation); and (2) income received from its portfolio securities. The Fund expects that changes in market value will comprise the largest component of its total return. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND’S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing primarily in equity securities of companies based outside the United States.

<R>

The Fund’s investment adviser (Adviser) uses a “bottom-up” approach to stock selection and selection of industry and country are secondary considerations. The Fund is not limited to investing according to any particular style, size of company or maintaining minimum allocations to any particular region or country. However, the Adviser anticipates that normally the Fund will primarily invest in mid- to-large capitalization companies based in developed countries outside the United States that have been selected using a growth style of stock selection. However, to a lesser extent, the Fund may also invest in foreign companies based in emerging markets.

</R>

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

Stock Market Risks. The value of equity securities in the Fund’s portfolio will fluctuate and, as a result, the Fund’s Share price may decline suddenly or over a sustained period of time.
Risks of Foreign Investing. Because the Fund invests in securities issued by foreign companies, the Fund’s Share price may be more affected by foreign economic and political conditions, taxation policies and accounting and auditing standards than would otherwise be the case.
Currency Risks. Because the exchange rates for currencies fluctuate daily, prices of the foreign securities in which the Fund invests are more volatile than prices of securities traded exclusively in the United States.
Emerging Markets Risks. Securities issued or traded in emerging markets generally entail greater risks than securities issued or traded in developed markets. Emerging market countries may have relatively unstable governments and may present the risk of nationalization of businesses, expropriation, confiscatory taxation or, in certain instances, reversion to closed market, centrally planned economies.
Liquidity Risks. Trading opportunities are more limited for equity securities that are not widely held. This may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund’s performance.

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Credit Risks. 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.

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Leverage Risks. The derivative contracts in which the Fund may invest may be subject to leverage risks. Leverage risk is 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.
Risks Related to Investing for Growth. The growth stocks in which the Fund may invest are typically more volatile than traditional value stocks and may depend more on price changes than dividend returns.
Exchange-Traded Funds Risks. An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded).
Custodial Services and Related Investment Costs. Custodial services and other costs relating to investment in international securities markets generally are more expensive due to differing settlement and clearance procedures than those of the United States. The inability of the Fund to make intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. In addition, security settlement and clearance procedures in some emerging market countries may not fully protect the Fund against loss of its assets.

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Risks of Investing in Derivative Contracts. The Fund’s use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Also, derivative contracts and hybrid instruments may involve other risks described in this prospectus or the Fund’s Statement of Additional Information (SAI), such as credit, liquidity and leverage risks.

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

Risk/Return Bar Chart and Table

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The total returns shown in the bar chart do not reflect the payment of any sales charges or recurring shareholder account fees. If these charges or fees had been included, the returns shown would have been lower.

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Within the period shown in the bar chart, the Fund’s Class A Shares highest quarterly return was 55.35% (quarter ended December 31, 1999). Its lowest quarterly return was (21.42)% (quarter ended September 30, 2002).

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Average Annual Total Return Table

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The Average Annual Total Returns for the Fund’s Class A, Class B and Class C Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor’s personal tax situation, and are likely to differ from those shown. The table also shows returns for the Morgan Stanley Capital International (MSCI) Europe, Australasia and Far East (EAFE) Growth Index (MSCI-EAFE GI),a broad based market index. The MSCI-EAFE GI is a subset of the MSCI EAFE Index designed to measure developed market equity performance, excluding the United States and Canada. The MSCI-EAFE GI measures developed market securities classified as growth by MSCI. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund’s performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

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(For the Periods Ended December 31, 2006)

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	1 Year	5 Years	10 Years

Class A Shares:

Return Before Taxes	12.44%	7.41%	5.97%

Return After Taxes on Distributions¹	12.44%	7.46%	5.02%

Return After Taxes on Distributions and Sale of Fund Shares¹	8.08%	6.47%	4.75%

Class B Shares:

Return Before Taxes	12.58%	7.49%	5.92%

Class C Shares:²

Return Before Taxes	17.10%	7.80%	5.76%

MSCI-EAFE GI	22.33%	12.27%	5.07%

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1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns for Class B Shares and Class C Shares will differ from those shown above for Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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2 Historical returns do not include the effect of a 1.00% front-end sales charge on Class C Shares purchased prior to February 1, 2007. Effective February 1, 2007, this sales charge was eliminated.

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What are the Fund’s Fees and Expenses?

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FEDERATED INTERNATIONAL EQUITY FUND

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FEES AND EXPENSES

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

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Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	5.50%	None	None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)	None	5.50%	1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)	None	None	None
Redemption Fee (as a percentage of amount redeemed, if applicable)¹	2.00%	2.00%	2.00%
Exchange Fee	None	None	None

Annual Fund Operating Expenses (Before Waiver and Reduction)²
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee	1.00%	1.00%	1.00%
Distribution (12b-1) Fee	None	0.75%	0.75%
Other Expenses³	0.75%	0.75%	0.75%
Total Actual Annual Fund Operating Expenses	1.75%	2.50%⁴	2.50%


1 The redemption fee is imposed upon the redemptions of shares within 30 days of purchase.
2 The percentages shown are based on expenses for the entire fiscal year ended November 30, 2006. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the administrator and shareholder services provider waived and/or elected not to charge certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended November 30, 2006.
Total Waiver and Reduction of Fund Expenses	0.02%	0.01%	0.01%
Total Actual Annual Fund Operating Expenses (after waiver and reduction)	1.73%	2.49%	2.49%
3 Includes a shareholder services fee/account administration fee which is used to compensate intermediaries for shareholder services or account administrative services. Also includes a recordkeeping fee which is used to compensate intermediaries for recordkeeping services. Please see “Payments to Financial Intermediaries” herein. The administrator voluntarily waived a portion of its fee. Additionally, the shareholder services provider elected not to charge, and therefore the Fund did not accrue, a portion of its fee. The administrator and shareholder services provider can terminate the voluntary waiver and/or reduction at any time. Total other expenses paid by the Fund’s Class A, Class B and Class C Shares (after the waiver and reduction) were 0.73%, 0.74% and 0.74%, respectively, for the fiscal year ended November 30, 2006.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

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EXAMPLE

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

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

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Share Class	1 Year	3 Years	5 Years	10 Years

Class A:

Expenses assuming redemption	$718	$1,071	$1,447	$2,499

Expenses assuming no redemption	$718	$1,071	$1,447	$2,499

Class B:

Expenses assuming redemption	$803	$1,179	$1,531	$2,652

Expenses assuming no redemption	$253	$779	$1,331	$2,652

Class C:

Expenses assuming redemption	$353	$779	$1,331	$2,836

Expenses assuming no redemption	$253	$779	$1,331	$2,836

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What are the Fund’s Investment Strategies?

The Fund pursues its investment objective by investing primarily in equity securities of companies based outside the United States.

The Adviser actively manages the Fund’s portfolio. The Adviser’s process for selecting investments is a combination of bottom-up stock selection and top- down analysis. Bottom-up stock selection emphasizes fundamental analysis of companies by skilled portfolio managers while top-down analysis attempts to predict the impact of economic and market cycles.

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The Adviser seeks to identify individual companies with the potential for investment return. The investment return could result from the Adviser’s view that a company has strong earnings growth potential, that a company is undervalued, or based on generating income or the potential for income. The Fund is not limited to investing according to any particular style, size of company or maintaining minimum allocations to any particular region or country. However, the Adviser anticipates that normally the Fund will primarily invest in mid-to-large capitalization companies based in developed markets outside the United States that have been selected using a growth style of stock selection. However to a lesser extent, the Fund may also invest in foreign companies in emerging markets.

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The Adviser selects stocks by attempting to evaluate the companies in the Fund’s investment universe based on fundamental analysis of, and forecasting, their potential for future stock price appreciation. Key factors in this analysis are: evaluation of the quality of company management, industry position, financial strength, and expected future growth in earnings or cash flows. Before purchasing a stock, the Adviser weighs appreciation potential against market price to evaluate the stock’s potential compared to its current price.

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The Adviser attempts to manage the risk of relative underperformance of the stocks of the growth companies it selects in down markets by seeking to purchase growth stocks at reasonable prices. The Adviser manages the portfolio’s exposure to random or unpredictable events that may adversely affect individual companies, or the risk that the Adviser is otherwise wrong in its analysis of any particular company, through portfolio diversification. There is no assurance these strategies will be successful in reducing portfolio risk. In addition, even if these strategies are successful, the Fund’s portfolio is expected to have a relatively high price volatility.

The Fund may purchase shares of exchange-traded funds (ETFs). The shares of ETFs are listed and traded on stock exchanges at market prices. The Fund may invest in ETFs in order to achieve exposure to a specific region, country, or market sector, or for other reasons consistent with its investment strategy.

The Fund is not limited in the portion of its investments that are denominated in either foreign currency or in U.S. dollars. From time to time, the Fund may hedge a portion of its currency risk by using derivatives such as futures or forward contracts. Currency hedges can protect against price movements in a security that a fund owns that are attributable to changes in the value of the currency in which the security is denominated. Hedging may reduce gains or cause losses to the Fund if the hedged currency moves in a different manner than the Adviser anticipated or if the cost of the hedge outweighs its value. It is anticipated that the majority of the Fund’s portfolio will not be hedged and will therefore remain subject to currency risk.

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Obtain premiums from the sale of derivative contracts;

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Realize gains from trading a derivative contract; or

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Hedge against potential losses

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There can be no assurance that the Fund’s use of derivative contracts or hybrid instruments will work as intended.

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Because the Fund refers to equity investments in its name, it will notify shareholders at least 60 days in advance of any changes in its investment policies that would enable the Fund to normally invest less than 80% of its assets in equity investments.

PORTFOLIO TURNOVER

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

EQUITY SECURITIES

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

Common Stocks

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

Preferred Stocks

Preferred stocks have the right to receive specified dividends or distributions before the issuer makes payments on its common stock. Some preferred stocks also participate in dividends and distributions paid on common stock. Preferred stocks may also permit the issuer to redeem the stock.

Interests in Other Limited Liability Companies

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

Depositary Receipts

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

Foreign Securities

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

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. Although it has historically not done so, 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.

DERIVATIVE CONTRACTS

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Futures Contracts

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Option Contracts

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Swap Contracts

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Common types of swaps in which the Fund may invest include currency swaps and total return swaps.

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HYBRID INSTRUMENTS

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Hybrid instruments combine elements of two different kinds of securities or financial instruments (such as a derivative contract). Frequently, the value of a hybrid instrument is determined by reference to changes in the value of designated securities, commodities, currencies, indices, or other assets or instruments (each a, “Valuation Instrument”). Hybrid instruments can take on many forms including, but not limited to, the following forms. First, a common form of a hybrid instrument combines elements of a derivative contract with those of another security (typically a fixed-income security). In this case all or a portion of the interest or principal payable on a hybrid security is determined by reference to changes in the price of a Valuation Instrument. Second, a hybrid instrument may also combine elements of a fixed-income security and an equity security. Third, hybrid instruments may include convertible securities with conversion terms related to a Valuation Instrument.

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ASSET SEGREGATION

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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. These other investment companies are managed independently of the Fund and incur additional 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 additional expenses.

The Fund may also invest in ETFs as an efficient means of carrying out its investment strategies. As with traditional mutual funds, ETFs charge asset-based fees, although these fees tend to be relatively low. ETFs do not charge initial sales charges or redemption fees and investors pay only customary brokerage fees to buy and sell ETF shares.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

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

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

RISKS RELATED TO INVESTING FOR GROWTH

Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. For instance, the price of a growth stock may experience a larger decline on a forecast of lower earnings, a negative fundamental development, or an adverse market development. Further, growth stocks may not pay dividends or may pay lower dividends than value stocks. This means they depend more on price changes for returns and may be more adversely affected in a down market compared to value stocks that pay higher dividends.

CURRENCY RISKS

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

RISKS OF FOREIGN INVESTING

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

Foreign 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 U.S. 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 that could adversely affect the liquidity of the Fund’s investments.

Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries.

EMERGING MARKETS RISK

Securities issued or traded in emerging markets generally entail greater risks than securities issued or traded in developed markets. For example, their prices can be significantly more volatile than prices in developed countries. Emerging market economies may also experience more severe downturns (with corresponding currency devaluations) than developed economies.

Emerging market countries may have relatively unstable governments and may present the risk of nationalization of businesses, expropriation, confiscatory taxation or, in certain instances, reversion to closed market, centrally planned economies.

EXCHANGE-TRADED FUNDS

An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange-traded) that has the same investment objectives, strategies, and policies. The price of an ETF can fluctuate up or down, and the Fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs may be subject to the following risks that do not apply to conventional funds: (i) the market price of an ETF’s shares may trade above or below its net asset value; (ii) an active trading market for an ETF’s shares may not develop or be maintained; or (iii) trading of an ETF’s shares may be halted if the listing exchange’s officials deem such action appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.

CUSTODIAL SERVICES AND RELATED INVESTMENT COSTS

Custodial services and other costs relating to investment in international securities markets are generally more expensive than in the United States. Such markets have settlement and clearance procedures that differ from those in the United States. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Inability of the Fund to make intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result in losses to the Fund due to a subsequent decline in value of the portfolio security. In addition, security settlement and clearance procedures in some emerging market countries may not fully protect the Fund against loss or theft of its assets.

RISKS OF INVESTING IN DERIVATIVE CONTRACTS AND HYBRID INSTRUMENTS

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The Fund’s use of derivative contracts and hybrid instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts and hybrid instruments in which the Fund invests may not be correlated with changes in the value of the underlying Reference or Valuation Instruments or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivative contracts and hybrid instruments may be erroneously priced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Fourth, derivative contracts and hybrid instruments may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Fifth, a common provision in over-the-counter (OTC) derivative contracts permits the counterparty to terminate any such contract between it and the Fund, if the value of the Fund’s total net assets declines below a specified level over a given time period. Factors that may contribute to such a decline (which usually must be substantial) include significant shareholder redemptions and/or a marked decrease in the market value of the Fund’s investments. Any such termination of the Fund’s OTC derivative contracts may adversely affect the Fund (for example, by increasing losses and/or costs, and/or preventing the Fund from fully implementing its investment strategies). Finally, derivative contracts and hybrid instruments may also involve other risks described herein or in the Fund’s SAI, such as stock market, credit, liquidity and leverage risks.

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LIQUIDITY RISKS

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

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

CREDIT RISKS

LEVERAGE RISKS

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

What Do Shares Cost?

You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). When the Fund holds foreign securities that trade in foreign markets on days the NYSE is closed, the value of the Fund’s assets may change on days you cannot purchase or redeem Shares. NAV is determined as of the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund’s current NAV and public offering price may be found in the mutual funds section of certain local newspapers under “Federated.” The Fund generally values equity securities according to the last sale price or official closing price reported in the market in which they are primarily traded (either a national securities exchange or the over-the-counter market). 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. If prices are not available from an independent pricing service, securities and derivatives contracts 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 security or contract as provided by an investment dealer or other financial institution that deals in the security or contract.

Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund’s Board of Directors (Board). The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Fund’s Adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security’s present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued at their last sale price, or based on market quotations.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charges

Shares Offered		Front-End Sales Charge²	Contingent Deferred Sales Charge³

Class A	$1,500/$100	5.50%	0.00%

Class B	$1,500/$100	None	5.50%

Class C	$1,500/$100	None	1.00%

1 The minimum initial and subsequent investment amounts for retirement plans are $250 and $100, respectively. The minimum subsequent investment amounts for Systematic Investment Programs (SIP) is $50. Financial intermediaries may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. To maximize your return and minimize the sales charges and marketing fees, purchases of Class B Shares are generally limited to $100,000 and purchases of Class C Shares are generally limited to $1,000,000. Purchases in excess of these limits may be made in Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund. See “Purchase Limits on Class B and Class C Shares” below. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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

3 See “Sales Charge When You Redeem.”

SALES CHARGE WHEN YOU PURCHASE

The following tables list the sales charges which will be applied to your Share purchase, subject to the breakpoint discounts indicated in the tables and described below.

Class A Shares:

Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV

Less than $50,000	5.50%	5.82%

$50,000 but less than $100,000	4.50%	4.71%

$100,000 but less than $250,000	3.75%	3.90%

$250,000 but less than $500,000	2.50%	2.56%

$500,000 but less than $1 million	2.00%	2.04%

$1 million or greater¹	0.00%	0.00%

REDUCING THE SALES CHARGE WITH BREAKPOINT DISCOUNTS

Contingent upon notification to the Transfer Agent, the sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

Larger Purchases

purchasing Class A Shares in greater quantities to reduce the applicable sales charge;

Concurrent and Accumulated Purchases

combining concurrent purchases of and/or current investments in Class A, Class B, Class C, Class F and Class K Shares of any Federated fund made or held by Qualifying Accounts; the purchase amount used in determining the sales charge on your additional Share purchase will be calculated by multiplying the maximum public offering price times the number of Class A, Class B, Class C, Class F and Class K Shares of any Federated fund currently held in Qualifying Accounts and adding the dollar amount of your current purchase; or

Letter of Intent

signing a letter of intent to purchase a qualifying amount of Class A Shares within 13 months (call your financial intermediary or the Fund for more information). The Fund’s custodian will hold Shares in escrow equal to the maximum applicable sales charge. If you complete the Letter of Intent, the Custodian will release the Shares in escrow to your account. If you do not fulfill the Letter of Intent, the Custodian will redeem the appropriate amount from the Shares held in escrow to pay the sales charges that were not applied to your purchases.

PURCHASE LIMITS ON CLASS B AND CLASS C SHARES

In order to maximize shareholder returns and minimize sales charges and marketing fees, an investor’s purchases of Class B Shares are generally limited to $100,000 and an investor’s purchases of Class C Shares are generally limited to $1,000,000. In applying the limit, the dollar amount of the current purchase is added to the product obtained by multiplying the maximum public offering price times the number of Class A, Class B, and Class C shares of any Federated fund currently held in linked Qualifying Accounts. If the sum of these two amounts would equal or exceed the limit, then the current purchase order will not be processed. Instead, the Distributor will attempt to contact the investor or the investor’s financial intermediary to offer the opportunity to convert the order to Class A Shares. If your Shares are held on the books of the Fund in the name of a financial intermediary, you may be subject to rules of your financial intermediary that differ from those of the Fund.

ELIMINATING THE SALES CHARGE

Contingent upon notification to the Transfer Agent, the sales charge will be eliminated when you purchase Shares:

within 120 days of redeeming Shares of an equal or greater amount;
through a financial intermediary that did not receive a dealer reallowance on the purchase;
with reinvested dividends or capital gains;
as a shareholder that originally became a shareholder of a Federated fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
as a Federated Life Member (Federated shareholders who originally were issued shares through the “Liberty Account,” which was an account for the Liberty Family of Funds on February 28, 1987, or who invested through an affinity group prior to August 1, 1987, into the Liberty Account) (Class A Shares only);
as a Director, employee or former employee of the Fund, the Adviser, the Distributor and their affiliates, an employee of any financial intermediary that sells Shares according to a sales agreement with the Distributor, an immediate family member of these individuals or a trust, pension or profit-sharing plan for these individuals; or
pursuant to the exchange privilege.

SALES CHARGE WHEN YOU REDEEM

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

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

Shares that are not subject to a CDSC; and
Shares held the longest (to determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund).

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

Class A Shares:

If you make a purchase of Class A Shares in the amount of $1 million or more and your financial intermediary received an advance commission on the sale, you will pay a 0.75% CDSC on any such shares redeemed within 24 months of the purchase.

Class B Shares:

Shares Held Up To:		CDSC

1 Year		5.50%

2 Years		4.75%

3 Years		4.00%

4 Years		3.00%

5 Years		2.00%

6 Years		1.00%

7 Years or More		0.00%

Class C Shares:

You will pay a 1.00% CDSC if you redeem Shares within 12 months of the purchase date.

Contingent upon notification to the Transfer Agent, you will not be charged a CDSC when redeeming Shares:

following the death of the last surviving shareholder on the account or your post-purchase disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder on the account);
representing minimum required distributions from an Individual Retirement Account or other retirement plan to a shareholder who has attained the age of 70½;
purchased within 120 days of a previous redemption of Shares, to the extent that the value of the Shares purchased was equal to or less than the value of the previous redemption;
purchased by Directors, employees of the Fund, the Adviser, the Distributor and their affiliates, by employees of a financial intermediary that sells Shares according to a sales agreement with the Distributor, by the immediate family members of the above persons, and by trusts, pension or profit-sharing plans for the above persons;
purchased through a financial intermediary that did not receive an advance commission on the purchase;
purchased with reinvested dividends or capital gains;
redeemed by the Fund when it closes an account for not meeting the minimum balance requirements;
purchased pursuant to the exchange privilege if the Shares were held for the applicable CDSC holding period (the holding period on the shares purchased in the exchange will include the holding period of the shares sold in the exchange); or

Class B Shares only

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

FEE WHEN YOU REDEEM OR EXCHANGE

For 30 days following your purchase, Shares are redeemable at a price equal to the current NAV per Share less a 2.00% redemption fee.

The 2.00% fee, referred to in the prospectus and Statement of Additional Information (SAI) as a redemption/exchange fee, directly affects the amount a shareholder who is subject to the fee receives upon exchange or redemption. This redemption/exchange fee is intended to encourage long-term investments in the Fund, to offset transaction and other Fund expenses caused by short-term redemptions, and to facilitate portfolio management (e.g., by decreasing the likelihood that the Fund will need to sell portfolio securities at an inopportune time, or maintain a larger cash position, in order to meet short-term redemption requests). There are no assurances that the redemption/exchange fee will deter short-term redemptions, as intended, including redemptions made as part of an overall strategy to buy and sell Shares in response to incremental changes in the Fund’s NAV. The redemption/exchange fee will be paid to the Fund. The redemption/exchange fee is not a sales charge, is not paid to the Adviser or its affiliates, and is not subject to waiver or reduction except as described in this section. The Fund reserves the right to modify the terms of or terminate this redemption/exchange fee at any time. For purposes of computing this redemption/exchange fee, Shares will be deemed to be redeemed on a first in, first out basis (i.e., Shares held the longest will be deemed to be redeemed first).

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The Fund’s goal is to collect the redemption/exchange fee on all Shares that are redeemed or exchanged within 30 days of purchase. However, the Fund may not be able to achieve its goal, since many financial intermediaries do not have the systems capability to collect the redemption/exchange fee from underlying account owners. Until these systems limitations are resolved, the Fund specifically anticipates that it may not be able to collect the redemption/exchange fee with respect to Shares purchased through some omnibus accounts, including omnibus accounts of banks, broker-dealers, trust companies and retirement plan recordkeepers.

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Participant directed transactions involving Shares held in retirement plans established under Sections 401(a) or 401(k) of the Internal Revenue Code (the “Code”), custodial plan accounts established under Section 403(b)(7) of the Code, or deferred compensation plans established under Section 457 of the Code will be subject to the redemption/exchange fee. Non-participant directed transactions such as distributions due to death, disability, health, or financial hardship will not be subject to the redemption/exchange fee. The redemption/exchange fee will not apply to Shares held in plans administered as college savings programs under Section 529 of the Code. Finally, Shares acquired by reinvestment of dividends or distributions of the Fund, or purchased pursuant to the Systematic Investment Program or withdrawn pursuant to the Systematic Withdrawal Program, will not be subject to the redemption/exchange fee. For more discussion regarding the redemption/exchange fee, please see the Fund’s SAI.

How is the Fund Sold?

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

Payments to Financial Intermediaries

FRONT-END SALES CHARGE REALLOWANCES

When a financial intermediary’s customer purchases Shares, the financial intermediary may receive a Dealer Reallowance as follows:

Class A Shares:

Purchase Amount		Dealer Reallowance as a Percentage of Public Offering Price

Less than $50,000		5.00%

$50,000 but less than $100,000		4.00%

$100,000 but less than $250,000		3.25%

$250,000 but less than $500,000		2.25%

$500,000 but less than $1 million		1.80%

$1 million or greater		0.00%

ADVANCE COMMISSIONS

When a financial intermediary’s customer purchases Shares, the financial intermediary may receive an advance commission as follows:

Class A Shares (for purchases over $1 million):

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

First $1 million - $5 million		0.75%

Next $5 million - $20 million		0.50%

Over $20 million		0.25%

Class B Shares:

Purchase Amount		Advance Commission as a Percentage of Public Offering Price

All Purchase Amounts		Up to 5.50%

Class C Shares:

All Purchase Amounts		1.00%

RULE 12b-1 FEES

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees of up to 0.75% of average net assets to the Distributor for the sale, distribution, administration and customer servicing of the Fund’s Class B Shares and Class C Shares. When the Distributor receives Rule 12b-1 Fees, it may pay some or all of them to financial intermediaries whose customers purchase Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.

SERVICE FEES

ACCOUNT ADMINISTRATION FEES

RECORDKEEPING FEES

NETWORKING FEES

ADDITIONAL PAYMENTS TO FINANCIAL INTERMEDIARIES

How to Purchase Shares

You may purchase Shares through a financial intermediary, directly from the Fund or through an exchange from another Federated fund. The Fund reserves the right to reject any request to purchase or exchange Shares. Where the Fund offers more than one Share class and you do not specify the class choice on your New Account Form or form of payment (e.g., Federal Reserve wire or check), you automatically will receive Class A Shares.

THROUGH A FINANCIAL INTERMEDIARY

Establish an account with the financial intermediary; and
Submit your purchase order to the financial intermediary before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive the next calculated NAV if the financial intermediary forwards the order to the Fund on the same day and the Fund receives payment within three business days. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Financial intermediaries should send payments according to the instructions in the sections “By Wire” or “By Check.”

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
Send your payment to the Fund by Federal Reserve wire or check.

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

By Wire

Send your wire to:

State Street Bank and Trust Company Boston, MA Dollar Amount of Wire ABA Number 011000028 Attention: EDGEWIRE Wire Order Number, Dealer Number or Group Number Nominee/Institution Name Fund Name and Number and Account Number

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

By Check

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

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

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

The Federated Funds 30 Dan Road Canton, MA 02021

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (ACH)

RETIREMENT INVESTMENTS

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

through a financial intermediary if you purchased Shares through a financial intermediary; or
directly from the Fund if you purchased Shares directly from the Fund.

Shares may be redeemed at the NAV next determined after the Fund receives the redemption request. If the Shares are redeemed or exchanged within 30 days of purchase, a 2% redemption/exchange fee will be charged, as more fully described previously under the sub-heading, “Fee When You Redeem or Exchange.” The redemption/exchange fee will be paid to the Fund.”

THROUGH A FINANCIAL INTERMEDIARY

DIRECTLY FROM THE FUND

By Telephone

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You may redeem or exchange Shares by simply calling the Fund at 800-341-7400.

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If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time) you will receive a redemption amount based on that day’s NAV.

By Mail

You may redeem or exchange Shares by sending a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

The Federated Funds P.O. Box 8600 Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

The Federated Funds 30 Dan Road Canton, MA 02021

All requests must include:

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

Call your financial intermediary or the Fund if you need special instructions.

Signature Guarantees

Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

your redemption will be sent to an address other than the address of record;
your redemption will be sent to an address of record that was changed within the last 30 days;
a redemption is payable to someone other than the shareholder(s) of record; or
if exchanging (transferring) into another fund with a different shareholder registration.

PAYMENT METHODS FOR REDEMPTIONS

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

to allow your purchase to clear (as discussed below);
during periods of market volatility;
when a shareholder’s trade activity or amount adversely impacts the Fund’s ability to manage its assets; or
during any period when the Federal Reserve wire or applicable Federal Reserve banks are closed, other than customary weekend and holiday closings.

If you request a redemption of Shares recently purchased by check (including a cashier’s check or certified check), money order, bank draft or ACH, your redemption proceeds may not be made available up to seven calendar days to allow the Fund to collect payment on the instrument used to purchase such Shares. If the purchase instrument does not clear, your purchase order will be cancelled and you will be responsible for any losses incurred by the Fund as a result of your cancelled order.

In addition, the right of redemption may be suspended, or the payment of proceeds may be delayed, during any period:

when the NYSE is closed, other than customary weekend and holiday closings;
when trading on the NYSE is restricted, as determined by the SEC; or
in which an emergency exists, as determined by the SEC, so that disposal of the Fund’s investments or determination of its NAV is not reasonably practicable.

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGE

You may exchange Shares of the Fund into shares of the same class of another Federated fund. To do this, you must:

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

In an effort to deter shareholders from using repeated exchanges to take advantage of short-term market movements (also known as “market timing”), after July 30, 2001, Shares acquired on or before April 1, 2007, through an exchange may not be exchanged again (a “Subsequent Exchange”) for a period of 15 days. The Fund will not process any request for a Subsequent Exchange made during the 15-day period. The rights of shareholders to redeem their Shares are not affected by this provision.

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However, because the Fund has adopted new policies to deter market timing, Shares acquired through an exchange on or after April 2, 2007, will no longer be subject to the 15-day holding period regardless of when the Shares were purchased. However, any applicable redemption fee will continue to apply to such Shares. For more information on the circumstances in which the redemption fee will apply, please see “What Do Shares Cost?”.

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SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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Generally, it is not advisable to continue to purchase Shares subject to a sales charge while redeeming Shares using this program.

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Systematic Withdrawal Program (SWP) On Class B Shares

You will not be charged a CDSC on SWP redemptions if:

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

FREQUENT TRADING POLICIES

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The Fund’s Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund’s Shares. As described above, the Fund imposes a fee on redemptions or exchanges of Fund Shares within 30 days of the date of purchase. See “What Do Shares Cost?” As of April 2, 2007, Shares will no longer be subject to the 15-day holding period on exchanges regardless of when the Shares were purchased. However, any applicable redemption fee will continue to apply to such Shares. For more information on the circumstances in which the redemption fee will apply, please see “What do Shares Cost?” The Fund’s fair valuation procedures are intended in part to discourage short-term trading strategies by reducing the potential for these strategies to succeed. See “What Do Shares Cost?” The Fund also monitors trading in Fund Shares in an effort to identify disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of twelve months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund’s management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions or exchanges that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund’s portfolio and its performance.

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The Fund’s objective is that its fees and restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

PORTFOLIO HOLDINGS INFORMATION

You may also access from the “Products” section of the website portfolio information as of the end of the Fund’s fiscal quarters. The Fund’s annual and semiannual reports, which contain complete listings of the Fund’s portfolio holdings as of the end of the Fund’s second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on “Prospectuses and Regulatory Reports” and selecting the link to the appropriate PDF. Complete listings of the Fund’s portfolio holdings as of the end of the Fund’s first and third fiscal quarters may be accessed by selecting “Portfolio Holdings” from the “Products” section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC’s website at www.sec.gov.

Who Manages the Fund?

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The Board governs the Fund. The Board selects and oversees the Adviser, Federated Global Investment Management Corp. The Adviser manages the Fund’s assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides research, quantitative analysis, equity trading and transaction settlement and certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser is 450 Lexington Avenue, Suite 3700, New York, NY 10017-3943. The address of FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

The Adviser and other subsidiaries of Federated advise approximately 148 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $237 billion in assets as of December 31, 2006. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1,243 employees. Federated provides investment products to nearly 5,500 investment professionals and institutions.

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PORTFOLIO MANAGEMENT INFORMATION

Stephen F. Auth

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Stephen F. Auth has been the Fund’s Portfolio Manager since June 2005. Mr. Auth joined Federated in May 2000 as Senior Vice President and Director of Global Portfolio Management of the Fund’s Adviser. From 1985 through March 2000, Mr. Auth was employed with Prudential Investments, a unit of Prudential Insurance Company of America, where he served as a Portfolio Manager since September 1991 and also as Senior Managing Director. Mr. Auth is a Chartered Financial Analyst charter holder. He earned a Bachelors Degree from Princeton University and an M.B.A. from Harvard University.

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Richard Winkowski

Richard Winkowski has been the Fund’s Portfolio Manager since January 2003. Mr. Winkowski joined Federated as a Senior Investment Analyst in April 1998. He became an Assistant Vice President of the Fund’s Adviser in July 1999 and became a Vice President of the Fund’s Adviser in July 2000. He served as a Senior Research Analyst with Union Bank of Switzerland from October 1997 through March 1998. He was employed with American Express Financial Corp. as a Statistical Analyst from 1994 through January 1995 and then as a Portfolio Manager Assistant until September 1997. Mr. Winkowski earned his B.A. from the University of Wisconsin.

Regina Chi

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Regina Chi has been the Fund’s Portfolio Manager since May 2005. Ms. Chi joined Federated in August 1999 as a Senior Investment Analyst and became an Assistant Vice President of the Fund’s Adviser in July 2000. Ms. Chi was previously employed with Clay Finlay, Inc., where she served as a Vice President/Portfolio Manager from July 1997 to July 1999 and as a Research Analyst from June 1994 to July 1997. Ms. Chi earned her B.A. in Economics and Philosophy from Columbia University. Ms. Chi provides general investment support and assistance to the Fund.

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The Fund’s SAI provides additional information about the Portfolio Managers’ compensation, management of other accounts, and ownership of securities in the Fund.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 1.00% of the Fund’s average daily net assets. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.

A discussion of the Board’s review of the Fund’s investment advisory contract is available in the Fund’s Annual Report dated November 30, 2006.

Legal Proceedings

Since October 2003, Federated and related entities (collectively, “Federated”), and various Federated funds (“Funds”), have been named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. These lawsuits began to be filed shortly after Federated’s first public announcement that it had received requests for information on shareholder trading activities in the Funds from the SEC, the Office of the New York State Attorney General (“NYAG”), and other authorities. In that regard, on November 28, 2005, Federated announced that it had reached final settlements with the SEC and the NYAG with respect to those matters. Specifically, the SEC and NYAG settled proceedings against three Federated subsidiaries involving undisclosed market timing arrangements and late trading. The SEC made findings: that Federated Investment Management Company (“FIMC”), an SEC-registered investment adviser to various Funds, and Federated Securities Corp., an SEC-registered broker-dealer and distributor for the Funds, violated provisions of the Investment Advisers Act and Investment Company Act by approving, but not disclosing, three market timing arrangements, or the associated conflict of interest between FIMC and the funds involved in the arrangements, either to other fund shareholders or to the funds’ board; and that Federated Shareholder Services Company, formerly an SEC-registered transfer agent, failed to prevent a customer and a Federated employee from late trading in violation of provisions of the Investment Company Act. The NYAG found that such conduct violated provisions of New York State law. Federated entered into the settlements without admitting or denying the regulators’ findings. As Federated previously reported in 2004, it has already paid approximately $8.0 million to certain funds as determined by an independent consultant. As part of these settlements, Federated agreed to pay disgorgement and a civil money penalty in the aggregate amount of an additional $72 million and, among other things, agreed that it would not serve as investment adviser to any registered investment company unless (i) at least 75% of the fund’s directors are independent of Federated, (ii) the chairman of each such fund is independent of Federated, (iii) no action may be taken by the fund’s board or any committee thereof unless approved by a majority of the independent trustees of the fund or committee, respectively, and (iv) the fund appoints a “senior officer” who reports to the independent trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved. The settlements are described in Federated’s announcement which, along with previous press releases and related communications on those matters, is available in the “About Us” section of Federated’s website at FederatedInvestors.com.

The board of the Funds has retained the law firm of Dickstein Shapiro LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and intend to defend this litigation. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys’ fees, and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

Financial Information

FINANCIAL HIGHLIGHTS

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This information has been audited by Ernst & Young LLP, an independent registered public accounting firm, whose report along with the Fund’s audited financial statements, is included in the Annual Report.

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Financial Highlights--Class A Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006			2005			2004			2003			2002

Net Asset Value, Beginning of Period	$18.10			$16.97			$14.51			$12.14			$14.92
Income From Investment Operations:
Net investment income (loss)	(0.04	)¹		0.07	¹		(0.03	)¹		0.04	¹		(0.01	)¹
Net realized and unrealized gain (loss) on investments and foreign currency transactions	4.30			1.06			2.50			2.33			(2.77	)

TOTAL FROM INVESTMENT OPERATIONS	4.26			1.13			2.47			2.37			(2.78	)

Less Distributions:
Distributions from net investment income	--			--			(0.01	)		--			--

Net Asset Value, End of Period	$22.36			$18.10			$16.97			$14.51			$12.14

Total Return²	23.54	%		6.66	%³		17.02	%⁴		19.52	%		(18.63	)%


Ratios to Average Net Assets:

Net expenses	1.73	%		1.71	%⁵		1.82	%⁵		1.79	%⁵		1.72	%⁵

Net investment income (loss)	(0.20	)%		0.42	%		(0.19	)%		0.35	%		(0.05	)%

Expense waiver/reimbursement⁶	0.00	%⁷		0.05	%		0.00	%⁷		0.00	%⁷		0.00	%⁷

Supplemental Data:

Net assets, end of period (000 omitted)	$197,189		$194,192			$219,439			$210,332			$264,843

Portfolio turnover	79	%		113	%		74	%		150	%		103	%

Redemption fees consisted of the following per share amounts	$0.00	⁸		$0.00	⁸		$0.00	⁸		--			--

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1 Per share numbers have been calculated using the average shares method.

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3 During the period, the Fund was reimbursed by the shareholder services provider, which had an impact of 0.06% on the total return.

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4 During the period, the Fund was reimbursed by the Adviser, which had an impact of 0.07% on the total return.

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5 The net expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The net expense ratios are 1.71%, 1.82%, 1.79% and 1.72% for the years ended November 30, 2005, 2004, 2003 and 2002, respectively, after taking into account these expense reductions.

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

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7 Represents less than 0.01%.

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8 Represents less than $0.01.

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Further information about the Fund’s performance is contained in the Annual Report, dated November 30, 2006, which can be obtained free of charge.

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Financial Highlights--Class B Shares

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(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006		2005		2004		2003		2002

Net Asset Value, Beginning of Period	$16.33		$15.44		$13.30		$11.22		$13.89
Income From Investment Operations:
Net investment income (loss)	(0.18	)¹	(0.06	)¹	(0.14	)¹	(0.04	)¹	(0.10	)¹
Net realized and unrealized gain (loss) on investments and foreign currency transactions	3.87		0.95		2.28		2.12		(2.57	)

TOTAL FROM INVESTMENT OPERATIONS	3.69		0.89		2.14		2.08		(2.67	)

Net Asset Value, End of Period	$20.02		$16.33		$15.44		$13.30		$11.22

Total Return²	22.60	%	5.76	%	16.09	%	18.54	%	(19.22	)%


Ratios to Average Net Assets:

Net expenses	2.49	%	2.52	%³	2.57	%³	2.54	%³	2.47	%³

Net investment income (loss)	(0.95	)%	(0.39	)%	(0.95	)%	(0.40	)%	(0.79	)%

Expense waiver/reimbursement⁴	0.00	%⁵	0.00	%⁵	0.00	%⁵	0.00	%⁵	0.00	%⁵

Supplemental Data:

Net assets, end of period (000 omitted)	$32,784		$34,732		$39,549		$39,772		$41,084

Portfolio turnover	79	%	113	%	74	%	150	%	103	%

Redemption fees consisted of the following per share amounts	$0.00	⁶	$0.00	⁶	$0.00	⁶	--		--

</R>
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1 Per share numbers have been calculated using the average shares method.

</R>
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3 The net expense ratio is calculated without reduction for fees paid indirectly for directed brokerage arrangements. The net expense ratios are 2.52%, 2.57%, 2.54% and 2.47% for the years ended November 30, 2005, 2004, 2003 and 2002, respectively, after taking into account these expense reductions.

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

</R>
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5 Represents less than 0.01%.

</R>
<R>

6 Represents less than $0.01.

</R>
<R>

Further information about the Fund’s performance is contained in the Annual Report, dated November 30, 2006, which can be obtained free of charge.

</R>
<R>

Financial Highlights--Class C Shares

</R>
<R>

(For a Share Outstanding Throughout Each Period)

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Year Ended November 30	2006			2005			2004			2003			2002

Net Asset Value, Beginning of Period	$16.10			$15.24			$13.12			$11.06			$13.70
Income From Investment Operations:
Net investment income (loss)	(0.18	)¹		(0.06	)¹		(0.13	)¹		(0.04	)¹		(0.10	)¹
Net realized and unrealized gain (loss) on investments and foreign currency transactions	3.82			0.92			2.25			2.10			(2.54	)

TOTAL FROM INVESTMENT OPERATIONS	3.64			0.86			2.12			2.06			(2.64	)

Net Asset Value, End of Period	$19.74			$16.10			$15.24			$13.12			$11.06

Total Return²	22.61	%		5.64	%		16.16	%		18.63	%		(19.27	)%


Ratios to Average Net Assets:

Net expenses	2.49	%		2.52	%³		2.57	%³		2.54	%³		2.47	%³

Net investment income (loss)	(0.96	)%		(0.38	)%		(0.98	)%		(0.40	)%		(0.79	)%

Expense waiver/reimbursement⁴	0.00	%⁵		0.00	%⁵		0.00	%⁵		0.00	%⁵		0.00	%⁵

Supplemental Data:

Net assets, end of period (000 omitted)	$65,796		$58,892			$64,211			$66,305			$56,214

Portfolio turnover	79	%		113	%		74	%		150	%		103	%

Redemption fees consisted of the following per share amounts	$0.00	⁶		$0.00	⁶		$0.00	⁶		--			--

</R>
<R>

1 Per share numbers have been calculated using the average shares method.

</R>
<R>

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

</R>
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5 Represents less than 0.01%.

</R>
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6 Represents less than $0.01.

</R>
<R>

Further information about the Fund’s performance is contained in the Annual Report, dated November 30, 2006, which can be obtained free of charge.

</R>

Appendix A: Hypothetical Investment and Expense Information

<R>

FEDERATED INTERNATIONAL EQUITY FUND -- CLASS A SHARES
ANNUAL EXPENSE RATIO: 1.75%
MAXIMUM FRONT-END SALES CHARGE: 5.50%

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<R>

Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$472.50	$9,922.50	$718.06	$9,757.13

2	$9,757.13	$487.86	$10,244.99	$173.52	$10,074.24

3	$10,074.24	$503.71	$10,577.95	$179.16	$10,401.65

4	$10,401.65	$520.08	$10,921.73	$184.99	$10,739.70

5	$10,739.70	$536.99	$11,276.69	$191.00	$11,088.74

6	$11,088.74	$554.44	$11,643.18	$197.21	$11,449.12

7	$11,449.12	$572.46	$12,021.58	$203.62	$11,821.22

8	$11,821.22	$591.06	$12,412.28	$210.23	$12,205.41

9	$12,205.41	$610.27	$12,815.68	$217.07	$12,602.09

10	$12,602.09	$630.10	$13,232.19	$224.12	$13,011.66

Cumulative		$5,479.47		$2,498.98

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FEDERATED INTERNATIONAL EQUITY FUND -- CLASS B SHARES
ANNUAL EXPENSE RATIO: 2.50%

</R>
<R>

Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$500.00	$10,500.00	$253.13	$10,250.00

2	$10,250.00	$512.50	$10,762.50	$259.45	$10,506.25

3	$10,506.25	$525.31	$11,031.56	$265.94	$10,768.91

4	$10,768.91	$538.45	$11,307.36	$272.59	$11,038.13

5	$11,038.13	$551.91	$11,590.04	$279.40	$11,314.08

6	$11,314.08	$565.70	$11,879.78	$286.39	$11,596.93

7	$11,596.93	$579.85	$12,176.78	$293.55	$11,886.85

8	$11,886.85	$594.34	$12,481.19	$300.89	$12,184.02

Converts from Class B to Class A			Annual Expense Ratio: 1.75%

9	$12,184.02	$609.20	$12,793.22	$216.69	$12,580.00

10	$12,580.00	$629.00	$13,209.00	$223.73	$12,988.85

Cumulative		$5,606.26		$2,651.76

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<R>

FEDERATED INTERNATIONAL EQUITY FUND - CLASS C SHARES
ANNUAL EXPENSE RATIO: 2.50%
MAXIMUM FRONT-END SALES CHARGE: NONE

</R>
<R>

Year	Hypothetical Beginning Investment	Hypothetical Performance Earnings	Investment After Returns	Hypothetical Expenses	Hypothetical Ending Investment

1	$10,000.00	$500.00	$10,500.00	$253.13	$10,250.00

2	$10,250.00	$512.50	$10,762.50	$259.45	$10,506.25

3	$10,506.25	$525.31	$11,031.56	$265.94	$10,768.91

4	$10,768.91	$538.45	$11,307.36	$272.59	$11,038.13

5	$11,038.13	$551.91	$11,590.04	$279.40	$11,314.08

6	$11,314.08	$565.70	$11,879.78	$286.39	$11,596.93

7	$11,596.93	$579.85	$12,176.78	$293.55	$11,886.85

8	$11,886.85	$594.34	$12,481.19	$300.89	$12,184.02

9	$12,184.02	$609.20	$12,793.22	$308.41	$12,488.62

10	$12,488.62	$624.43	$13,113.05	$316.12	$12,800.84

Cumulative		$5,601.69		$2,835.87

</R>
<R>

</R>

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated’s website at FederatedInvestors.com.

Federated Investors
World-Class Investment Manager

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

Federated Securities Corp., Distributor

Investment Company Act File No. 811-3984

Cusip 31420G101
Cusip 31420G200
Cusip 31420G309

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G00692-02-ABC (2/07)

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FEDERATED INTERNATIONAL EQUITY FUND

A PORTFOLIO OF FEDERATED INTERNATIONAL SERIES, INC.

STATEMENT OF ADDITIONAL INFORMATION

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FEBRUARY 1, 2007

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectus for Federated International Equity Fund
(Fund), dated February 1, 2007. This SAI incorporates by reference the Fund's
Annual Report. Obtain the prospectus or the Annual Report without charge by
calling 1-800-341-7400.

</R>

- 1 -

HOW IS THE FUND ORGANIZED?

The Fund is a diversified portfolio of Federated International Series, Inc.
(Corporation). The Corporation is an open-end, management investment company
that was established under the laws of the State of Maryland on March 9, 1984.
The Corporation may offer separate series of shares representing interests in
separate portfolios of securities. The Corporation changed its name from
International Series, Inc. to Federated International Series, Inc. on January
19, 2000.

SECURITIES IN WHICH THE FUND INVESTS

In pursuing its investment strategy, the Fund may invest in the following
securities, in addition to the securities listed in the prospectus, for any
purpose that is consistent with its investment objective:

SECURITIES DESCRIPTIONS AND TECHNIQUES

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

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

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

FIXED INCOME SECURITIES
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.
The following describes the types of fixed income securities in which the Fund
invests:

U.S. TREASURY SECURITIES
U.S. Treasury securities are direct obligations of the federal government of the
United States. U.S. 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 (GSE) acting under federal authority. Some GSE
securities are supported by the full faith and credit of the United States.
These include the Government National Mortgage Association, Small Business
Administration, Farm Credit System Financial Assistance Corporation, Farmer's
Home Administration, Federal Financing Bank, General Services Administration,
Department of Housing and Urban Development, Export-Import Bank, Overseas
Private Investment Corporation, and Washington Metropolitan Area Transit
Authority Bonds.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

A Fund treats mortgage-backed securities guaranteed by a GSE as if issued or
guaranteed by a federal agency.

Although such a guarantee protects against credit risks, it does not reduce
market and prepayment risks.

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.

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 nonconvertible 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.

FOREIGN GOVERNMENT SECURITIES
Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.
Foreign government securities also include fixed income securities of quasi-
governmental agencies that are either issued by entities owned by a national,
state or equivalent government or are obligations of a political unit that are
not backed by the national government's full faith and credit. Further, foreign
government securities include mortgage-related securities issued or guaranteed
by national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.

BRADY BONDS
Brady Bonds are U.S. dollar denominated debt obligations that foreign
governments issue in exchange for commercial bank loans. The International
Monetary Fund (IMF) typically negotiates the exchange to cure or avoid a default
by restructuring the terms of the bank loans. The principal amount of some Brady
Bonds is collateralized by zero coupon U.S. Treasury securities which have the
same maturity as the Brady Bonds. However, neither the U.S. government nor the
IMF has guaranteed the repayment of any Brady Bond.
<R>

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.

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 on how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the Reference Instrument,
derivative contracts may increase or decrease the Fund's exposure to the risks
of the Reference Instrument, 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, including
combinations thereof:

FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a Reference Instrument at a specified
price, date and time. Entering into a contract to buy a Reference Instrument is
commonly referred to as buying a contract or holding a long position in the
asset. Entering into a contract to sell a Reference Instrument is commonly
referred to as selling a contract or holding a short position in the Reference
Instrument. Futures contracts are considered to be commodity contracts. The
Fund has claimed an exclusion from the definition of the term "commodity pool
operator" under the Commodity Exchange Act and, therefore, is not subject to
registration or regulation as a commodity pool operator under that Act. Futures
contracts traded OTC are frequently referred to as forward contracts. The Fund
can buy or sell financial futures (such as currency futures, index futures and
security futures), as well as, currency forward contracts.
CURRENCY FORWARD CONTRACT
A currency forward contract is an obligation to purchase or sell a specific
currency at a future date, at a price set at the time of the contract and for a
period agreed upon by the parties which may be either a window of time or a
fixed number of days from the date of the contract. Forward currency contracts
are highly volatile, with a relatively small price movement potentially
resulting in substantial gains or losses to the Fund. Additionally, the Fund may
lose money on forward currency transactions if changes in currency rates do not
occur as anticipated or if the Fund's counterparty to the contract were to
default. Currency forward contracts are OTC derivatives.
OPTION CONTRACTS
Option contracts (also called "options") are rights to buy or sell a Reference
Instrument for a specified price (the exercise price) during, or at the end of,
a specified period. The seller (or 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. Options can trade on exchanges or in the OTC
market and may be bought or sold on a wide variety of Reference Instruments.
Options that are written on futures contracts will be subject to margin
requirements similar to those applied to futures contracts. The Fund may buy or
sell options on a Reference Instrument if it is permitted to own, invest, or
otherwise have economic exposure to that instrument. The Fund is not required
to own a Reference Instrument, in order to buy or write an option on that
Reference Instrument.

The Fund may buy and/or sell the following types of options:

CALL OPTIONS
A call option gives the holder (buyer) the right to buy the Reference Instrument
from the seller (writer) of the option. The Fund may use call options in the
following ways:

{circle}Buy call options on a Reference Instrument in anticipation of an
increase in the value of the Reference Instrument; and

PUT OPTIONS
A put option gives the holder the right to sell the Reference Instrument to the
writer of the option. The Fund may use put options in the following ways:

{circle}Buy put options on a Reference Instrument in anticipation of a decrease
in the value of the Reference Instrument; and

The Fund may also buy or write options, as needed, to close out existing option
positions.

SWAP CONTRACTS
A swap contract (also known as a "swap") is a type of derivative contract in
which two parties agree to pay each other (swap) the returns derived from
Reference Instruments. Most swaps do not involve the delivery of the underlying
assets by either party, and the parties might not own the Reference Instruments.
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. Common swap agreements 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 (commonly referred to as a "notional principal amount") 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 London Interbank
Offered Rate (LIBOR) swap would require one party to pay the equivalent of the
London Interbank Offered 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.

TOTAL RETURN SWAPS
A total return swap is an agreement between two parties whereby one party agrees
to make payments of the total return from a Reference Instrument (or a basket of
such instruments) during the specified period, in return for payments equal to a
fixed or floating rate of interest or the total return from another Reference
Instrument. Alternately, a total return swap can be structured so that one
party will make payments to the other party if the value of a Reference
Instrument increases, but receive payments from the other party if the value of
that instrument decreases.
CREDIT DEFAULT SWAPS
A credit default swap (CDS) is an agreement between two parties whereby one
party (the "Protection Buyer") agrees to make payments over the term of the CDS
to the other party (the "Protection Seller"), provided that no designated event
of default, restructuring or other credit related event (each a "Credit Event")
occurs with respect to Reference Instrument that is usually a particular bond or
the unsecured credit of an issuer, in general (the "Reference Obligation"). Many
CDS are physically settled, which means that if a Credit Event occurs, the
Protection Seller must pay the Protection Buyer the full notional value, or "par
value," of the Reference Obligation in exchange for delivery by the Protection
Buyer of the Reference Obligation or another similar obligation issued by the
issuer of the Reference Obligation (the "Deliverable Obligation"). The
Counterparties agree to the characteristics of the Deliverable Obligation at the
time that they enter into the CDS. Alternately, a CDS can be "cash settled,"
which means that upon the occurrence of a Credit Event, the Protection Buyer
will receive a payment from the Protection Seller equal to the difference
between the par amount of the Reference Obligation and its market value at the
time of the Credit Event. The Fund may be either the Protection Buyer or the
Protection Seller in a CDS. If the Fund is a Protection Buyer and no Credit
Event occurs, the Fund will lose its entire investment in the CDS (i.e., an
amount equal to the payments made to the Protection Seller over the term of the
CDS). However, if a Credit Event occurs, the Fund (as Protection Buyer) will
deliver the Deliverable Obligation and receive a payment equal to the full
notional value of the Reference Obligation, even though the Reference Obligation
may have little or no value. If the Fund is the Protection Seller and no Credit
Event occurs, the Fund will receive a fixed rate of income throughout the term
of the CDS. However, if a Credit Event occurs, the Fund (as Protection Seller)
will pay the Protection Buyer the full notional value of the Reference
Obligation and receive the Deliverable Obligation from the Protection Buyer. A
CDS may involve greater risks than if the Fund invested directly in the
Reference Obligation. For example, a CDS may increase credit risk since the Fund
has exposure to both the issuer of the Reference Obligation and the Counterparty
to the CDS.

CURRENCY SWAPS
Currency swaps are contracts which provide for interest payments in different
currencies. The parties might agree to exchange the notional principal amounts
of the currencies as well (commonly called a "foreign exchange swap").
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.
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<R>

HYBRID INSTRUMENTS
Hybrid instruments combine elements of two different kinds of securities or
financial instruments (such as a derivative contract). Frequently, the value of
a hybrid instrument is determined by reference to changes in the value of
designated securities, commodities, currencies, indices, or other assets or
instruments (each a, "Valuation Instrument"). Hybrid instruments can take on
many forms including, but not limited to, the following forms. First, a common
form of a hybrid instrument combines elements of a derivative contract with
those of another security (typically a fixed-income security). In this case all
or a portion of the interest or principal payable on a hybrid security is
determined by reference to changes in the price of a Valuation Instrument.
Second, a hybrid instrument may also combine elements of a fixed-income security
and an equity security. Third, hybrid instruments may include convertible
securities with conversion terms related to a Valuation Instrument.
Depending on the type and terms of the hybrid instrument, its risks may reflect
a combination of the risks of investing in securities, currencies and derivative
contracts. Thus, an investment in a hybrid instrument may entail significant
risks in addition to those associated with traditional securities or the
Valuation Instrument. Hybrid instruments are also potentially more volatile
than traditional securities or the Valuation Instrument. Moreover, depending on
the structure of the particular hybrid, it may expose the Fund to leverage risks
or carry liquidity risks.
CREDIT LINKED NOTE
A credit linked note (CLN) is a type of hybrid instrument in which a special
purpose entity issues a structured note (the "Note Issuer") with respect to
which the Valuation Instrument is a single bond, a portfolio of bonds, or the
unsecured credit of an issuer, in general (each a "Reference Credit"). The
purchaser of the CLN (the "Note Purchaser") invests a par amount and receives a
payment during the term of the CLN that equals a fixed or floating rate of
interest equivalent to a high rated funded asset (such as a bank certificate of
deposit) plus an additional premium that relates to taking on the credit risk of
the Reference Credit. Upon maturity of the CLN, the Note Purchaser will receive
a payment equal to (i) the original par amount paid to the Note Issuer, if there
is no occurrence of a designated event of default, restructuring or other credit
event (each, a "Credit Event") with respect to the issuer of the Reference
Credit or (ii) the market value of the Reference Credit, if a Credit Event has
occurred. Depending upon the terms of the CLN, it is also possible that the
Note Purchaser may be required to take physical delivery of the Reference Credit
in the event of Credit Event. Most credit linked notes use a corporate bond (or
a portfolio of corporate bonds) as the Reference Credit. However, almost any
type of fixed-income security (including foreign government securities), index,
or derivative contract (such as a credit default swap) can be used as the
Reference Credit.
EQUITY LINKED NOTE
An equity linked note (ELN) is a type of hybrid instrument that provides the
noteholder with exposure to a single equity security, a basket of equity
securities, or an equity index (the "Reference Equity Instrument"). Typically,
an ELN pays interest at agreed rates over a specified time period and, at
maturity, either converts into shares of a Reference Equity Instrument or
returns a payment to the noteholder based on the change in value of a Reference
Equity Instrument.

</R>

SPECIAL TRANSACTIONS

DELAYED DELIVERY TRANSACTIONS
Delayed delivery securities, 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, when-issued transactions create market risks for
the Fund. When-issued transactions also involve credit risks in the event of a
counterparty default.

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

</R>

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 Federated fund than market-competitive rates on overnight repurchase
agreements (Repo Rate) and more attractive to the borrowing Federated fund than
the rate of interest that would be charged by an unaffiliated bank for short-
term borrowings (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. These
other investment companies are managed independently of the Fund and incur
additional expenses. Therefore, any such investment made by the Fund may be
subject to duplicate expenses. However, the Adviser believes that the benefits
and efficiencies of this approach should outweigh the additional expenses.
The Fund may also invest in exchange-traded funds (ETFs). As with traditional
mutual funds, ETFs charge asset-based fees, although these fees tend to be
relatively low. ETFs do not charge initial sales charges or redemption fees and
investors pay only customary brokerage fees to buy and sell ETF shares.

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 & 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.

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

EMERGING MARKET RISKS
Securities issued or traded in emerging markets generally entail greater risks
than securities issued or traded in developed markets. For example, their prices
can be significantly more volatile than prices in developed countries. Emerging
market economies may also experience more severe downturns (with corresponding
currency devaluations) than developed economies.
Emerging market countries may have relatively unstable governments and may
present the risk of nationalization of businesses, expropriation, confiscatory
taxation or, in certain instances, reversion to closed market, centrally planned
economies.

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

LIQUIDITY RISKS
* Trading opportunities are more limited for fixed income securities that have
not received any credit ratings, have received ratings below investment grade
or are not widely held.

* 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 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.

<R>

RISKS OF INVESTING IN DERIVATIVES CONTRACTS AND HYBRID INSTRUMENTS
* The Fund's use of derivative contracts and hybrid instruments involves risks
different from, or possibly greater than, the risks associated with investing
directly in securities and other traditional investments. First, changes in
the value of the derivative contracts and hybrid instruments in which the
Fund invests may not be correlated with changes in the value of the
underlying Reference or Valuation Instruments or, if they are correlated, may
move in the opposite direction than originally anticipated. Second, while
some strategies involving derivatives may reduce the risk of loss, they may
also reduce potential gains or, in some cases, result in losses by offsetting
favorable price movements in portfolio holdings. Third, there is a risk that
derivative contracts and hybrid instruments may be erroneously priced or
improperly valued and, as a result, the Fund may need to make increased cash
payments to the counterparty. Fourth, derivative contracts and hybrid
instruments may cause the Fund to realize increased ordinary income or short-
term capital gains (which are treated as ordinary income for Federal income
tax purposes) and, as a result, may increase taxable distributions to
shareholders. Fifth, a common provision in OTC derivative contracts permits
the counterparty to terminate any such contract between it and the Fund, if
the value of the Fund's total net assets declines below a specified level
over a given time period. Factors that may contribute to such a decline
(which usually must be substantial) include significant shareholder
redemptions and/or a marked decrease in the market value of the Fund's
investments. Any such termination of the Fund's OTC derivative contracts may
adversely affect the Fund (for example, by increasing losses and/or costs,
and/or preventing the Fund from fully implementing its investment
strategies). Finally, derivative contracts and hybrid instruments may also
involve other risks described herein or in the Fund's prospectus, such as
stock market, credit, liquidity and leverage risks.

</R>

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 Investors Service. 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.

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.

* 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.

PREPAYMENT RISKS
* Unlike traditional fixed income securities, which pay a fixed rate of
interest until maturity (when the entire principal amount is due) payments on
mortgage backed securities include both interest and a partial payment of
principal. Partial payment of principal may be comprised of scheduled
principal payments as well as unscheduled payments from the voluntary
prepayment, refinancing, or foreclosure of the underlying loans. These
unscheduled prepayments of principal create risks that can adversely affect a
Fund holding mortgage backed securities.

* For example, when interest rates decline, the values of mortgage backed
securities generally rise. However, when interest rates decline, unscheduled
prepayments can be expected to accelerate, and the Fund would be required to
reinvest the proceeds of the prepayments at the lower interest rates then
available. Unscheduled prepayments would also limit the potential for capital
appreciation on mortgage backed securities.

* Conversely, when interest rates rise, the values of mortgage backed
securities generally fall. Since rising interest rates typically result in
decreased prepayments, this could lengthen the average lives of mortgage
backed securities, and cause their value to decline more than traditional
fixed income securities.

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

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 United States.

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.

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

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

* Smaller companies may lack depth of management. They may be unable to
generate funds necessary for growth or development or they may be developing
or marketing new products or services for which markets are not yet
established and may never become established. Therefore, while smaller
companies may offer greater opportunities for capital growth than larger,
more established companies, they also involve greater risks and should be
considered speculative.

INVESTMENT LIMITATIONS

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

INVESTING IN COMMODITIES
The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.

CONCENTRATION
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD AND BY
THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING SECURITIES," AS DEFINED BY THE
1940 ACT. THE FOLLOWING LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD
WITHOUT SHAREHOLDER APPROVAL. SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL
CHANGE IN THESE LIMITATIONS BECOMES EFFECTIVE.

ILLIQUID SECURITIES
The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits that the
Fund cannot dispose of within seven days, if immediately after and as a result,
the value of such securities would exceed, in the aggregate, 15% of the Fund's
net assets.
In applying the concentration restriction: (a) utility companies will be divided
according to their services (for example, gas, gas transmission, electric and
telephone will be considered a separate industry); (b) financial service
companies will be classified according to the end users of their services (for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry); and (c) asset backed securities will be
classified according to the underlying assets securing such securities.
To conform to the current view of the SEC staff that only domestic bank
instruments may be excluded from industry concentration limitations, as a matter
of non-fundamental policy, the Fund will not exclude foreign bank instruments
from industry concentration limitation tests so long as the policy of the SEC
remains in effect. In addition, investments in bank instruments, and investments
in certain industrial development bonds funded by activities in a single
industry, will be deemed to constitute investment in an industry, except when
held for temporary defensive purposes. Foreign securities will not be excluded
from industry concentration limits. The investment of more than 25% of the value
of the Fund's total assets in any one industry will constitute "concentration."
As a matter of non-fundamental operating policy, for purposes of the commodities
policy, investments in transactions involving futures contracts and options,
forward currency contracts, swap transactions and other financial contracts that
settle by payment of cash are not deemed to be investments in commodities.
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.

PORTFOLIO TURNOVER
<R>
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Portfolio securities will be sold when the
Adviser believes it is appropriate, regardless of how long those securities have
been held. For the fiscal years ended November 30, 2006 and 2005, the portfolio
turnover rates were 79% and 113%, respectively.
</R>

DETERMINING MARKET VALUE OF SECURITIES
<R>

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

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

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

{circle}for fixed income securities, according to the prices as furnished by
an independent pricing service, except that fixed income securities with
remaining maturities of less than 60 days at the time of purchase are
valued at amortized cost; and

{circle}for investments in other open-end regulated investment companies, based
on net asset value (NAV); and

{circle}for all other securities at fair value as determined in accordance with
procedures established by and under the general supervision of the Board.

Prices for fixed income securities furnished by a pricing service may be based
on a valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. Such prices are generally intended to
be indicative of the bid prices currently offered to institutional investors
for the securities, except that prices for corporate fixed income traded in
the United States are generally intended to be indicative of the mean between
such bid prices and asked prices. The Board has approved the use of such
pricing services. A number of pricing services are available, and the Fund may
use various pricing services or discontinue the use of any pricing service.

</R>

TRADING IN FOREIGN SECURITIES

WHAT DO SHARES COST?

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

FEE WHEN YOU REDEEM OR EXCHANGE
For 30 days following your purchase, Shares are redeemable at a price equal to
the current NAV per Share less a 2.00% redemption fee. This 2.00% fee, referred
to in the prospectus and SAI as a redemption/exchange fee, directly affects the
amount a shareholder who is subject to the fee receives upon exchange or
redemption. The redemption/exchange fee is intended to encourage long-term
investments in the Fund, to offset transaction and other Fund expenses caused by
short-term redemptions, and to facilitate portfolio management (e.g., by
decreasing the likelihood that the Fund will need to sell portfolio securities
at an inopportune time, or maintain a larger cash position, in order to meet
short-term redemption requests). There are no assurances that the
redemption/exchange fee will deter short-term redemptions, as intended,
including redemptions made as part of an overall strategy to buy and sell Shares
in response to incremental changes in the Fund's NAV. The redemption/exchange
fee will be paid to the Fund. The redemption/exchange fee is not a sales
charge, is not paid to the Adviser or its affiliates, and is not subject to
waiver or reduction except as described in this section. The Fund reserves the
right to modify the terms of or terminate this redemption/exchange fee at any
time. For purposes of computing this redemption/exchange fee, Shares will be
deemed to be redeemed on a first in, first out basis (i.e., Shares held the
longest will be deemed to be redeemed first).

The Fund's goal is to collect the fee on all Shares that are redeemed or
exchanged within 30 days of purchase. However, the Fund may not be able to
achieve its goal, since many financial intermediaries do not have the systems
capability to collect the redemption/exchange fee from underlying account
owners. Until these systems limitations are resolved, the Fund specifically
anticipates that it may not be able to collect the redemption/exchange fee with
respect to Shares purchased through some omnibus accounts, including omnibus
accounts of banks, broker-dealers and trust companies.
Participant directed transactions involving Shares held in retirement plans
established under Sections 401(a) or 401(k) of the Internal Revenue Code (the
"Code"), custodial plan accounts established under Section 403(b)(7) of the
Code, or deferred compensation plans established under Section 457 of the Code
( "Retirement Plans") will be subject to the redemption/exchange fee. The
following is a list of specific examples of non-participant directed Retirement
Plan transactions that will not be subject to the redemption/exchange fee:
{circle}Distributions from a Retirement Plan due to death, disability, health or
financial hardship;
{circle}Distributions from a Retirement Plan made in connection with the
termination of employment;
{circle}Distributions from a Retirement Plan required by the Code, such as the
distribution that must be made when the plan participant reaches age 70 1/2
(and any subsequent, related distributions for years thereafter);
{circle}Distributions from a Retirement Plan made in connection with a qualified
participant loan;
{circle}Redemptions from a Retirement Plan made in connection with the regularly
scheduled automatic rebalancing of assets in a Retirement Plan (i.e.,
automatic rebalancing according to predetermined allocation levels); and
{circle}Redemptions from or exchanges within a Retirement Plan made as a result
of plan level directed events, such as changes to plan investment options.
Additionally, the redemption/exchange fee will not apply to Shares held in plans
administered as college savings programs under Section 529 of the Code.
Finally, Shares acquired by reinvestment of dividends or distributions of the
Fund, or purchased pursuant to the Systematic Investment Program or withdrawn
pursuant to the Systematic Withdrawal Program, will not be subject to the
redemption/exchange fee.

EXCHANGE PRIVILEGE
<R>

You may exchange Shares of the Fund into shares of the same class of another
Federated fund.

In an effort to deter shareholders from using repeated exchanges to take
advantage of short-term market movements (also known as "market timing"), after
July 30, 2001, Shares acquired on or before April 1, 2007 through an exchange
may not be exchanged again (a "Subsequent Exchange") for a period of 15 days.
The Fund will not process any request for a Subsequent Exchange made during the
15-day period. A shareholder who needs to effect a Subsequent Exchange to avoid
unreasonable hardship during the 15-day period should contact the Fund's
Distributor. The Distributor may, in its sole discretion, permit the Subsequent
Exchange if the Distributor finds that the Subsequent Exchange will not harm the
Fund or its shareholders and that the requesting shareholder has not engaged in
what the Distributor considers to be a pattern of excessive trading. The rights
of shareholders to redeem their shares are not affected by this provision.

However, because the fund has adopted new policies to deter market timing,
Shares acquired through an exchange on or after April 2, 2007, will no longer be
subject to the 15-day holding period regardless of when the Shares were
purchased. However, any applicable redemption fee will continue to apply to such
Shares. For more information on the circumstances in which the redemption fee
will apply, please see "Fee When You Redeem or Exchange" under "What Do Shares
Cost?"

</R>

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 (CLASS B SHARES AND CLASS C SHARES)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor for activities principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses and sales literature to prospective shareholders and financial
intermediaries) and providing incentives to financial intermediaries to sell
Shares. The Plan is also designed to cover the cost of administrative services
performed in conjunction with the sale of Shares, including, but not limited to,
shareholder services, recordkeeping services and educational services, as well
as the costs of implementing and operating the Plan. The Rule 12b-1 Plan allows
the Distributor to contract with financial intermediaries to perform activities
covered by the Plan. The Rule 12b-1 Plan is expected to benefit the Fund in a
number of ways. For example, it is anticipated that the Plan will help the Fund
attract and retain assets, thus providing cash for orderly portfolio management
and Share redemptions and possibly helping to stabilize or reduce other
operating expenses.

In addition, the Plan is integral to the multiple class structure of the Fund,
which promotes the sale of Shares by providing a range of options to investors.
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.

The following examples illustrate the types of instances in which the
Distributor may make additional payments to financial intermediaries.

UNDERWRITING COMMISSIONS
<R>

2006 2005 2004

TOTAL SALES TOTAL SALES TOTAL SALES AMOUNT
CHARGES AMOUNT CHARGES AMOUNT CHARGES RETAINED
RETAINED RETAINED
Class A $144,532 $16,031 $16,967 $16,967 $121,845 $13,012
Shares
Class B 12,015 $0 83,912 0 41,081 0
Shares
Class C 3,762 669 4,871 316 8,877 0
Shares

</R>

EXCHANGING SECURITIES FOR SHARES

SUBACCOUNTING SERVICES

REDEMPTION IN KIND

ACCOUNT AND SHARE INFORMATION

VOTING RIGHTS
<R>

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 January 4, 2007, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class A Shares: Edward Jones & Co., Maryland
Hts., MO, owned approximately 1,613,493 Shares (18.46)%; Emjay Corporation,
Greenwood Village, CO., owned approximately 1,363,472 Shares (15.60)%; MLPF&S,
Jacksonville, FL, owned approximately 815,969 Shares (9.33)% and Paychex
Securities Corporation, W. Henrietta, NY, owned approximately 787,300 Shares
(9.00)%.

As of January 4, 2007, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Class B Shares: Pershing LLC, Jersey City,
NJ, owned approximately 170,506 Shares (10.75)%; Edward Jones & Co., Maryland
Hts., MO, owned approximately 160,750 Shares (10.14)% and MLPF&S, Jacksonville,
FL, owned approximately 117,013 Shares (7.38)%.

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.

MLPF&S is organized in the state of Delaware and is a subsidiary of Merrill
Lynch & Co., organized in the state of Delaware.

</R>

TAX INFORMATION

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

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.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD OF DIRECTORS
<R>

As of January 4, 2006, the Fund's Board and Officers as a group owned less than
1% of each class of the Fund's outstanding Shares.

INTERESTED DIRECTORS BACKGROUND AND COMPENSATION

LAWRENCE D. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $718.26 $180,000
ELLIS, M.D.* Professor of Medicine, University of Pittsburgh; Medical Director, University of
Birth Date: Pittsburgh Medical Center Downtown; Hematologist, Oncologist and Internist,
October 11, University of Pittsburgh Medical Center.
1932
3471 Fifth OTHER DIRECTORSHIPS HELD: Member, National Board of Trustees, Leukemia Society of
Avenue America.
Suite 1111
Pittsburgh, PREVIOUS POSITIONS: Trustee, University of Pittsburgh; Director, University of
PA Pittsburgh Medical Center.
DIRECTOR
Began
serving:
August 1987

- 2 -

INDEPENDENT DIRECTORS BACKGROUND AND COMPENSATION

NAME
BIRTH DATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITIONS PRINCIPAL OCCUPATION(S) FOR PAST FIVE YEARS, FROM FUND FROM
HELD WITH OTHER DIRECTORSHIPS HELD AND PREVIOUS POSITION(S) (PAST FISCAL CORPORATION
CORPORATION YEAR) AND
DATE SERVICE FEDERATED
BEGAN FUND COMPLEX
(PAST
CALENDAR
YEAR)
THOMAS G. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $790.08 $198,000
BIGLEY
Birth Date: OTHER DIRECTORSHIPS HELD: Director, Member of Executive Committee, Children's
February 3, Hospital of Pittsburgh; Director, University of Pittsburgh.
1934
15 Old PREVIOUS POSITION: Senior Partner, Ernst & Young LLP.
Timber Trail
Pittsburgh,
PA
DIRECTOR
Began
serving:
November
1994

JOHN T. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $790.08 $198,000
CONROY, JR. Chairman of the Board, Investment Properties Corporation; Partner or Trustee in
Birth Date: private real estate ventures in Southwest Florida.
June 23,
1937 PREVIOUS POSITIONS: President, Investment Properties Corporation; Senior Vice
Investment President, John R. Wood and Associates, Inc., Realtors; President, Naples
Properties Property Management, Inc. and Northgate Village Development Corporation.
Corporation
3838 North
Tamiami
Trail
Suite 402
Naples, FL
DIRECTOR
Began
serving:
August 1991

NICHOLAS P. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $790.08 $198,000
CONSTANTAKIS
Birth Date: OTHER DIRECTORSHIPS HELD: Director and Member of the Audit Committee, Michael
September 3, Baker Corporation (engineering and energy services worldwide).
1939
175 PREVIOUS POSITION: Partner, Andersen Worldwide SC.
Woodshire
Drive
Pittsburgh,
PA
DIRECTOR
Began
serving:
January 2000

JOHN F. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex; $718.26 $180,000
CUNNINGHAM Director, WinsorTech.
Birth Date:
March 5, OTHER DIRECTORSHIPS HELD: Chairman, President and Chief Executive Officer,
1943 Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston
353 El College.
Brillo Way
Palm Beach, PREVIOUS POSITIONS: Director, Redgate Communications and EMC Corporation
FL (computer storage systems); Chairman of the Board and Chief Executive Officer,
DIRECTOR Computer Consoles, Inc.; President and Chief Operating Officer, Wang
Began Laboratories; Director, First National Bank of Boston; Director, Apollo Computer,
serving: Inc.
January 2000

PETER E. PRINCIPAL OCCUPATION: Director or Trustee of the Federated Fund Complex. $718.26 $180,000
MADDEN
Birth Date: OTHER DIRECTORSHIPS HELD: Board of Overseers, Babson College.
March 16,
1942 PREVIOUS POSITIONS: Representative, Commonwealth of Massachusetts General Court;
One Royal President, State Street Bank and Trust Company and State Street Corporation
Palm Way (retired); Director, VISA USA and VISA International; Chairman and Director,
100 Royal Massachusetts Bankers Association; Director, Depository Trust Corporation;
Palm Way Director, The Boston Stock Exchange.
Palm Beach,
FL
DIRECTOR
Began
serving:
August 1991

CHARLES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $790.08 $198,000
MANSFIELD, Management Consultant.
JR.
Birth Date: PREVIOUS POSITIONS: Chief Executive Officer, PBTC International Bank; Partner,
April 10, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail
1945 Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA
80 South (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of
Road Banking and Finance, Frank G. Zarb School of Business, Hofstra University;
Westhampton Executive Vice President DVC Group, Inc. (marketing, communications and
Beach, NY technology).
DIRECTOR
Began
serving:
January 1999

JOHN E. PRINCIPAL OCCUPATIONS: Director or Trustee, and Chairman of the Board of $933.74 $234,000
MURRAY, JR., Directors or Trustees, of the Federated Fund Complex; Chancellor and Law
J.D., S.J.D. Professor, Duquesne University; Partner, Murray, Hogue & Lannis.
Birth Date:
December 20, OTHER DIRECTORSHIPS HELD: Director, Michael Baker Corp. (engineering,
1932 construction, operations and technical services).
Chancellor,
Duquesne PREVIOUS POSITIONS: President, Duquesne University; Dean and Professor of Law,
University University of Pittsburgh School of Law; Dean and Professor of Law, Villanova
Pittsburgh, University School of Law.
PA
DIRECTOR
Began
serving:
February
1995

THOMAS M. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $177.48 $45,000
O'NEILL Managing Director and Partner, Navigator Management Company, L.P. (investment and
Birth Date: strategic consulting).
June 14,
1951 OTHER DIRECTORSHIPS HELD: Director, Midway Pacific (lumber); Board of Overseers,
95 Standish Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College.
Street
P.O. Box PREVIOUS POSITIONS: Chief Executive Officer and President, Managing Director and
2779 Chief Investment Officer, Fleet Investment Advisors; President and Chief
Duxbury, MA Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman,
DIRECTOR Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam
Began Companies, Boston, MA; and Credit Analyst and Lending Officer, Fleet Bank.
serving:
October 2006
MARJORIE P. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; Public $718.26 $180,000
SMUTS Relations/Marketing Consultant/Conference Coordinator.
Birth Date:
June 21, PREVIOUS POSITIONS: National Spokesperson, Aluminum Company of America;
1935 television producer; President, Marj Palmer Assoc.; Owner, Scandia Bord.
4905 Bayard
Street
Pittsburgh,
PA
DIRECTOR
Began
serving:
March 1984

JOHN S. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; $718.26 $180,000
WALSH President and Director, Heat Wagon, Inc. (manufacturer of construction temporary
Birth Date: heaters); President and Director, Manufacturers Products, Inc. (distributor of
November 28, portable construction heaters); President, Portable Heater Parts, a division of
1957 Manufacturers Products, Inc.
2604 William
Drive PREVIOUS POSITION: Vice President, Walsh & Kelly, Inc.
Valparaiso,
IN
DIRECTOR
Began
serving:
January 1999
JAMES F. PRINCIPAL OCCUPATIONS: Director or Trustee of the Federated Fund Complex; Vice $538.62 $134,415,99
WILL Chancellor and President, Saint Vincent College.
Birth Date:
October 12, OTHER DIRECTORSHIPS HELD: Alleghany Corporation.
1938
Saint PREVIOUS POSITIONS: Chairman, President and Chief Executive Officer, Armco, Inc.;
Vincent President and Chief Executive Officer, Cyclops Industries; President and Chief
College Operating Officer, Kaiser Steel Corporation.
Latrobe, PA
DIRECTOR
Began
serving:
March 2006

OFFICERS**

STEPHEN F. PRINCIPAL OCCUPATIONS: Stephen F. Auth has been the Fund's Portfolio Manager since June 2006. Mr. Auth is Chief
AUTH Investment Officer of this Fund and various other Funds in the Federated Fund Complex; Executive Vice President,
Birth Date: Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of
September Pennsylvania.
3, 1956
CHIEF PREVIOUS POSITIONS: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd.
INVESTMENT (Investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division;
OFFICER Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and
Began Portfolio Manager, Prudential Investments.
serving:
January
2003

**Officers do not receive any compensation from the Fund.

In addition, the Fund has appointed an Anti-Money Laundering Compliance Officer.

COMMITTEES OF THE BOARD

MEETINGS
BOARD COMMITTEE HELD
COMMITTEE MEMBERS COMMITTEE FUNCTIONS DURING
LAST
FISCAL
YEAR

BOARD OWNERSHIP OF SHARES IN THE FUND AND IN THE FEDERATED FAMILY OF INVESTMENT
COMPANIES AS OF DECEMBER 31, 2006

DOLLAR RANGE OF AGGREGATE
SHARES OWNED DOLLAR RANGE OF
IN FEDERATED INTERNATIONAL EQUITY FUND SHARES OWNED IN
INTERESTED FEDERATED FAMILY OF
BOARD MEMBER NAME INVESTMENT COMPANIES

John F. Donahue Over $100,000 Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

INDEPENDENT
BOARD MEMBER NAME
Thomas G. Bigley None Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis $10,001-$50,000 Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden Over $100,000 Over $100,000
Charles F. Mansfield, Jr. None Over $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Thomas M. O'Neill None Over $100,000
Marjorie P. Smuts None Over $100,000
John S. Walsh None Over $100,000
James F. Will None None

</R>

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

The Adviser is a wholly owned subsidiary of Federated.

PORTFOLIO MANAGER INFORMATION
<R>

The following information about the Fund's Portfolio Manager is provided as of
the end of the Fund's most recently completed fiscal year.

OTHER ACCOUNTS MANAGED TOTAL NUMBER OF OTHER ACCOUNTS TOTAL NUMBER OF OTHER ACCOUNTS MANAGED / TOTAL ASSETS SUBJECT TO
BY STEPHEN F. AUTH MANAGED / TOTAL ASSETS* PERFORMANCE BASED FEES

Registered Investment 2 funds / $388.73 million 0
Companies
Other Pooled Investment 1 portfolio / $62.22 million 0
Vehicles
Other Accounts 0 1 account / $90.68 million

* None of the Accounts has an advisory fee that is based on the performance of
the account.

Dollar value range of shares owned in the Fund: $100,001-$500,000.

Steve Auth is paid a fixed base salary and a variable annual incentive. Base
salary is determined within a market competitive position-specific salary range,
based on the portfolio manager's experience and performance. The annual
incentive amount is determined based on multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction
and Service, and Financial Success. The total Balanced Scorecard "score" is
applied against an annual incentive opportunity that is competitive in the
market for this portfolio manager role to determine the annual incentive
payment.

IPP is measured on a rolling 1, 3, and 5 calendar year pre-tax total return
basis vs. the Account's benchmark (i.e. Morgan Stanley Capital International
Europe, Australasia and Far East Growth Index), and on a rolling 3 and 5
calendar year pre-tax total return basis vs. a designated peer group of
comparable accounts. Performance periods are adjusted if a portfolio manager
has been managing an account for less than five years; accounts with less than
one-year of performance history under a portfolio manager may be excluded. As
noted above, Mr. Auth is also the portfolio manager for other accounts in
addition to the Fund. Such other accounts may have different benchmarks. In
his role as Chief Investment Officer, Steve Auth has oversight responsibility
for all equity products. Mr. Auth's IPP is calculated with an equal weighting
of seventeen funds designated by Federated as "flagship" products in their
respective investment strategy groups. IPP is measured on a rolling 1, 3, and 5
calendar year pre-tax total return basis vs. fund benchmarks, and on a rolling 3
and 5 calendar year pre-tax total return basis vs. designated peer groups of
comparable accounts. A portion of IPP is calculated with an equal weighting of
each account managed by the portfolio manager.

Leadership/Teamwork/Communication is assessed by Federated's senior management.

Client Satisfaction and Service is assessed by Federated's senior management
considering the quality, amount, and effectiveness of client support activities,
with input from sales management.

OTHER ACCOUNTS MANAGED TOTAL NUMBER OF OTHER ACCOUNTS TOTAL NUMBER OF OTHER ACCOUNTS MANAGED / TOTAL ASSETS SUBJECT TO
RICHARD WINKOWSKI MANAGED / TOTAL ASSETS* PERFORMANCE BASED FEES

Registered Investment 2 funds / $388.73 million 0
Companies
Other Pooled Investment 1 portfolio / $29.71 million 0
Vehicles
Other Accounts 0 1 account / $43.92 million

* None of the Accounts has an advisory fee that is based on the performance of
the account.

Dollar value range of shares owned in the Fund: $10,001-$50,000.

Richard Winkowski is paid a fixed base salary and a variable annual incentive.
Base salary is determined within a market competitive position-specific salary
range, based on the portfolio manager's experience and performance. The annual
incentive amount is determined based on multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Research Performance, Leadership/Teamwork/Communication,
and Financial Success. The total Balanced Scorecard "score" is applied against
an annual incentive opportunity that is competitive in the market for this
portfolio manager role to determine the annual incentive payment.

IPP is measured on a rolling 1, 3, and 5 calendar year pre-tax total return
basis vs. the Fund's benchmark (i.e. Morgan Stanley Capital International
Europe, Australasia and Far East Growth Index), and on a rolling 3 and 5
calendar year pre-tax total return basis vs. the Fund's designated peer group of
comparable accounts. Performance periods are adjusted if a portfolio manager
has been managing an account for less than five years; accounts with less than
one-year of performance history under a portfolio manager may be excluded. As
noted above, Mr. Winkowski is also the portfolio manager for other accounts in
addition to the Fund. Such other accounts may have different benchmarks. IPP
is calculated with an equal weighting of each account managed by the portfolio
manager. The IPP score can be reduced based on management's assessment of the
Fund's comparative risk profile.

Research performance is assessed quantitatively and qualitatively based on the
performance of the portfolio manager's buy and sell recommendations and judgment
of quality, thoroughness and skill in security selection by the Chief Investment
Officer and other managers in the Equity group.

Leadership/Teamwork/Communication is assessed by Federated's management.

OTHER ACCOUNTS TOTAL NUMBER OF OTHER ACCOUNTS MANAGED TOTAL NUMBER OF OTHER ACCOUNTS MANAGED / TOTAL ASSETS SUBJECT TO
MANAGED BY REGINA / TOTAL ASSETS* PERFORMANCE BASED FEES
CHI

Registered 3 funds / $588.10 million 0
Investment Companies
Other Pooled 3 portfolios / $198.65 million 0
Investment Vehicles
Other Accounts 0 1 account / $103.89 million

* None of the Accounts has an advisory fee that is based on the performance of
the account.

Dollar value range of shares owned in the Fund: none.

Regina Chi is paid a fixed base salary and a variable annual incentive. Base
salary is determined within a market competitive position-specific salary range,
based on the portfolio manager's experience and performance. The annual
incentive amount is determined based on multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance (IPP) is the predominant factor. Of
lesser importance are: Leadership/Teamwork/Communication, Client Satisfaction
and Service, and Financial Success. The total Balanced Scorecard "score" is
applied against an annual incentive opportunity that is competitive in the
market for this portfolio manager role to determine the annual incentive
payment.

IPP is calculated with an equal weighting of certain other accounts managed by
the portfolio manager. IPP is measured on a rolling 1, 3, and 5 calendar year
pre-tax total return basis vs. account benchmarks, and on a rolling 3 and 5
calendar year pre-tax total return basis vs. designated peer groups of
comparable accounts. Performance periods are adjusted if a portfolio manager
has been managing an account for less than five years; accounts with less than
one-year of performance history under a portfolio manager may be excluded. The
IPP score can be reduced based on management's assessment of the account's
comparative risk profile.

Leadership/Teamwork/Communication is assessed by Federated's management.

Client Satisfaction and Service is assessed by Federated's senior management
considering the quality, amount, and effectiveness of client support activities,
with input from sales management.

</R>

SERVICES AGREEMENT
Federated Advisory Services Company, an affiliate of the Adviser, provides
research, quantitative analysis, equity trading and transaction settlement and
certain support services to the Adviser. The fee for these services is paid by
the Adviser and not by the Fund.

CODE OF ETHICS RESTRICTIONS ON PERSONAL TRADING

PROXY VOTING PROCEDURES
The Adviser has established a Proxy Voting Committee (Proxy Committee), to
exercise all voting discretion granted to the Adviser by the Board in accordance
with the proxy voting policies. The Adviser has hired Institutional Shareholder
Services (ISS) to obtain, vote, and record proxies in accordance with the Proxy
Committee's directions. The Proxy Committee directs ISS by means of Proxy
Voting Guidelines, and ISS may vote any proxy as directed in the Proxy Voting
Guidelines without further direction from the Proxy Committee (and may make any
determinations required to implement the Proxy Voting Guidelines). However, if
the Proxy Voting Guidelines require case-by-case direction for a proposal, ISS
will provide the Proxy Committee with all information that it has obtained
regarding the proposal and the Proxy Committee will provide specific direction
to ISS. The Adviser's proxy voting procedures generally permit the Proxy
Committee to amend the Proxy Voting Guidelines, or override the directions
provided in such Guidelines, whenever necessary to comply with the proxy voting
policies.

PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund's portfolio holdings is available in the
"Products" section of Federated's website at FederatedInvestors.com. A complete
listing of the Fund's portfolio holdings as of the end of each month is posted
on the website 15 days (or the next business day) after the end of the month and
remains posted until replaced by the information for the succeeding month.
Summary portfolio composition information as of the close of each month (except
for recent purchase and sale transaction information, which is updated
quarterly) is posted on the website 15 days (or the next business day) after
month-end and remains until replaced by the information for the succeeding
month. The summary portfolio composition information may include
identification of the Fund's top ten holdings, recent purchase and sale
transactions and percentage breakdowns of the portfolio by sector and geographic
region.

BROKERAGE TRANSACTIONS AND INVESTMENT ALLOCATION
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). The
Adviser may also direct certain portfolio trades to a broker that, in turn, pays
a portion of the Fund's operating expenses. 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. Except as noted below, 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.
Investments for Federated Kaufmann Fund and other accounts managed by that
fund's portfolio managers in initial public offerings ("IPO") are made
independently from any other accounts, and much of their non-IPO trading may
also be conducted independently from other accounts.

<R>

On November 30, 2006, the Fund owned securities of the following regular
broker/dealers: Mitsubishi UFJ Financial Group, Inc.- $10,663,211; Mizuho
Financial Group, Inc. -$6,705,300; Banco Santander Central Hispano, SA-
$5,000,396; Royal Bank of Scotland, PLC, Edinburgh-$3,684,167; BNP Paribas, SA-
$2,811,908; Industrial & Commercial Bank of China- $1,665,719; Credit Suisse
Group-$6,381,529; Nomura Holdings, Inc.- $4,656,084; ING Groep, NV - $4,246,033;
Allianz, SE-$6,500,085 and AXA- $3,761,129.

</R>

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

In all brokerage orders, the Fund's managers seek the most favorable prices and
executions. Determining what may constitute the most favorable price and
execution in a brokerage order involves a number of factors, including the
overall direct net economic result to the Fund (involving both price paid or
received and any commissions or other costs paid) and the efficiency with which
the transaction is effected. The managers also consider the ongoing brokerage
and research services provided to the Fund. The Fund will pay broker-dealers a
commission for executing a particular transaction for the Fund that may be in
excess of the amount of commission those or other broker-dealers may normally
charge other institutional investors if the managers determine, in good faith,
that such commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer, viewed in terms of the
particular transaction or of the overall benefits to the Fund.

For the fiscal year ended November 30, 2006, the Fund's Adviser directed
brokerage transactions to certain brokers due to research services they
provided. The total amount of these transactions was $413,150,312 for which the
Fund paid $800,133 in brokerage commissions.

FAS 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.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, the Fund's registered transfer agent,
maintains all necessary shareholder records.

<R>

FEES PAID BY THE FUND FOR SERVICES

FOR THE YEAR ENDED NOVEMBER 30 2006 2005 2004
Advisory Fee Earned $2,966,257 $2,965,646 $3.183.153
Advisory Fee Reduction 0 0 0
Advisory Fee Reimbursement 0 0 316
Brokerage Commissions 889,261 1,241,119 1,018,616
Administrative Fee 226,029 225,983 242,556
12B-1 FEE:
Class B Shares 258,387 -- --
Class C Shares 475,444 -- --
SHAREHOLDER SERVICES FEE:
Class A Shares 467,754 -- --
Class B Shares 86,129 -- --
Class C Shares 156,335 -- --
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.

</R>

HOW DOES THE FUND MEASURE PERFORMANCE?

AVERAGE ANNUAL TOTAL RETURNS AND YIELD
<R>

Total returns are given for the one-year, five-year and ten-year periods ended
November 30, 2006.

Yield is given for the 30-day period ended November 30, 2006.

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS

CLASS A SHARES:
Total Return
Before Taxes N/A 16.81% 7.23% 5.85%
After Taxes on Distributions N/A 16.81% 7.27% 4.86%
After Taxes on Distributions and Sale of Shares
N/A 10.93% 6.31% 4.62%
Yield N/A N/A N/A N/A

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS

CLASS B SHARES:
Total Return
Before Taxes N/A 17.10% 7.28% 5.79%
After Taxes on Distributions N/A 17.10% 7.28% 4.73%
After Taxes on Distributions and Sale of Shares
N/A 11.11% 6.31% 4.54%
Yield N/A N/A N/A N/A

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS

CLASS C SHARES:
Total Return
Before Taxes N/A 21.67% 7.59% 5.64%
After Taxes on Distributions N/A 21.67% 7.59% 4.57%
After Taxes on Distributions and Sale of Shares
N/A 14.09% 6.39% 4.31%
Yield N/A N/A N/A N/A