<PAGE>
PAGE 1
1996 ANNUAL REPORT
IDS Federal Income Fund
(prospectus enclosed)
(graphic of an eagle head enclosed in a shield)
The goals of IDS Federal Income Fund, Inc. are to provide
shareholders with a high level of current income and safety of
principal consistent with investment in U.S. government and
government agency securities.
(This annual report includes a prospectus that describes in detail
the Fund's objective, investment policies, risks, sales charges,
fees and other matters of interest. Please read the prospectus
carefully before you invest or send money.)
AMERICAN
EXPRESS
Financial
Advisors
Distributed by American Express Financial Advisors Inc.
<PAGE>
PAGE 2
(graphic of an eagle head enclosed in a shield)
A comfortable compromise
Balancing risk and reward is something all investors must consider.
In the fixed-income area, intermediate-term securities issued by
the federal government and its agencies offer a good middle ground.
These securities, which form the core of Federal Income Fund,
normally provide greater investment stability than long-term bonds,
while still offering a yield higher than that of insured
investments such as bank CDs. For a conservative investor, that
can be a rewarding combination.
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PAGE 3
Contents
(graphic of two nested, open booklets)
The purpose of this annual report is to tell investors how the Fund
performed.
The prospectus, which is bound into the middle of this annual
report, describes the Fund in detail.
1996 annual report
From the president 4
From the portfolio manager 4
Making the most of your Fund 6
Long-term performance 7
Independent auditors' report 8
Financial statements 9
Notes to financial statements 12
Investments in securities 23
IDS mutual funds 28
Federal income tax information 31
1996 prospectus
The Fund in brief 3p
Goals 3p
Investment policies and risks 3p
Structure of the Fund 4p
Manager and distributor 4p
Portfolio manager 4p
Alternative purchase arrangements 4p
Sales charge and Fund expenses 5p
Performance 7p
Financial highlights 7p
Total returns 9p
Yield 11p
Investment policies and risks 12p
Facts about investments and their risks 12p
Valuing Fund shares 16p
How to purchase, exchange or redeem shares 17p
Alternative purchase arrangements 17p
How to purchase shares 19p
How to exchange shares 22p
How to redeem shares 22p
Reductions and waivers of the sales charge 27p
Special shareholder services 32p
Services 32p
Quick telephone reference 32p
Distributions and taxes 33p
Dividend and capital gain distributions 33p
Reinvestments 34p
Taxes 34p
How to determine the correct TIN 36p
How the Fund is organized 37p
Shares 37p
Voting rights 37p
Shareholder meetings 37p
Special considerations regarding
master/feeder structure 38p
Board members and officers 39p
Investment manager 41p
Administrator and Transfer Agent 41p
Distributor 42p
About American Express Financial Corporation 44p
General information 44p
Appendix 45p
Descriptions of derivative instruments 45p
(This annual report is not part of the prospectus.)
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PAGE 4
To our shareholders
[photo of William Pearce]
William R. Pearce
President of the Fund
[photo of James Snyder]
James W. Snyder
Portfolio manager
From the president
If you're an experienced investor, you know that 1995 was an
unusually strong year for the U.S. financial markets. Perhaps just
as important, you also know that history shows that bull markets
don't last forever. Through they're often unpredictable,
declines - whether they're brief or long-lasting, moderate or
substantial - are always a possibility.
That fact reinforces the need for investors to review periodically
their long-term goals and assess whether their investment program
remains on track to achieving them. Your quarterly investment
statements are one part of that monitoring process. The other is a
meeting with your American Express financial advisor. That becomes
even more important if there's a major change in your financial
situation or in the financial markets.
[signature]
William R. Pearce
From the portfolio manager
During the past fiscal year, the bond market followed an up-and-
down course, rallying strongly through last December, then
retreating quickly early in 1996.
IDS Federal Income Fund weathered the volatile environment
relatively well, generating a total return of 5% on Class A shares
(net asset change plus interest income) for shareholders over the
July 1995 through May 1996 period.
The bond market's remarkable advance, which actually began last in
1994, was fueled by the favorable forces of moderate economic
growth and a surprisingly low rate of inflation. Adding further
support to the market in 1995 were two reductions of short-term
interest rates by the Federal Reserve Board and renewed hope for an
agreement to balance the federal budget. The ultimate result of
these developments was an ongoing decline in long-term interest
rates, a trend that drives up the values of previously issued bonds
and, in turn, the net asset value of bond-holders such as this
Fund.
An aggressive approach
In anticipation of falling long-term rates, I maintained a
relatively aggressive strategy that centered on keeping a longer-
than-average maturity level among the securities held in our
<PAGE>
PAGE 5
portfolio. Because a portfolio's sensitivity to interest rate
changes increases as its average maturity lengthens, the Fund
enjoyed an extra performance boost when rates came down.
Also benefiting Fund results was my decision to increase the
holdings among U.S. Treasury bonds (particularly those in the five-
to ten-year maturity range), whose prices rose more during that
time than those of our core investments in mortgage-backed
securities. This resulted from the fact that falling interest
rates spawn more home refinancings, which tempers the performance
of mortgage-backed securities.
I should also note that most of the Fund's assets are invested in
mortgage-backed securities - primarily mortgage pass-throughs and
included collateralized mortgage obligations (CMO's), inverse
floaters, interest-only (IO) and principal-only (PO) strips. In
combination, these positions enable the portfolio to deliver
competitive total return, high level of income, and relatively
stable net asset value (NAV). I also maintained various
combinations of futures, options on futures, and options on
mortgage pass-throughs to further reduce the portfolio's
sensitivity to changes in interest rates.
Market changes direction in '96
Shortly after the new year began, professional bond investors'
attitude toward the market began to sour, as stronger-than-expected
economic growth, a stalemate on the balanced-budget agreement and a
spike in certain commodity prices raised fears of impending higher
inflation - always a bond investor's worst enemy. The negative
psychology soon spawned considerable selling and, as a result,
higher long-term interest rates and lower prices for existing
bonds.
Naturally, the Fund was negatively affected by the market reversal.
However, it held up better than some types of bond funds because of
its substantial exposure to mortgage-backed securities, which
typically perform better than U.S. Treasury bonds when long-term
interest rates rise, as they did in early 1996. To help temper the
effect of the market downturn, I also shortened the portfolio's
average maturity.
Although I continue to be bullish on the longer-term outlook for
the bond market, I plan to stay with a more conservative investment
strategy until I see signs of a better environment. Although it's
impossible to say with any real precision, I would expect that to
occur before the year is out. In the meantime, I expect
shareholders will have to be content to rely on the income
generated by the portfolio, rather than price appreciation, for
their investment return.
[signature]
James Snyder
Class A
11-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1996 $4.92
June 30, 1995 $4.97
Decrease $(.05)
Distributions
July 1, 1995-May 31, 1996
From income $0.29
From capital gains $ --
Total distribution $0.29
Total return* +5.0%**
Class B
11-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1996 $4.92
June 30, 1995 $4.96
Decrease $(.04)
Distributions
July 1, 1995-May 31, 1996
From income $0.26
From capital gains $ --
Total distribution $0.26
Total return* +4.3%**
Class Y
11-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1996 $4.92
June 30, 1995 $4.97
Decrease $(.05)
Distributions
July 1, 1995-May 31, 1996
From income $0.30
From capital gains $ --
Total distribution $0.30
Total return* +5.2%**
*The prospectus discusses the effects of sales charge, if any, on
the various classes.
**The total return is a hypothetical investment in the Fund with
all distributions reinvested.
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PAGE 6
Making the most of your Fund
Average annual total return
(as of May 31, 1996)
1 year 5 years 10 years or
since inception
Class A +0.55% +5.31% +7.11%
Class B* +0.82% -- +2.39%
Class Y* +6.01% -- +8.07%
*Inception date was March 20, 1995
The performance of Class B and Class Y will vary from the
performance of Class A based on differences in sales charges and
fees.
Your investment and return values fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Figures for Class A and Class B reflect the effect of the maximum
5% sales charge. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
Build your assets systematically
One of the best ways to invest in the fund is by dollar-cost
averaging -- a time-tested strategy that can make market
fluctuations work for you. To dollar-cost average, simply invest a
fixed amount of money regularly. You'll automatically buy more
shares when the Fund's share price is low, fewer shares when it is
high.
This does not ensure a profit or avoid a loss if the market
declines. But, if you can continue to invest regularly through
changing market conditions, it can be an effective way to
accumulate shares to meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
[3-part caption in margin:]
By investing an equal number of dollars each month...
you automatically buy more shares when the per share market price
is low... [arrow pointing to "April" line in table above]
and fewer shares when the per share market price is high. [arrow
pointing to "Sept" line in table above]
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
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PAGE 7
The Fund's long-term performance
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's investments do
well
o you receive capital gains when the gains on investments sold by
the Fund exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can
increase your investment if, like most investors, you reinvest your
dividends and capital gain distributions to buy additional shares
of the Fund or another fund.
How your $10,000 has grown in IDS Federal Income Fund
Lehman Aggregate
Bond Index
$20,000
$19,880
Merrill Lynch Federal
Lehman 1-5 Yr. Income Fund
Treasury Government Class A
Index
$9,500
'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96
Average annual total return
(as of May 31, 1996)
1 year 5 years 10 years or
since inception
Class A +0.55% +5.31% +7.11%
Class B* +0.82% -- +2.39%
Class Y* +6.01% -- +8.07%
*Inception date was March 20, 1995
[the following three paragraphs appear in the margin next to the
graph:]
Assumes: Holding period from 6/1/86 to 5/31/96. Returns do not
reflect taxes payable on distributions. Reinvestment of all income
and capital gain distributions for the Fund, with a value of
$10,630. Also see "Performance" in the fund's current prospectus.
Lehman Aggregate Bond Index is made up of a representative list of
government and corporate bonds as well as asset-backed securities
and mortgage-backed securities. The index is frequently used as a
general measure of bond market performance. However, the
securities used to create the index may not be representative of
the bonds held in the fund.
Lehman Treasury Bond Index is made up of a representative list of
government bonds that includes all publicly issued obligations of
the U.S. Treasury. The index is frequently used as a general
measure of government bond performance. However, the securities
used to create the index may not be representative of the debt
securities held in the fund.
Merrill Lynch 1 to 5 year Government Index is made up of a
representative list of government bonds. The index is frequently
used as a general measure of government bond performance. However,
the securities used to create the index may not be representative
of the bonds held in the fund.
On the graph above you can see how the Fund's total return compared
to three widely cited performance indexes, Lehman Treasury Index,
Lehman Aggregate Bond Index and Merrill Lynch 1 to 5 year
Government Index. In comparing Federal Income Fund to the three
indexes, you should take into account the fact that the Fund's
performance reflects the maximum sales charge of 5%, while such
charges are not reflected in the performance of the indexes. If
you were actually to buy either individual bonds or bond mutual
funds, any sales charges that you pay would reduce your total
return as well.
Your investment and return values fluctuate so that your shares,
when redeemed, may be worth more or less than the original cost.
Average annual total return figures reflect the deduction of the
maximum 5% sales charge, if any. This was a period of widely
fluctuating security prices. Past performance is no guarantee of
future results.
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PAGE 8
Independent auditors' report
The board and shareholders
IDS Federal Income Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments in securities,
of IDS Federal Income Fund, Inc. as of May 31, 1996, and the
related statements of operations and changes in net assets, and the
financial highlights for the eleven months then ended and the
statement of changes in net assets for the year ended June 30, 1995
and the financial highlights for each of the years in the nine-year
period ended June 30, 1995. These financial statements and the
financial highlights are the responsibility of fund management. Our
responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and the financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Investment securities held in custody are
confirmed to us by the custodian. As to securities purchased and
sold but not received or delivered, we request confirmations from
brokers, and where replies are not received, we carry out other
appropriate auditing procedures. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of IDS
Federal Income Fund, Inc. at May 31, 1996, and the results of its
operations and changes in its net assets for the eleven months then
ended and the changes in its net assets for the year ended June 30,
1995, and the financial highlights for the periods stated in the
first paragraph above, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 5, 1996
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PAGE 9
<TABLE>
<CAPTION>
Financial statements
Statement of assets and liabilities
IDS Federal Income Fund, Inc.
May 31, 1996
_____________________________________________________________________________________________________________
Assets
_____________________________________________________________________________________________________________
<S> <C>
Investments in securities, at value (Note 1)
(identified cost $1,751,340,289) $1,741,569,276
Accrued interest receivable 9,895,703
Receivable for investment securities sold 257,702,808
_____________________________________________________________________________________________________________
Total assets 2,009,167,787
_____________________________________________________________________________________________________________
Liabilities
_____________________________________________________________________________________________________________
Disbursements in excess of cash on demand deposit 11,836,711
Dividends payable to shareholders 898,226
Payable for investment securities purchased 278,109,499
Accrued investment management services fee 24,117
Accrued distribution fee 10,774
Accrued service fee 7,801
Accrued transfer agency fee 5,250
Accrued administrative services fee 2,267
Other accrued expenses 440,007
Open option contracts written, at value
(premium received $4,398,857)(Note 5) 3,865,038
_____________________________________________________________________________________________________________
Total liabilities 295,199,690
_____________________________________________________________________________________________________________
Net assets applicable to outstanding capital stock $1,713,968,097
_____________________________________________________________________________________________________________
Represented by
_____________________________________________________________________________________________________________
Capital stock -- authorized 10,000,000,000 shares of $.01 par value $ 3,481,647
Additional paid-in capital 1,762,945,613
Undistributed net investment income 873,023
Accumulated net realized loss (Notes 1 and 7) (47,208,634)
Unrealized depreciation (Note 4) (6,123,552)
_____________________________________________________________________________________________________________
Total -- representing net assets applicable to outstanding capital stock $1,713,968,097
_____________________________________________________________________________________________________________
Net assets applicable to outstanding shares: Class A $1,095,222,866
Class B $ 519,857,677
Class Y $ 98,887,554
Net asset value per share of outstanding capital stock: Class A shares 222,446,482 $ 4.92
Class B shares 105,626,695 $ 4.92
Class Y shares 20,091,530 $ 4.92
See accompanying notes to financial statements.
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PAGE 10
Financial statements
Statement of operations
IDS Federal Income Fund, Inc.
Eleven months ended May 31, 1996
_____________________________________________________________________________________________________________
Investment income
_____________________________________________________________________________________________________________
Income:
Interest $ 105,533,391
_____________________________________________________________________________________________________________
Expenses (Note 2):
Investment management services fee 7,421,829
Distribution fee -- Class B 2,982,481
Transfer agency fee 1,608,801
Incremental transfer agency fee -- Class B 27,978
Service fee
Class A 1,681,522
Class B 691,906
Administrative services fee 699,798
Compensation of board members 34,588
Compensation of officers 12,275
Custodian fees 126,580
Postage 270,324
Registration fees 468,038
Reports to shareholders 57,109
Audit fees 35,000
Administrative 12,524
Other 20,440
_____________________________________________________________________________________________________________
Total expenses 16,151,193
Earnings credits on cash balances (Note 2) (9,875)
_____________________________________________________________________________________________________________
Total net expenses 16,141,318
_____________________________________________________________________________________________________________
Investment income -- net 89,392,073
_____________________________________________________________________________________________________________
Realized and unrealized gain (loss) -- net
_____________________________________________________________________________________________________________
Net realized gain on security transactions (Note 3) 13,465,253
Net realized loss on closed interest rate futures contracts (14,075,204)
Net realized gain on closed, exercised or expired option
contracts written (Note 5) 11,046,124
_____________________________________________________________________________________________________________
Net realized gain on investments 10,436,173
Net change in unrealized appreciation or depreciation (28,963,992)
_____________________________________________________________________________________________________________
Net loss on investments (18,527,819)
_____________________________________________________________________________________________________________
Net increase in net assets resulting from operations $ 70,864,254
_____________________________________________________________________________________________________________
See accompanying notes to financial statements.
</TABLE>
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PAGE 11
<TABLE>
<CAPTION>
Financial statements
Statements of changes in net assets
IDS Federal Income Fund, Inc.
_____________________________________________________________________________________________________________
Operations and distributions May 31, 1996 June 30, 1995
_____________________________________________________________________________________________________________
Eleven months ended Year ended
<S> <C> <C>
Investment income -- net $ 89,392,073 $ 71,607,308
Net realized gain/(loss) on investments 10,436,173 (23,666,307)
Net change in unrealized appreciation or depreciation (28,963,992) 52,857,972
_____________________________________________________________________________________________________________
Net increase in net assets resulting from operations 70,864,254 100,798,973
_____________________________________________________________________________________________________________
Distributions to shareholders from:
Net investment income
Class A (61,393,266) (64,225,838)
Class B (22,254,823) (4,334,929)
Class Y (5,539,421) (1,938,661)
_____________________________________________________________________________________________________________
Total distributions (89,187,510) (70,499,428)
_____________________________________________________________________________________________________________
Capital share transactions (Note 6)
_____________________________________________________________________________________________________________
Proceeds from sales
Class A shares (Note 2) 747,243,121 641,569,225
Class B shares 594,129,348 138,024,110
Class Y shares 39,504,359 89,538,242
Fund merger (Note 8)
Class A shares -- 3,521,950
Class B shares -- 213,190,532
Reinvestment of distributions at net asset value
Class A shares 52,527,243 54,545,686
Class B shares 21,396,595 4,222,182
Class Y shares 5,539,139 1,657,604
Payments for redemptions
Class A shares (670,726,520) (771,657,740)
Class B shares (Note 2) (381,443,715) (68,176,074)
Class Y shares (30,634,859) (7,300,426)
_____________________________________________________________________________________________________________
Increase in net assets from capital share transactions 377,534,711 299,135,291
_____________________________________________________________________________________________________________
Total increase in net assets 359,211,455 329,434,836
Net assets at beginning of period 1,354,756,642 1,025,321,806
_____________________________________________________________________________________________________________
Net assets at end of period
(including undistributed net investment income of
$873,023 and $668,460) $1,713,968,097 $1,354,756,642
_____________________________________________________________________________________________________________
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PAGE 12
IDS Federal Income Fund, Inc.
Notes to financial statements
___________________________________________________________________
1. Summary of significant accounting policies
The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company.
The goal of the Fund is to provide shareholders with a high level
of current income and safety of principal consistent with
investment in U.S. government and government agency securities. The
Fund offers Class A, Class B and Class Y shares. Class A shares are
sold with a front-end sales charge. Class B shares may be subject
to a contingent deferred sales charge and such shares automatically
convert to Class A shares after eight years. Class Y shares have no
sales charge and are offered only to qualifying institutional
investors.
All classes of shares have identical voting, dividend, liquidation
and other rights, and the same terms and conditions, except that
the level of distribution fee, transfer agency fee and service fee
(class specific expenses) differs among classes. Income, expenses
(other than class specific expenses) and realized and unrealized
gains or losses on investments are allocated to each class of
shares based upon its relative net assets.
Significant accounting policies followed by the Fund are summarized
below:
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from
those estimates.
Valuation of securities
All securities are valued at the close of each business day.
Securities traded on national securities exchanges or included in
national market systems are valued at the last quoted sales price;
securities for which market quotations are not readily available
are valued at fair value according to methods selected in good
faith by the board. Determination of fair value involves, among
other things, reference to market indexes, matrixes and data from
independent brokers. Short-term securities maturing in more than 60
days from the valuation date are valued at the market price or
approximate market value based on current interest rates; those
maturing in 60 days or less are valued at amortized cost.
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PAGE 13
Option transactions
In order to produce incremental earnings, protect gains, and
facilitate buying and selling of securities for investment
purposes, the Fund may buy and sell put and call options and write
covered call options on portfolio securities and may write
cash-secured put and call options on U.S. government securities.
The Fund also may purchase mortgage-backed security (MBS) put
spread options and write covered MBS call spread options. MBS
spread options are based upon the changes in the price spread
between a specified mortgage-backed security and a like-duration
Treasury security. The risk in writing a call option is that the
Fund gives up the opportunity of profit if the market price of the
security increases. The risk in writing a put option is that the
Fund may incur a loss if the market price of the security decreases
and the option is exercised. The risk in buying an option is that
the Fund pays a premium whether or not the option is exercised. The
Fund also has the additional risk of not being able to enter into a
closing transaction if a liquid secondary market does not exist.
The Fund also may write over-the-counter options where the
completion of the obligation is dependent upon the credit standing
of the other party.
Option contracts are valued daily at the closing prices on their
primary exchanges and unrealized appreciation or depreciation is
recorded. The Fund will realize a gain or loss upon expiration or
closing of the option transaction. When options on debt securities
or futures are exercised, the Fund will realize a gain or loss.
When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or
the cost of a security for a purchased put or call option is
adjusted by the amount of premium received or paid.
Futures transactions
In order to gain exposure to or protect itself from changes in the
market, the Fund may buy and sell interest rate futures contracts.
Risks of entering into futures contracts and related options
include the possibility that there may be an illiquid market and
that a change in the value of the contract or option may not
correlate with changes in the value of the underlying securities.
Upon entering into a futures contract, the Fund is required to
deposit either cash or securities in an amount (initial margin)
equal to a certain percentage of the contract value. Subsequent
payments (variation margin) are made or received by the Fund each
day. The variation margin payments are equal to the daily changes
in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the
contract is closed or expires.
Securities purchased on a when-issued basis
Delivery and payment for securities that have been purchased by the
Fund on a forward-commitment or when-issued basis can take place
one month or more after the transactioin date. During this period,
such securitites are subject to market fluctuations, and they may
<PAGE>
PAGE 14
affect the Fund's net assets the same as owned securities. The fund
designates cash or liquid high-grade short-term debt securities at
least equal to the amount of its commitment. As of May 31, 1996,
the Fund had entered into outstanding when-issued or forward
commitments of $250,159,288.
Federal taxes
Since the Fund's policy is to comply with all sections of the
Internal Revenue Code applicable to regulated investment companies
and to distribute all of its taxable income to shareholders, no
provision for income or excise taxes is required.
Net investment income (loss) and net realized gains (losses) may
differ for financial statement and tax purposes primarily because
of the deferral of losses on certain futures contracts, the
recognition of certain foreign currency gains (losses) as ordinary
income (loss) for tax purposes and losses deferred due to "wash
sale" transactions. The character of distributions made during the
year from net investment income or net realized gains may differ
from their ultimate characterization for federal income tax
purposes. Also, due to the timing of dividend distributions, the
fiscal year in which amounts are distributed may differ from the
year that the income or realized gains (losses) were recorded by
the Fund.
Dividends to shareholders
Dividends from net investment income, declared daily and payable
monthly, are reinvested in additional shares of the Fund at net
asset value or payable in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar
year.
Other
Security transactions are accounted for on the date securities are
purchased or sold. Interest income, including level-yield
amortization of premium and discount is accrued daily.
___________________________________________________________________
2. Expenses and sales charges
Effective March 20, 1995, the Fund entered into agreements with
American Express Financial Corporation (AEFC) for managing its
portfolio, providing administrative services and serving as
transfer agent as follows: Under its Investment Management Services
Agreement, AEFC determines which securities will be purchased, held
or sold. The management fee is a percentage of the Fund's average
daily net assets in reducing percentages from 0.52% to 0.395%
annually.
Under an Administrative Services Agreement, the Fund pays AEFC for
administration and accounting services at a percentage of the
Fund's average daily net assets in reducing percentages from 0.05%
to 0.025% annually.
<PAGE>
PAGE 15
Under a separate Transfer Agency Agreement, AEFC maintains
shareholder accounts and records. The Fund pays AEFC an annual fee
per shareholder account for this service as follows:
o Class A $15.50
o Class B $16.50
o Class Y $15.50
Also effective March 20, 1995, the Fund entered into agreements
with American Express Financial Advisors Inc. for distribution and
shareholder servicing- related services as follows: Under a Plan
and Agreement of Distribution, the Fund pays a distribution fee at
an annual rate of 0.75% of the Fund's average daily net assets
attributable to Class B shares for distribution-related services.
Under a Shareholder Service Agreement, the Fund pays a fee for
service provided to shareholders by financial advisors and other
servicing agents. The fee is calculated at a rate of 0.175% of the
Fund's average daily net assets attributable to Class A and Class B
shares.
AEFC will assume and pay any expenses (except taxes and brokerage
commissions) that exceed the most restrictive applicable state
expense limitation.
Sales charges received by American Express Financial Advisors Inc.
for distributing Fund shares were $26,301,380 for Class A and
$268,231 for Class B for the fiscal period ended May 31, 1996. The
Fund also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
During the fiscal period ended May 31, 1996, the Fund's custodian
and transfer agency fees were reduced by $9,875 as a result of
earnings credits from overnight cash balances.
Prior to April 30, 1996, the Fund had a retirement plan for its
independent board members. The plan was terminated April 30, 1996.
The retirement plan expense amounted to $14,881 for the period
ended May 31, 1996. The total liability for the plan is $61,505
which will be paid out at some future date.
___________________________________________________________________
3. Securities transactions
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $2,203,791,501 and
$1,794,838,755, respectively, for the fiscal period ended May 31,
1996. Realized gains and losses are determined on an identified
cost basis. Income from securities lending amounted to $64,299 for
the fiscal period ended May 31, 1996. The risks to the Fund of
securities lending are that the borrower may not provide additional
collateral when required or return the securities when due.
<PAGE>
PAGE 16
___________________________________________________________________
4. Interest rate futures contracts
At May 31, 1996, investments in securities included securities
valued at $45,085,832 that were pledged as collateral to cover
initial margin deposits on 1,401 open purchase contracts and 2,611
open sale contracts. The market value of the open contracts at May
31, 1996 was $428,651,661 with a net unrealized gain of $3,113,642.
___________________________________________________________________
5. Options contracts written
The number of contracts and premium amounts associated with options
contracts written is as follows:
<TABLE><CAPTION>
Period ended May 31, 1996
__________________________________________________________________________
Puts Calls MBS Puts and Calls
__________________________________________________________________________
Contracts Premium Contracts Premium Contracts Premium
<S> <C> <C> <C> <C> <C> <C>
_________________________________________________________________________________________________
Balance June 30, 1995 1,325 $ 1,198,457 1,016 $ 1,902,171 -- $ --
Opened 11,302 12,521,721 24,312 28,298,805 91,175 4,771,904
Closed (8,584) (10,411,886) (16,450) (21,370,797) (65,300) (3,550,278)
Exercised (2,542) (2,753,498) (3,187) (2,863,151) (7,600) (308,042)
Expired (1,501) (554,794) (2,688) (2,322,380) (3,400) (159,375)
_________________________________________________________________________________________________
Balance May 31, 1996 -- $ -- 3,003 $ 3,644,648 14,875 $ 754,209
_________________________________________________________________________________________________
</TABLE>
___________________________________________________________________
6. Capital share transactions
Transactions in shares of capital stock for the periods indicated
are as follows:
Eleven months ended May 31, 1996
Class A Class B Class Y
_____________________________________________________________
Sold 149,105,568 118,610,090 7,980,462
Issued for reinvested 10,494,421 4,273,427 1,106,730
distributions
Redeemed (133,889,465) (76,081,026) (6,205,925)
_____________________________________________________________
Net increase 25,710,524 46,802,491 2,881,267
_____________________________________________________________
Year ended June 30, 1995
Class A Class B* Class Y*
____________________________________________________________
Sold 132,313,514 28,069,540 18,364,074
Fund Merger 723,045 43,767,303 --
Issued for reinvested 11,239,784 856,748 336,591
distributions
Redeemed (159,116,207) (13,869,387) (1,490,402)
_____________________________________________________________
Net increase (decrease) (14,839,864) 58,824,204 17,210,263
_____________________________________________________________
*Inception date was March 20, 1995.
<PAGE>
PAGE 17
___________________________________________________________________
7. Capital loss carryover
For federal income tax purposes, the Fund had a capital loss
carryover of $24,453,239 at May 31, 1996, that if not offset by
subsequent capital gains, will expire in 2003. It is unlikely the
board will authorize a distribution of any net realized gains until
the available capital loss carryover has been offset or expires.
___________________________________________________________________
8. Fund merger
On March 17, 1995, IDS Federal Income Fund acquired the assets and
assumed the identified liabilities of IDS Strategy -- Short-Term
Income Fund.
The aggregate net assets of IDS Federal Income Fund immediately
before the acquisition was $1,015,587,336.
The merger was accomplished by a tax-free exchange of 219,863,326
shares of IDS Strategy -- Short-Term Income Fund valued at
$216,712,482.
In exchange for the IDS Strategy -- Short-Term Income Fund shares
and assets, IDS Federal Income Fund issued the following number of
shares:
Class A 723,045
Class B 43,767,303
IDS Strategy -- Short-Term Income Fund's net assets at that date
were as follows, which include the following amounts of capital
stock, unrealized depreciation and accumulated net realized loss
that was combined with IDS Federal Income Fund.
<TABLE>
<CAPTION>
Total net Capital stock Unrealized Accumulated net
assets depreciation realized loss
____________________________________________________________________________
<S> <C> <C> <C> <C>
Class A $ 3,521,950 $ 3,580,826 $ (31,076) $ (27,800)
Class B 213,190,532 216,754,432 (1,881,087) (1,682,813)
</TABLE>
___________________________________________________________________
9. Change of Fund's fiscal year
The by-laws of the Fund were amended on Jan. 10-11, 1996, changing
its fiscal year-end from June 30 to May 31, effective 1996.
___________________________________________________________________
10. Subsequent event
The Fund invested its assets in a master portfolio, called the
Government Income Portfolio, on June 10, 1996. The Portfolio is a
separate investment company, but has the same goals and investment
policies as the Fund. Additional information on investment policies
may be found in the prospectus and Statement of Additional
Information (SAI).<PAGE>
PAGE 18
___________________________________________________________________
11. Financial highlights
"Financial highlights" showing per share data and selected
information is presented on pages 7 and 8 of the prospectus.
<PAGE>
PAGE 19
<TABLE>
<CAPTION>
Investments in securities
IDS Federal Income Fund, Inc. (Percentages represent value of
May 31, 1996 investments compared to net assets)
_____________________________________________________________________________________________________________________________
Bonds (98.2%)
_____________________________________________________________________________________________________________________________
Issuer Coupon Maturity Principal Value(a)
rate year amount
_____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. government obligations (15.3%)
U.S. Treasury and agency 7.25 % 2016 $ 4,000,000 (e) $ 4,037,680
7.50 2024 3,490,000 3,646,212
8.125 2019 16,000,000 17,693,120
Zero Coupon 5.52 1999 97,225,000 (b,f) 80,643,276
Federal National Mortgage Association
Medium Term Nts 5.41 2001 10,000,000 9,432,800
Resolution Funding Corp 8.125 2019 8,000,000 8,714,640
Zero Coupon 6.06 2001 20,863,000 (b) 15,459,066
6.19 2002 32,850,000 (b,e) 22,152,398
6.36 2003 16,000,000 (b) 9,672,480
6.39 2007 32,653,000 (b) 15,075,564
6.70 1999 52,753,000 (b,e) 43,914,762
7.02 2010 19,000,000 (b,h) 6,642,970
7.08 2007 25,120,000 (b) 11,381,118
7.18 2009 16,000,000 (b) 6,104,640
7.87 2018 7,500,000 (b) 1,451,175
7.87 2019 16,500,000 (b) 3,134,505
8.04 2012 8,400,000 (b) 2,557,296
______________
Total 261,713,702
_____________________________________________________________________________________________________________________________
Mortgage-backed securities (82.9%)
Federal Home Loan Mortgage Corporation (17.5%)
6.50 2003-09 10,360,716 9,983,047
7.00 2010 22,384,500 21,964,791
7.50 2024 9,026,153 8,851,316
8.00 2023-25 80,024,919 80,398,970
8.50 2025 18,692,418 19,118,792
Collateralized Mtge Obligation 4.00 2023 14,821,976 13,544,618
6.75 2022 22,000,000 22,104,720
7.00 2021 10,000,000 9,557,100
8.25 2024 29,670,778 29,108,220
8.50 2022 9,150,000 9,452,865
Interest Only 10.00 2020 382,554 (c) 122,658
Inverse Floater 6.39 2007 11,739,040 (d) 9,800,455
6.825 2023 3,956,343 (d) 2,510,418
7.31 2024 10,642,081 (d) 7,676,665
7.42 2023 10,514,507 (d) 6,162,973
9.36 2022 5,798,581 (d) 4,731,932
9.415 2022 21,356,119 (d) 17,403,742
10.02 2023 24,078,648 (d,f) 18,483,974
14.91 2021 7,644,500 (d) 7,980,476
See accompanying notes to investments in securities.
<PAGE>
PAGE 20
______________
Total 298,957,732
_____________________________________________________________________________________________________________________________
Federal National Mortgage Association (63.6%)
6.00 2008-23 43,934,783 40,720,931
6.50 2023-25 217,196,638 (e,f) 201,654,047
7.00 2023-26 215,903,994 (f,h) 206,081,182
7.50 2025 44,000,000 (f,h) 43,120,000
8.00 2021-26 143,501,522 (h) 143,907,392
8.50 2007-25 235,897,073 (f,h) 241,164,692
9.00 2023-24 16,995,673 17,702,013
12.00 2016 5,409,243 6,110,767
Collateralized Mtge Obligation 3.00 2019 11,250,000 9,495,900
4.50 2010 8,204,208 7,127,160
4.70 2022 12,732,716 12,548,728
5.00 2024 6,663,083 5,976,186
5.50 2008 12,985,885 12,272,830
6.00 2008 8,563,461 8,387,140
6.50 2017 2,259,657 2,252,720
7.00 2012 7,552,058 7,450,180
8.50 2021 12,350,000 12,578,598
Interest Only 9.50 2018-23 56,496,300 (c) 17,903,733
10.00 2018-23 127,044,808 (c) 40,701,831
10.50 2021 17,030,626 (c) 5,460,528
Inverse Floater 7.18 2023 6,052,314 (d) 4,273,660
8.49 2024 5,277,963 (d) 4,169,749
8.715 2023 3,456,299 (d) 2,646,315
8.78 2022 5,723,329 (d) 5,439,337
11.20 2021 10,009,687 (d) 10,029,806
Principal Only 6.12 2020 14,500,000 (g) 13,105,678
9.52 2023 9,203,533 (g) 7,635,711
12.57 2021 927,265 (f,g) 670,747
______________
Total 1,090,587,561
_____________________________________________________________________________________________________________________________
Government National Mortgage Association (1.8%)
7.50 2025 15,477,770 15,168,214
11.00 2010-19 14,613,048 16,409,946
______________
Total 31,578,160
_____________________________________________________________________________________________________________________________
Total bonds
(Cost: $1,692,841,753) $1,682,837,155
_____________________________________________________________________________________________________________________________
Options purchased (0.2%)
Issuer Number Exercise Expiration Value(a)
of contracts price date
Call
MBS 3,400 $ 98 June 1996 $ 65,280
Put
U.S. Treasury Bonds Sept. 96 212 106 Aug. 1996 304,750
U.S. Treasury Bonds Sept. 96 220 112 Aug. 1996 1,106,875
U.S. Treasury Bonds Sept. 96 620 110 Aug. 1996 2,208,750
U.S. Treasury Bonds Sept. 96 416 106 Aug. 1996 604,498
MBS 6,800 97 June 1996 36,040
Total options purchased ______________
(Cost: $4,092,608) $ 4,326,193
_____________________________________________________________________________________________________________________________
Short-term securities (3.2%)
_____________________________________________________________________________________________________________________________
Issuer Annualized Amount Value(a)
yield on payable
date of at
purchase maturity
_____________________________________________________________________________________________________________________________
U.S. government agencies (3.2%)
Federal Home Loan Bank Disc Note
06-13-96 5.20% $27,100,000 $ 27,053,117
Federal Home Loan Mtge Corp Disc Notes
06-05-96 5.22 1,700,000 1,699,016
06-12-96 5.20 3,700,000 3,694,132
06-12-96 5.21 3,600,000 3,594,280
06-13-96 5.19 1,300,000 1,297,755
Federal Natl Mtge Assn Disc Note
06-13-96 5.20 12,300,000 12,278,721
06-17-96 5.21 4,800,000 4,788,907
<PAGE>
PAGE 21
Total 54,405,928
_____________________________________________________________________________________________________________________________
Total short-term securities
(Cost: $54,405,928) $ 54,405,928
_____________________________________________________________________________________________________________________________
Total investments in securities
(Cost: $1,751,340,289)(i) $1,741,569,276
_____________________________________________________________________________________________________________________________
Notes to investments in securities
_____________________________________________________________________________________________________________________________
(a) Securities are valued by procedures described in Note 1 to the
financial statements.
(b) For zero coupon bonds, the interest rate disclosed represents the
annualized effective yield on the date of acquisition.
(c) Interest-only represents securities that entitle holders to receive
only interest payments on the underlying mortgages. The yield to
maturity of an interest-only is extremely sensitive to the rate of
principal payments on the underlying mortgage assets. A rapid (slow)
rate of principal repayments may have an adverse (positive) effect
on yield to maturity. The principal amount shown is the notional
amount of the underlying mortgages.
(d) Inverse floaters represent securities that pay interest at a rate
that increases (decreases) in the same magnitude as, or in a multiple of,
a decline (increase) in the LIBOR (London InterBank Offering Rate) Index.
Interest rate disclosed is the rate in effect on May 31, 1996.
(e) Partially pledged as initial deposit on the following open interest
rate futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
______________________________________________________________________
Purchase contracts
U.S. Treasury Note Sept. 96 $ 800,000
U.S. Treasury Note June 96, 5-year notes 75,700,000
U.S. Treasury Note Sept. 96, 2-year notes 24,600,000
U.S. Treasury Note Sept. 96 27,000,000
U.S. Treasury Bonds June 96 12,000,000
Sale contracts
U.S. Treasury Bonds June 96 173,900,000
U.S. Treasury Note June 96, 10-year notes 26,500,000
U.S. Treasury Bonds Sept. 96 60,700,000
(f) At May 31, 1996, securities valued at $416,409,494 were held to cover
open call options written as follows:
</TABLE>
<TABLE><CAPTION>
Issuer Number of Exercise Expiration Value(a)
contracts price date
___________________________________________________________________________________
<S> <C> <C> <C> <C>
U.S. Treasury Note Sept. 96 1,020 $107 Aug. 1996 $1,051,875
U.S. Treasury Bonds Sept. 96 1 110 June 1996 281
U.S. Treasury Bonds Sept. 96 446 112 Aug. 1996 271,779
U.S. Treasury Bonds Sept. 96 855 110 Aug. 1996 961,875
U.S. Treasury Bonds Sept. 96 425 107 Aug. 1996 438,281
U.S. Treasury Bonds Sept. 96 256 108 Aug. 1996 176,000
Mortgage-Backed Security (MBS) Spread 6,800 98 June 1996 130,560
At May 31, 1996, cash or short-term securities were designated to
cover open put options written as follows:
Issuer Number of Exercise Expiration Value(a)
contracts price date
___________________________________________________________________________________
Mortgage-Backed Security (MBS) Spread 2,125 93 June 1996 282,227
Mortgage-Backed Security (MBS) Spread 5,950 98 June 1996 552,160
(g) Principal only represents securities that entitle holders to receive
only principal payments on the underlying mortgages. The yield to
maturity of a principal only is sensitive to the rate of principal
payments on the underlying mortgage assets. A slow (rapid) rate of
principal repayments may have an adverse (positive) effect on yield
to maturity. Interest rate disclosed represents current yield based
upon the current cost basis and estimated timing of future cash flows.
<PAGE>
PAGE 22
(h) At May 31, 1996, the cost of securities purchased on a when-issued
basis was $250,159,288.
(i) At May 31, 1996, the cost of securities for federal income tax
purposes was $1,751,506,522 and the aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation $ 26,490,989
Unrealized depreciation (36,428,235)
____________________________________________________________
Net unrealized depreciation $ (9,937,246)
____________________________________________________________
</TABLE>
<PAGE>
PAGE 23
IDS mutual funds
Cash equivalent investments
These money market funds have three main goals: conservation of
capital, constant liquidity and the highest possible current income
consistent with these objectives. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial
paper, bankers' acceptances, certificates of deposits (CDs) and
other bank securities.
(icon of) piggy bank
IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and
local governments to seek high current income exempt from federal
income taxes.
(icon of) shield with piggy bank enclosed
Income investments
The funds in this group invest their assets primarily in corporate
bonds or government securities to seek interest income. Secondary
objective is capital growth. Risk varies by bond quality.
IDS Global Bond Fund
Invests primarily in debt securities of U.S. and foreign issuers to
seek high total return through income and growth of capital.
(icon of) globe
IDS Extra Income Fund
Invests mainly in long-term, high-yielding corporate fixed-income
securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
(icon of) coins
IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher
rated, lower risk bond categories, or the equivalent, and in
government bonds.
(icon of) greek column
<PAGE>
PAGE 24
IDS Selective Fund
Invests in high-quality corporate bonds and other highly rated debt
instruments including government securities and short-term
investments. Seeks current income and preservation of capital.
(icon of) skyline
IDS Federal Income Fund
Invests primarily in securities issued or guaranteed as to the
timely payment of principal and interest by the U.S. government,
its agencies and instrumentalities. Seeks a high level of current
income and safety of principal consistent with its type of
investments.
(icon of) shield with eagle head enclosed
Tax-exempt income investments
These funds provide tax-free income by investing in municipal
bonds. The income is generally free from federal income tax. Risk
varies by bond quality.
IDS High Yield Tax-Exempt Fund
Invests primarily in medium- and lower-quality municipal bonds and
notes. Lower-quality securities generally involve greater risk of
principal and income.
(icon of) shield with basket of apples enclosed
IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to
provide income to residents of each respective state that is exempt
from federal, state and local income taxes. (New York is the only
state that is exempt at the local level.)
(icon of) shield with U.S. enclosed
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government
units, with at least 75% in the four highest rated, lowest risk
bond categories.
(icon of) shield with Greek column enclosed
IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to
the timely payment of principal and interest. The insurance
feature minimizes credit risk of the fund but does not guarantee
the market value of the fund's shares.
(icon of) shield with star enclosed
<PAGE>
PAGE 25
Growth and income investments
These funds focus on securities of medium to large, well-
established companies that offer long-term growth of capital and
reasonable income from dividends and interest. Moderate risk.
IDS International Fund
Invests primarily in common stocks of foreign companies that offer
potential for superior growth. The fund may invest up to 20% of
its assets in the U.S. market.
(icon of) three flags
IDS Managed Retirement Fund
Invests in U.S. equity securities, U.S. and foreign debt
securities, foreign equity securities and money market instruments.
The fund provides diversification among these major investment
categories and has a target mix that represents the way the fund's
investments will be allocated over the long term.
(icon of) bird in a nest
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks,
higher-yielding equities and bonds. Seeks growth of capital and
income.
(icon of) three pine trees
IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities
purchased are those recommended by our research analysts as the
best from each industry represented on the index. Offers potential
for long-term growth as well as dividend income.
(icon of) ribbon
IDS Stock Fund
Invests in common stock of companies representing many sectors of
the economy. Seeks current income and growth of capital.
(icon of) building with columns
IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential
for growth of capital and income.
(icon of) three growing flowers
<PAGE>
PAGE 26
IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek
high current income and growth of income and capital with reduced
volatility.
(icon of) light bulb
IDS Diversified Equity Income Fund
Invests primarily in high-yielding common stocks to seek high
current income and, secondarily, to benefit from the growth
potential offered by stock investments.
(icon of) two puzzle pieces
IDS Mutual
Invests in a balance between common stocks and senior securities
(preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
(icon of) scale of justice
Growth investments
Funds in this group seek capital growth, primarily from common
stocks. They are high risk mutual funds with a potential for high
reward.
IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies
emphasizing technological innovation and productivity enhancement.
Buys and holds larger growth-oriented stocks.
(icon of) ship
IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected
for their potential for above-average growth. Above-average means
that their growth potential is better, in the opinion of the
portfolio's investment manager, than the Standard & Poor's
Corporation (S&P) 500 Stock Index.
(icon of) chess piece
IDS Growth Fund
Invests primarily in companies that have above-average potential
for long-term growth as a result of new management, marketing
opportunities or technological superiority.
(icon of) trees
<PAGE>
PAGE 27
IDS Global Growth Fund
Invests in stocks of companies throughout the world that are
positioned to meet market needs in a changing world economy. These
companies offer above-average potential for long-term growth.
(icon of) world
IDS New Dimensions Fund
Invests primarily in companies with significant growth potential
due to superiority in technology, marketing or management. The
fund frequently changes its industry mix.
(icon of) dimension
IDS Progressive Fund
Invests primarily in undervalued common stocks. The fund holds
stocks for the long term with the goal of capital growth.
(icon of) shooting star
Specialty growth investment
This fund aggressively seeks capital growth as a hedge against
inflation.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic
companies that explore for, mine and process or distribute gold and
other precious metals. This is the most aggressive and most
speculative IDS mutual fund.
(icon of) cart of precious gems
For more complete information about any of these funds, including
charges and expenses, you can obtain a prospectus by contacting
your financial advisor or writing to American Express Shareholder
Service, P.O. Box 534, Minneapolis, MN 55440-0534. Read it
carefully before you invest or send money.
<PAGE>
PAGE 28
Federal income tax information
IDS Federal Income Fund, Inc.
___________________________________________________________________
The Fund is required by the Internal Revenue Code of 1986 to tell
its shareholders about the tax treatment of the dividends it pays
during its fiscal year. Some of the dividends listed below were
reported to you on a Form 1099-DIV, Dividends and Distributions,
last January. Dividends paid to you since the end of last year will
be reported to you on a tax statement sent next January.
Shareholders should consult a tax advisor on how to report
distributions for state and local purposes.
IDS Federal Income Fund, Inc.
Fiscal period ended May 31, 1996
Class A
Income distributions taxable as dividend income, none qualifying
for deduction by corporations.
Payable date Per share
July 27, 1995 $0.02491
Aug. 28, 1995 0.02525
Sept. 27, 1995 0.02762
Oct. 27, 1995 0.02552
Nov. 28, 1995 0.02827
Dec. 28, 1995 0.03073
Jan. 26, 1996 0.02541
Feb. 26, 1996 0.02807
March 28, 1996 0.02420
April 29, 1996 0.02452
May 29, 1996 0.02817
Total distributions $0.29267
Class B
Income distributions taxable as dividend income, none qualifying
for deduction by corporations.
July 27, 1995 $0.02196
Aug. 28, 1995 0.02218
Sept. 27, 1995 0.02431
Oct. 27, 1995 0.02241
Nov. 28, 1995 0.02493
Dec. 28, 1995 0.02760
Jan. 26, 1996 0.02235
Feb. 26, 1996 0.02461
March 28, 1996 0.02117
April 29, 1996 0.02143
May 29, 1996 0.02489
Total distributions $0.25784
<PAGE>
PAGE 29
Class Y
Income distributions taxable as dividend income, none qualifying
for deduction by corporations.
July 27, 1995 $0.02577
Aug. 28, 1995 0.02596
Sept. 27, 1995 0.02838
Oct. 27, 1995 0.02624
Nov. 28, 1995 0.02903
Dec. 28, 1995 0.03147
Jan. 26, 1996 0.02609
Feb. 26, 1996 0.02888
March 28, 1996 0.02487
April 29, 1996 0.02522
May 29, 1996 0.02892
Total distributions $0.30083
<PAGE>
PAGE 30
Quick telephone reference
American Express Telephone Transaction Service
Redemptions and exchanges, dividend payments or reinvestments and
automatic payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
American Express Shareholder Service
Fund performance, objectives and account inquiries
612-671-3733
TTY Service
For the hearing impaired
800-846-4852
American Express Infoline
Automated account information (TouchToneR phones only), including
current fund prices and performance, account values and recent
account transactions
National/Minnesota: 800-272-4445
Mpls./St. Paul area: 671-1630
AMERICAN
EXPRESS
Financial
Advisors
IDS Federal Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
PAGE 31
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report and
prospectus are placed
in blue strip at the top
of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report and prospectus. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
