FEDERATED INCOME SECURITIES TRUST, 497, 1996-07-01

FEDERATED INCOME SECURITIES TRUST
497, 1996-07-01

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FEDERATED SHORT-TERM INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES

PROSPECTUS

The Institutional Shares of Federated Short-Term Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio
of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company
(a mutual fund).

The investment objective of the Fund is to seek to provide current
income.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS
OF ANY BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.

This prospectus contains the information you should read and know
before you invest in Institutional Shares of the Fund. Keep this
prospectus for future reference.

The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30,
1996, with the Securities and Exchange Commission ("SEC"). The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy
of the Statement of Additional Information, or a paper copy of this
prospectus, if you have received your prospectus electronically, free
of charge by calling 1-800-341-7400. To obtain other information, or
make inquiries about the Fund, contact the Fund at the address listed
in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically
with the SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated June 30, 1996

TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS - INSTITUTIONAL SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Special Considerations 13

Portfolio Turnover 13

Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 14
Management of the Trust 14
Distribution of Institutional Shares 16
Administration of the Fund 16
NET ASSET VALUE 17
INVESTING IN INSTITUTIONAL SHARES 17
Share Purchases 17
Minimum Investment Required 17
What Shares Cost 18

Certificates and Confirmations 18
Dividends 18
Capital Gains 18

REDEEMING INSTITUTIONAL SHARES 18
Telephone Redemption 18

Redeeming Shares by Mail 19
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 19
Voting Rights 19
TAX INFORMATION 20
Federal Income Tax 20

State and Local Taxes 20

PERFORMANCE INFORMATION 20
OTHER CLASSES OF SHARES 21

FINANCIAL HIGHLIGHTS -
INSTITUTIONAL SERVICE SHARES 22

FINANCIAL STATEMENTS 23
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 36
ADDRESSES 37
</TABLE>

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>

Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
</TABLE>

ANNUAL OPERATING EXPENSES

(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(1) 0.36%
12b-1 Fee None

Total Other Expenses 0.20%
Shareholder Services Fee (after waiver) (2) 0.00%
Total Operating Expenses (3) 0.56%
</TABLE>

(2) The maximum shareholder services fee is 0.25%.

(3) The total operating expenses would have been 0.85% absent the
voluntary waivers of portions of the management fee and the
shareholder services fee.

The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of Institutional
Shares of the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Federated
Income Securities Trust Information" and "Investing in Institutional
Shares." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $6 $18 $31 $70

</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.

FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS - INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent
Auditors, on page 36.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994 1993 1992(A) 1991 1990 1989 1988 1987(B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74
Net realized and unrealized
gain (loss) on investments 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02)
Total from investment
operations 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74)
Distributions in excess
of net investment income(c) - - - - (0.02) (0.01) - - - -
Total distributions (0.57) (0.54) (0.51) ( 0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74)
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
TOTAL RETURN(D) 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%*
Net investment income 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%*
Expense waiver/
reimbursement(e) 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%*
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581 $80,073
Portfolio turnover 77% 38% 44% 62% 114% 23% 34% 38% 77% 82%
</TABLE>

* Computed on an annualized basis.
(a) On December 31, 1991, the shareholders approved a change in the
fundamental investment policies which state that the Fund will be
invested in high-grade as opposed to lower-rated debt securities, and
as a result, investment income per share is lower.
(b) Reflects operations for the period from July 1, 1986 (date of
initial public investment) to April 30, 1987.
(c) Distributions in excess of net investment income for the years
ended April 30, 1992 and 1991, were a result of certain book and tax
timing differences. These distributions did not represent a return of
capital for federal income tax purposes for the year ended April 30,
1992 and 1991.
(d) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(e) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.

(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the
Fund's annual report for the fiscal year ended April 30, 1996, which
can be obtained free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 24, 1986. On December 31, 1991, the
shareholders voted to permit the Trust to offer separate series of
shares of beneficial interest representing interests in separate
portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date
of this prospectus the Board of Trustees ("Trustees") has established
two classes of shares, Institutional Shares and Institutional Service
Shares. This prospectus relates only to Institutional Shares of the
Fund.

Institutional Shares ("Shares") are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity, or
other accounts where the financial institution maintains master
accounts with an aggregate investment of at least $400 million in
certain funds which are advised or distributed by affiliates of
Federated Investors. Shares are also made available to financial
intermediaries, and public and private organizations. An investment in
the Fund serves as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of corporate debt
securities. A minimum initial investment of $25,000 over a 90-day
period is required.

Shares are currently sold and redeemed at net asset value without a
sales charge imposed by the Fund.

INVESTMENT INFORMATION
INVESTMENT OBJECTIVE

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

INVESTMENT POLICIES

The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in
long-term high grade debt securities to the extent consistent with its
policies regarding the Fund's average dollar-weighted portfolio
maturity and duration. This investment policy may not be changed
without the prior approval of the Fund's shareholders. Unless
indicated otherwise, the other investment policies described in this
prospectus may be changed by the Trustees without the approval of the
Fund's shareholders. Shareholders will be notified before any material
changes in these policies become effective.

ACCEPTABLE INVESTMENTS. The high grade debt securities in which the
Fund invests include medium and long-term instruments rated by one or
more nationally recognized statistical rating organizations ("NRSROs")
in one of their three highest rating categories (e.g., AAA, AA or A by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service,
Inc. ("Fitch"), or Aaa, Aa or A by Moody's Investors Service, Inc.
("Moody's")and short-term instruments rated by one or more NRSROs
in one of their two highest categories (e.g., A-1 or A-2 by S&P,
Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). Although the
Fund may invest in unrated debt securities that are determined by the
Fund's investment adviser to be of comparable quality to instruments
having such ratings, as a matter of operating policy, the Fund will
invest only in rated securities. Downgraded securities will be
evaluated on a case by case basis by the adviser. The adviser will
determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold.

Acceptable investments currently include the following:

* corporate debt obligations, including medium-term notes and
variable rate demand notes;
* asset-backed securities;
* commercial paper (including Canadian Commercial Paper and
Europaper) ;
* certificates of deposit, demand and time deposits, bankers'
acceptances, deposit notes and other instruments of domestic and
foreign banks and other deposit institutions ("Bank Instruments");
* interest rate swaps, caps and floors;
* medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
* auction rate securities (see below) ;
* obligations issued or guaranteed as to payment of principal and
interest by the U. S. government or one of its agencies or
instrumentalities ("Government Securities") ; and
* other money market instruments.

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

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

ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government related, private loans,
receivables or other lender assets into pools. Interests in these
pools are sold as individual securities. Payments from the asset pools
may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular
installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive
payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear
different interest rates, which may be fixed or floating.

Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates, because many borrowers
refinance their mortgages to take advantage of the more favorable
rates. Prepayments on mortgage-backed securities are also affected by
other factors, such as the frequency with which people sell their
homes or elect to make unscheduled payments on their mortgages. All
asset-backed securities are subject to similar prepayment risks,
although they may be more or less sensitive to certain factors.
Depending upon market conditions, the yield that the Fund receives
from the reinvestment of such prepayments, or any scheduled principal
payments, may be lower than the yield on the original asset-backed security.
As a consequence, mortgage securities may be a less effective means of
"locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of
securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.

The credit characteristics of asset-backed securities also differ in a
number of respects from those of traditional debt securities. The
credit quality of most asset-backed securities depends primarily upon
the credit quality of the assets underlying such securities, how well
the entity issuing the securities is insulated from the credit risk of
the originator or any other affiliated entities, and the amount and
quality of any credit enhancement to such securities.

MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an
interest in real estate mortgages (collectively, "mortgage
securities"). Mortgage securities are: (i) issued or guaranteed by
the U. S. government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"); (ii) those issued by private
issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; (iii) those
issued by private issuers that represent an interest in or are
collateralized by whole loans or mortgage-backed securities without a
government guarantee but usually having some form of private credit
enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government.

The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and/or principal. The
interest portion of these payments will be distributed by the Fund as
income, and the capital portion will be reinvested.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than
fixed interest rate mortgages. Typically, the ARMS in which the Fund
invests are issued by GNMA, FNMA, and FHLMC and are actively traded.
ARMS may be collateralized by whole loans or private pass-through
securities. The underlying mortgages which collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration
("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.

Unlike conventional bonds, ARMS pay back principal over the life of
the ARMS rather than at maturity. Thus, a holder of the ARMS, such as
the Fund, would receive monthly scheduled payments of principal
and/or interest and may receive unscheduled principal payments
representing payments on the underlying mortgages. At the time that a
holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest
paid on the existing ARMS. As a consequence, ARMS may be a less
effective means of "locking in" long-term interest rates than other
types of fixed-income securities.

Like other fixed-income securities, the market value of ARMS will
generally vary inversely with changes in market interest rates. Thus,
the market value of ARMS generally declines when interest rates rise
and generally rises when interest rates decline.

While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and
unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely,
if ARMS are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal would increase
current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") . CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but may be collateralized by whole loans or private
pass-through securities.

The CMOs in which the Fund may invest may be: (a) collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment
of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U. S. government securities; or (c)
collateralized by pools of mortgages without a government guarantee
as to payment of principal and interest, but which have some form of
credit enhancement.

The following example illustrates how mortgage cash flows are
prioritized in the case of CMOs. Most of the CMOs in which the Fund
invests use the same basic structure.

(2) The cash flows from the underlying mortgages are applied first to
pay interest and then to retire securities.

(3) The tranches of securities are retired sequentially. All
principal payments are directed first to the shortest-maturity
tranche (or A bonds). When those securities are completely
retired, all principal payments are then directed to the next-
shortest-maturity security tranche (or B bond.) This process
continues until all of the tranches have been completely retired.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which
the Fund may invest are offerings of multiple class real estate
mortgage-backed securities which qualify and elect treatment as such
under provisions of the Internal Revenue Code, as amended. Issuers of
REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity
and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of
"regular interests, " some of which may offer adjustable rates of
interest, and a single class of "residual interests. " To qualify as
a REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property.

RESETS OF INTEREST. The interest rates paid on some of the ARMS,
CMOs, and REMICs in which the Fund may invest will be readjusted at
intervals of one year or less to an increment over some predetermined
interest rate index. There are two main categories of indices: those
based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury Note rates, the three-month
Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-
term Treasury securities, the National Median Cost of Funds, the one-
month or three-month London Interbank Offered Rate ("LIBOR"), the
prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to
lag changes in market rate levels and tend to have somewhat less
volatile interest rates.
To the extent that the adjusted interest rate on the mortgage
security reflects current market rates, the market value of an
adjustable rate mortgage security will tend to be less sensitive to
interest rate changes than a fixed rate debt security of the same
stated maturity. Hence, adjustable rate mortgage securities which use
indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that
closely mirror the market. Certain residual interest tranches of
CMO's may have adjustable interest rates that deviate significantly
from prevailing market rates, even after the interest rate is reset,
and are subject to correspondingly increased price volatility. In the
event that the Fund purchases such residual interest mortgage
securities, it will factor in the increased interest and price
volatility of such securities when determining its dollar-weighted
average portfolio maturity and duration.

CAPS AND FLOORS. The underlying mortgages which collateralize the
ARMS, CMOs, and REMICs in which the Fund may invest will frequently
have caps and floors which limit the maximum amount by which the loan
rate to the residential borrower may change up or down: (1) per reset
or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may
result in negative amortization.

NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in
pools of receivables, such as credit card and accounts receivable and
motor vehicle and other installment purchase obligations and leases.
These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities are structured similarly to
collateralized mortgage obligations and mortgage pass-through
securities, which are described above. Also, these securities may be
issued either by non-governmental entities and carry no direct or
indirect governmental guarantees, or by governmental entities (i.e.,
Small Business Administration) and carry varying degrees of
governmental support.

Non-mortgage related asset-backed securities have structural
characteristics similar to mortgage-related asset-backed securities
but have underlying assets that are not mortgage loans or interests
in mortgage loans. The Fund may invest in non-mortgage related asset-
backed securities including, but not limited to, interests in pools
of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. These securities may be in
the form of pass-through instruments or asset-backed bonds. The
securities are issued by non-governmental entities and carry no
direct or indirect government guarantee.

Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time the
Fund reinvests the payments and any unscheduled prepayments of
principal received, the Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks") . Although non-mortgage related asset-backed
securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities,
certain of the factors that affect the rate of prepayments on
mortgage-related asset-backed securities also affect the rate of
prepayments on non-mortgage related asset-backed securities.

Non-mortgage related asset-backed securities present certain risks
that are not presented by mortgage-related asset-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws,
many of which give such debtors the right to set off certain amounts
owed on the credit cards, thereby reducing the balance due. Most
issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If
the servicer sells these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of
the holders of the related asset-backed securities. Further, if a
vehicle is registered in one state and is then reregistered because
the owner and obligor moves to another state, such reregistration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved
in a typical issuance and technical requirements under state laws,
the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all
of the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities.

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

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

INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest
rate swaps and may purchase or sell (i.e., write) interest rate caps
and floors. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive
interest (e.g., an exchange of floating rate payments for fixed-rate
payments) on a notional principal amount. The principal amount of an
interest rate swap is notional in that it only provides the basis for
determining the amount of interest payments under the swap agreement,
and does not represent an actual loan. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate on $10 million principal amount in exchange for
the right to receive the equivalent of a fixed rate of interest on $10
million principal amount. Neither party to the swap would actually
advance $10 million to the other.

The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate,
to receive payments of the amount of excess interest on a notional
principal amount from the party selling the interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to receive
payments of the amount of the interest shortfall on a notional principal
amount from the party selling the interest rate floor.

The Fund expects to enter into interest rate transactions primarily to
hedge against changes in the price of other portfolio securities. For
example, the Fund may hedge against changes in the market value of a
fixed rate note by entering into a concurrent swap that requires the
Fund to pay the same or a lower fixed rate of interest on a notional
principal amount equal to the principal amount of the note in exchange
for a variable rate of interest based on a market index. Interest
accrued on the hedged note would then equal or exceed the Fund's
obligations under the swap, while changes in the market value of the
swap would largely offset any changes in the market value of the note.
The Fund may also enter into swaps and caps to preserve or enhance a
return or spread on a portfolio security. The Fund does not intend to
use these transactions in a speculative manner.

The Fund will usually enter into interest rate swaps on a net basis
(i.e., the two payment streams are netted out), with the Fund
receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis, and the Fund will segregate
liquid assets in an aggregate net asset value at least equal to the
accrued excess, if any, on each business day. If the Fund enters into
an interest rate swap on other than a net basis, the Fund will
segregate liquid assets in the full amount accrued on a daily basis of
the Fund's obligations with respect to the swap. If there is a default
by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the
transaction.

The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals
and agents utilizing standardized swap documentation. The Fund's
investment adviser has determined that, as a result, the swap market
has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. To the
extent interest rate swaps, caps or floors are determined by the
investment adviser to be illiquid, they will be included in the Fund's
limitation on investments in illiquid securities. To the extent the
Fund sells caps and floors, it will maintain in a segregated account
cash and/or U.S. Government Securities having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of
the Fund's obligations with respect to the caps or floors.

The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the
Fund's investment adviser is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would
have been if these investment techniques were not utilized. Moreover,
even if the Fund's investment adviser is correct in its forecasts,
there is a risk that the swap position may correlate imperfectly with
the price of the portfolio security being hedged.

There is no limit on the amount of interest rate swap transactions
that may be entered into by the Fund. These transactions do not
involve the delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to a default on
an interest rate swap is limited to the net asset value of the swap
together with the net amount of interest payments owed to the Fund by
the defaulting party. A default on a portfolio security hedged by an
interest rate swap would also expose the Fund to the risk of having to cover
its net obligations under the swap with income from other portfolio
securities. The Fund may purchase and sell caps and floors without
limitation, subject to the segregated account requirement described above.

AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities, (collectively,
"auction rate securities"). Provided that the auction mechanism is
successful, auction rate securities usually permit the holder to sell
the securities in an auction at par value at specified intervals. The
interest rate or dividend is reset by "Dutch" auction in which bids
are made by broker-dealers and other institutions for a certain amount
of securities at a specified minimum yield. The interest rate or
dividend rate set by the auction is the lowest interest or dividend
rate that covers all securities offered for sale. While this process
is designed to permit auction rate securities to be traded at par
value, there is some risk that an auction will fail due to
insufficient demand for the securities. If so, the securities may
become illiquid and subject to the Fund's 15% limitation on illiquid
securities.

AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not
maintain a stable net asset value, the adviser will seek to limit, to
the extent consistent with the Fund's investment objective of current
income, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average maturity and duration of the
Fund's portfolio. Securities with shorter maturities and durations
generally have less volatile prices than securities of comparable
quality with longer maturities or durations. The Fund should be
expected to maintain a higher average maturity and duration during
periods of lower expected market volatility, and a lower average
maturity and duration during periods of higher expected market
volatility. In any event, the Fund's dollar-weighted average maturity
will not exceed three years, and its dollar-weighted average duration
will not exceed three years.

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

DEMAND FEATURES. The Fund may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the
securities at their principal amount (usually with accrued interest)
within a fixed period following a demand by the Fund. The demand
feature may be issued by the issuer of the underlying securities, a
dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses
these arrangements to provide the Fund with liquidity and not to
protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other
event that terminates the demand feature before its exercise, will
adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the
underlying security are treated as a form of credit enhancement.

RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in
restricted and illiquid securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its
investment objective and policies, but which are subject to
restriction on resale under federal securities law. The Fund will
limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable
time deposits, and repurchase agreements providing for settlement in
more than seven days after notice, to 15% of its net assets.

The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to
institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that
Section 4(2) commercial paper and possibly certain other restricted
securities which meet the criteria for liquidity established by the
Trustees are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity
established by the Trustees, including Section 4(2) commercial paper,
as determined by the Fund's investment adviser, as liquid and not
subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is
liquid, the Fund intends to not subject such paper to the limitation
applicable to restricted securities.

REPURCHASE AGREEMENTS. Certain securities in which the Fund invests
may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or
other securities in which the Fund may invest to the Fund and agree at
the time of sale to repurchase them at a mutually agreed upon time and
price.

REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse
repurchase agreements. This transaction is similar to borrowing cash.
In a reverse repurchase agreement the Fund transfers possession of a
portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated
date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed
upon rate.

When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and maintained until the
transaction is settled.

During the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or
before the expiration date of the reverse repurchase agreements. This
policy may not be changed without the approval of the Fund's
shareholders.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the Fund may lend portfolio securities on a short-term or
long-term basis, or both, up to one-third of the value of its total
assets to broker/dealers, banks, or other institutional borrowers of
securities. The Fund will limit the amount of portfolio securities it
may lend to not more than one-third of its total assets. The Fund will
only enter into loan arrangements with broker/dealers, banks, or other
institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral
equal to at least 100% of the value of the securities loaned. This policy
may not be changed without the approval of the Fund's shareholders.

There is the risk that, when lending portfolio securities, the
securities may not be available to the Fund on a timely basis and the
Fund may, therefore, lose the opportunity to sell the securities at a
desirable price. In addition, in the event that a borrower of
securities would file for bankruptcy or become insolvent, the
disposition of the securities may be delayed pending court action.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause the Fund to miss a
price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Fund may pay more/less than the market value of the
securities on the settlement date. The Fund will limit its purchase of
securities on a when-issued or delayed delivery basis to no more than
20% of the value of its total assets. This policy may not be changed
without the approval of the Fund's shareholders.

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

SPECIAL CONSIDERATIONS

In the debt market, prices move inversely to interest rates. A decline
in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market
interest rates results in a decline in market prices of outstanding
debt obligations. In either case, the amount of change in market
prices of debt obligations in response to changes in market interest
rates generally depends on the maturity of the debt obligations: the
debt obligations with the longest maturities will experience the
greatest market price changes.

The market value of debt obligations, and therefore the Fund's net
asset value, will fluctuate due to changes in economic conditions and
other market factors such as interest rates which are beyond the
control of the Fund's investment adviser. The Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of these market factors. Although debt obligations with longer
maturities offer potentially greater returns, they have greater
exposure to market price fluctuation. Consequently, to the extent the
Fund is significantly invested in debt obligations with longer
maturities, there is a greater possibility of fluctuation in the
Fund's net asset value.

PORTFOLIO TURNOVER

While the Fund does not intend to engage in substantial short-term
trading, from time to time it may sell portfolio securities for
investment reasons without considering how long they have been held.
For example, the Fund would do this:

* to take advantage of short-term differentials in yields or market
values;
* to take advantage of new investment opportunities;
* to respond to changes in the creditworthiness of an issuer; or
* to try to preserve gains or limit losses.

Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet
any arbitrary turnover rate since turnover is incidental to
transactions considered necessary to achieve the Fund's investment
objective.

INVESTMENT LIMITATIONS

The Fund will not:

* lend any of its assets except portfolio securities up to one-third
of the value of its total assets;

* sell securities short except, under strict limitations, the Fund
may maintain open short positions so long as not more than 10% of
the value of its net assets is held as collateral for those
positions;

* underwrite any issue of securities, except as it may be deemed to
be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Fund may purchase
pursuant to its investment objective, policies, and
limitations;

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

* with respect to 75% of its assets, invest more than 5% of the value
of its total assets in securities of one issuer (except U.S.
government obligations), or purchase more than 10% of the
outstanding voting securities of any one issuer. For these purposes
the Fund takes all common stock and all preferred stock of an
issuer each as a single class, regardless of priorities, series,
designations, or other differences.

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

The Fund will not:

* invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for
settlement more than seven days after notice, non-negotiable time
deposits, certain interest rate swaps, caps and floors determined
by the investment adviser to be illiquid, and certain restricted
securities not determined by the Trustees to be liquid.

FEDERATED INCOME SECURITIES TRUST INFORMATION
MANAGEMENT OF THE TRUST

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

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

ADVISORY FEES. The Fund's Adviser receives an annual investment
advisory fee equal to .40% of the Fund's average daily net assets.
Under the investment advisory contract, the Adviser may voluntarily
reimburse some of the operating expenses of the Fund. The Adviser can
terminate this voluntary reimbursement of expenses at any time at its
sole discretion. The Adviser has also undertaken to reimburse the
Fund for operating expenses in excess of limitations established by
certain states.

ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under
the Investment Advisers Act of 1940. It is a subsidiary of Federated
Investors. All of the Class A (voting) shares of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue,
Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.
Federated Management and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With
over $80 billion invested across more than 250 funds under management
and/or administration by its subsidiaries, as of December 31, 1995,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 1,800 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,000 financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.

Deborah A. Cunningham has been the Fund's portfolio manager since
July 1991. Ms. Cunningham joined Federated Investors in 1981 and has
been a Vice President of the Fund's investment adviser since 1993.
Ms. Cunningham served as an Assistant Vice President of the
investment adviser from 1989 until 1992. Ms. Cunningham is a
Chartered Financial Analyst and received her M.S.B.A. in Finance from
Robert Morris College.

Randall S. Bauer has been the Fund's portfolio manager since October
1995. Mr. Bauer joined Federated Investors in 1989 and has been a
Vice President of the Fund's investment adviser since 1994. Mr. Bauer
was an Assistant Vice President of the Fund's investment adviser from
1989 to 1993. Mr. Bauer is a Chartered Financial Analyst and received
his M.B.A. in Finance from Pennsylvania State University.

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

DISTRIBUTION OF INSTITUTIONAL SHARES

Federated Securities Corp. is the principal distributor for shares of
the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated
Investors.

State securities laws may require certain financial institutions such
as depository institutions to register as dealers.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary
to operate the Fund. Federated Services Company provides these at an
annual rate which relates to the average aggregate daily net assets of
all funds advised by affiliates of Federated Investors as specified
below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>

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

SHAREHOLDER SERVICES. The Trust has entered into a Shareholder
Services Agreement with Federated Shareholder Services, a subsidiary
of Federated Investors, under which the Trust may make payments up to
.25% of the average daily net asset value of Shares, computed at an
annual rate, to obtain certain personal services for shareholders and
to maintain shareholder accounts. From time to time and for such
periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly
or will select financial institutions to perform shareholder services.
Financial institutions will receive fees based upon Shares owned by
their clients or customers. The schedules of such fees and the basis
upon which such fees will be paid will be determined from time to time
by the Trust and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to
payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for
the performance of substantial sales services, distribution-related
support services, or shareholder services.

The support may include sponsoring sales, educational and training
seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes
of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the
type and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by
the Fund's investment adviser or its affiliates.

NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value
for Shares is determined by adding the interest of the Shares in the
market value of all securities and other assets of the Fund, subtracting
the interest of the Shares in the liabilities of the Fund and those
attributable to Shares, and dividing the remainder by the total number of
Shares outstanding.

INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open.
Shares may be purchased either by wire or by mail.

To purchase Shares of the Fund, open an account by calling Federated
Securities Corp. Information needed to establish the account will be
taken over the telephone. The Fund reserves the right to reject any
purchase request.

BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call
the Fund before 4:00 p.m. (Eastern time) to place an order. The order
is considered received immediately. Payment by federal funds must be
received before 3:00 p. m. (Eastern time) on the next business day
following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and
Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit to:
Federated Short-Term Income Fund - Institutional Shares; Fund Number
(this number can be found on the account statement or by contacting
the Fund); Group Number or Order Number; Nominee or Institution Name;
and ABA Number 011000028. Shares cannot be purchased by wire on
holidays when wire transfers are restricted. Questions on wire
purchases should be directed to your shareholder services
representative at the telephone number listed on your account
statement.

BY MAIL. To purchase Shares of the Fund by mail, send a check made
payable to Federated Short-Term Income Fund - Institutional Shares to:
Federated Shareholder Services Company, c/o State Street Bank and
Trust Company, P. O. Box 8600, Boston, MA 02266-8600. Orders by mail
are considered received after payment by check is converted by the
transfer agent's bank, State Street Bank, into federal funds. This is
normally the next business day after State Street Bank receives the
check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in the Fund is $25,000 plus any
financial intermediary's fee. However, an account may be opened with a
smaller amount as long as the $25,000 minimum is reached within 90
days. An institutional investor's minimum investment will be
calculated by combining all accounts it maintains with the Fund.
Accounts established through a financial intermediary may be subject
to a smaller minimum investment.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an
order is received. There is no sales charge imposed by the Fund.
Investors who purchase Shares through a financial intermediary may be
charged a service fee by that financial intermediary.
The net asset value is determined as of the close of trading (normally
4:00 p.m. Eastern time) on the New York Stock Exchange, Monday through
Friday, except on: (i) days on which there are not sufficient changes
in the value of the Fund's portfolio securities that its net asset
value might be materially affected; (ii) days during which no Shares
are tendered for redemption and no orders to purchase Shares are
received; and (iii) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company
maintains a Share account for each shareholder. Share certificates are
not issued unless requested by contacting the Fund.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid
during the month.

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends are declared
just prior to determining net asset value. If an order for Shares is
placed on the preceding business day, Shares purchased by wire begin
earning dividends on the business day wire payment is received by
State Street Bank. If the order for Shares and payment by wire are
received on the same day, Shares begin earning dividends on the next
business day. Shares purchased by check begin earning dividends on the
business day after the check is converted upon instruction of by the
transfer agent into federal funds. Dividends are automatically
reinvested on payment dates in additional Shares of the Fund unless
cash payments are requested by contacting the Fund.

CAPITAL GAINS

Capital gains realized by the Fund, if any, will be distributed at
least once every 12 months.

REDEEMING INSTITUTIONAL SHARES

The Fund redeems Shares at their net asset value next determined after
the Fund receives the redemption request. Investors who redeem Shares
through a financial intermediary may be charged a service fee by that
financial intermediary. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be
received in proper form and can be made by telephone request or by
written request.

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Fund before 4:00
p.m. (Eastern time). The proceeds will normally be wired the
following business day, but in no event more than seven days, to the
shareholder's account at a domestic commercial bank that is a member
of the Federal Reserve System. If at any time the Fund shall determine
it is necessary to terminate or modify this method of redemption,
shareholders would be promptly notified. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be
wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your
shareholder services representative at the telephone number listed on your
account statement.

An authorization form permitting the Fund to accept telephone requests
must first be completed. Authorization forms and information on this
service are available from Federated Securities Corp. Telephone
redemption instructions may be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur,
another method of redemption, such as "Redeeming Shares By Mail,"
should be considered.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be
sent unendorsed with the written request by registered or certified
mail to the address noted above.

The written request should state: the Fund name and Share class name;
the account name as registered with the Fund; the account number; and
the number of Shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the Shares
are registered. Normally, a check for the proceeds is mailed within
one business day, but in no event more than seven days, after the
receipt of a proper written redemption request. Dividends are paid up
to and including the day that a redemption request is processed.

Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund or a redemption
payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution, " as defined in the Securities Exchange Act of
1934. The Fund does not accept signatures guaranteed by a notary
public.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the
Fund may redeem Shares in any account and pay the proceeds to the
shareholder if the account balance falls below a required minimum
value of $25,000 due to shareholder redemptions. This requirement does
not apply, however, if the balance falls below $25,000 because of
changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is
notified in writing and allowed 30 days to purchase additional Shares
to meet the minimum requirement.

SHAREHOLDER INFORMATION
VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders of the Trust for
vote. All shares of each portfolio in the Trust have equal voting
rights, except that, in matters affecting only a particular fund or
class, only shares of that particular fund or class are entitled to
vote. As of May 31, 1996, Trust Company of St. Joseph, St. Joseph, MO,
owned 34.80% of the voting securities of the Fund's Institutional Service
Shares, and, therefore, may, for certain purposes, be deemed to control the
Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders.

As a Massachusetts business trust, the Trust is not required to hold
annual shareholder meetings. Shareholder approval will be sought only
for certain changes in the Trust's or the Fund's operation and for the
election of Trustees under certain circumstances.

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

TAX INFORMATION
FEDERAL INCOME TAX

The Fund will pay no federal income tax because the Fund expects to
meet requirements of the Internal Revenue Code, as amended, applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies.

The Fund will be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and
losses realized by the Trust's other portfolios, if any, will not be
combined for tax purposes with those realized by the Fund.

Unless otherwise exempt, shareholders are required to pay federal
income tax on any dividends and other distributions received. This
applies whether dividends and distributions are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.

STATE AND LOCAL TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Fund,
Shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent
that the portfolio securities in the Fund would be subject to such
taxes if owned directly by residents of those jurisdictions.

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for
Institutional Shares.

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

The yield of Institutional Shares is calculated by dividing the net
investment income per Share (as defined by the Securities and Exchange
Commission) earned by Institutional Shares over a thirty-day period by
the net asset value per Share of Institutional Shares on the last day
of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually
earned by Institutional Shares and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

The Institutional Shares are sold without any sales charge or other
similar non-recurring charges.

Total return and yield will be calculated separately for Institutional
Shares and Institutional Service Shares.

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

OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Institutional
Service Shares.

Institutional Service Shares are sold primarily to banks and other
institutions that hold assets in an agency capacity. Institutional
Service Shares are sold at net asset value and are subject to a
minimum initial investment of $25,000.

Institutional Shares and Institutional Service Shares are subject to
certain of the same expenses; however, Institutional Service Shares
are distributed under a 12b-1 Plan adopted by the Trust. Expense
differences, between Institutional Shares and Institutional Service
Shares may affect the performance of each class.

To obtain more information and a prospectus for Institutional Service
Shares, investors may call 1-800-235-4669.

FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS - INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent
Auditors, on page 36.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized
gain(loss) on investments 0.07 (0.24) (0.32) 0.19 (0.10)
Total from investment operations 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/
reimbursement(c) 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 77% 38% 44% 62% 114%
</TABLE>

* Computed on an annualized basis.
(a) Reflects operations for the period from January 21, 1992 (date of
initial public investment) to April 30, 1992.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.

Further information about the Fund's performance is contained in the
Fund's annual report for the fiscal year ended April 30, 1996, which
can be obtained free of charge.

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES - 60.6%
AUTOMOTIVE - 10.6%
$ 4,062,996 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 4,065,556
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,437,228
2,451,452 Daimler-Benz Auto Grantor Trust 1995, Class A-1, 5.85%,
5/15/2002 2,444,833
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.38%, 4/15/1999 5,074,150
6,000,000 Navistar Dealer Note Trust 1990, Class A-3, Floating Rate Pass
Thru Certificate, 1/25/2003 6,093,780
2,730,000 Navistar Financial Owner Trust 1995-A, Class B, 6.85%,
11/20/2001 2,735,214
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,957,970
Total 24,808,731

BANKING - 15.1%
3,000,000 (a) BankAmerica Corp., FRN, 6.69%, 6/25/2003 2,917,500
2,000,000 Chase Manhattan Credit Card Master Trust 1991-1, Class A, 8.75%,
8/15/1999 2,017,580
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%,
5/15/2000 5,058,200
4,000,000 Chemical Master Credit Card Trust 1996-1, Class A, 5.55%,
9/15/2003 3,829,476
5,000,000 (a) Citibank Sub., FRN, 5.85%, 10/25/2005 4,912,500
4,000,000 (a) First USA Credit Card Master Trust, Class B, 6.40%,
12/15/1999 4,005,000
1,000,000 (a) J.P. Morgan & Co., Inc., FRN, 5.75%, 8/19/2002 982,500
3,000,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 3,144,960
4,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%,
11/7/2003 4,256,240
4,000,000 Toronto Dominion Bank, Sub. Note, 7.88%, 8/15/2004 4,084,760
Total 35,208,716
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES - CONTINUED
FINANCE - AUTOMOTIVE - 1.3%
$ 3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 $ 2,951,250
FINANCE - RETAIL - 6.7%
5,000,000 Discover Card Trust 1991-B, Class A, 8.63%, 7/16/1998 5,016,150
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,037,550
1,635,000 (b) Encyclopedia Britannica Domestic Funding Corp., Series
1994-1, 6.76%, 3/15/2002 1,630,406
2,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/1997 2,000,000
2,000,000 Household Private Label Credit Card Trust 1994-1, Class B, 7.55%, 1/1/1999 2,026,920
Total 15,711,026
GAS & ELECTRIC UTILITIES - 1.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 9/15/2017 1,108,720
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 9.73%,
12/15/2017 1,900,955
1,000,000 Soyland Power Cooperative, 9.70%, 3/20/1997 1,086,720
Total 4,096,395
GOVERNMENT AGENCY - 1.6%
3,380,000 Swedish Export Credit Corp., 9.88%, 3/15/2038 3,716,885
HOME EQUITY LOAN RECEIVABLES - 11.1%
2,297,952 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 2,296,964
4,001,709 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 4,023,758
2,000,000 (b) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3,
6.07%, 11/15/2013 1,940,000
3,316,248 (b) Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5,
6.12%, 1/15/2024 3,175,308
1,065,906 GE Capital Home Equity Loan 1991-1, Class A, 7.20%, 9/15/2011 1,066,236
4,000,000 GE Capital Home Equity Loan 1991-1, Class B, 8.70%, 9/15/2011 4,039,160
1,913,244 HFC Home Equity Loan Trust 1992-2, Class A, 6.65%, 11/20/2012 1,882,537
3,854,181 Merrill Lynch Home Equity Loan Trust 1991-2, Class B, 6.19%,
4/15/2006 3,873,452
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES - CONTINUED
HOME EQUITY LOAN RECEIVABLES - CONTINUED
$ 3,631,308 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 6.50%, 2/15/2003 $ 3,657,453
Total 25,954,868
INSURANCE - 3.5%
4,000,000 American General Co., 9.63%, 2/1/2018 4,356,120
3,346,000 American Reinsurance Corp., 10.88%, 9/15/2004 3,678,091
Total 8,034,211
LEASING - 0.1%
136,674 (b) Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%,
1/20/1999 135,527
MANUFACTURED HOUSING RECEIVABLES - 4.5%
3,716,788 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 7.65%,
1/15/2012 3,750,908
436,001 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B,
8.50%, 4/15/2012 445,196
6,265,285 (b) Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B,
9.25%, 5/15/2011 6,345,543
Total 10,541,647
RECREATIONAL VEHICLE RECEIVABLES - 0.6%
1,293,395 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 1,301,129
TELECOMMUNICATIONS - 2.3%
2,000,000 British Telecom Finance, 9.63%, 2/15/2019 2,223,560
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,188,580
Total 5,412,140
UTILITIES - 1.4%
2,000,000 Duke Power Co., Mortgage, 8.63%, 3/1/2022 2,059,920
1,300,000 Philadelphia Electric Co., Mortgage, 8.63%, 6/1/2022 1,318,655
Total 3,378,575
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $142,645,433) 141,251,100
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
GOVERNMENT AGENCIES - 5.1%
$ 2,000,000 Federal Home Loan Bank System, 7.25%, 3/4/2011 $ 1,888,340
10,000,000 United States Treasury Note, 5.88%, 3/31/1999 9,915,900
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $11,985,904) 11,804,240

MORTGAGE-BACKED SECURITIES - 29.5%
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES - 7.0%
2,930,063 GNMA, 7.50%, 2/15/2024 2,896,133
11,976,623 GNMA, 11.00%, 4/15/2026 13,436,334
Total 16,332,467
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES - 22.5%
39,074 Citicorp Mortgage Securities Inc., Series 1992-5, Class A-1, 8.00%,
9/25/2021 39,105
2,354,781 (a) Greenwich Capital Associates 1993-AFI, Class B-1, 7.90%,
9/25/2023 2,278,250
4,530,285 (a) Greenwich Capital Associates 1993-LB2, Class A-1, 7.80%,
8/25/2023 4,564,262
2,478,155 (a) Greenwich Capital Associates 1993-LB3, Class A-1, 7.66%,
1/25/2024 2,496,741
2,366,441 (a)(b)Greenwich Capital Associates REMIC PTC, 1991-4, Class B-1A,
8.53%, 7/1/2019 2,342,777
3,927,304 (a) Greenwich Capital Associates REMIC Trust V, Class B, 5.96%,
5/1/2020 3,672,029
7,852,324 (a) Greenwich Capital Associates Sub. Mortgage Securities Trust
1994-B, Class A, 7.72%, 1/25/2018 7,773,801
1,783,450 (a) Glendale Federal Bank 1988-1, Class A, 7.47%, 11/25/2027 1,792,367
676,908 (b) Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2022 702,292
1,000,000 Prudential Home Mortgage 1992-32, Class A-6, 7.50%, 10/25/2022 980,120
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 5,985,900
4,000,000 Residential Acredit Loans, Inc., Series 1995-QS1, Class A-2, 6.90%,
1/25/2020 3,967,640
341,053 Residential Funding Mortgage Securities Inc., 1992-S43, Class A-4,
8.00%, 12/25/2022 340,418
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MORTGAGE-BACKED SECURITIES - CONTINUED
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES - CONTINUED
$ 424,983 Residential Funding Mortgage Securities, Inc. 1993-S18, Class A-2,
7.50%, 5/25/2023 $ 425,663
2,000,018 (a) Resolution Trust Corp. 1992-12, Class B-3, 7.85%, 1/25/2025 1,971,898
945,122 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 942,173
12,000,000 Salomon Brothers Mortgage Securities VII, Inc., 1993-5, Class A-3C,
7.37%, 10/25/2023 12,090,000
Total 52,365,436
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $69,232,798) 68,697,903

(C)REPURCHASE AGREEMENT - 4.5%
10,455,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(AT AMORTIZED COST) 10,455,000
TOTAL INVESTMENTS (IDENTIFIED COST $234,319,135)(D) $ 232,208,243
</TABLE>

Note: The categories of investments are shown as a percentage of net
assets ($233,020,824) at April 30, 1996.

The following acronyms are used throughout this portfolio:
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
MTN - Medium Term Note
PTC - Put-Conditional
REMIC - Real Estate Mortgage Investment Conduit

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost
$234,319,135) $ 232,208,243
Income receivable 2,112,820
Receivable for shares sold 195,112
Total assets 234,516,175
LIABILITIES:
Payable to Bank $ 154,937
Income distribution payable 1,041,772
Payable for shares redeemed 261,795
Accrued expenses 36,847
Total liabilities 1,495,351
Net Assets for 26,833,429 shares outstanding $ 233,020,824
NET ASSETS CONSIST OF:
Paid-in capital $ 262,186,134
Net unrealized depreciation of investments (2,110,892)
Accumulated net realized loss on investments (27,054,418)
Total Net Assets $ 233,020,824
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$216,674,769 / 24,951,084 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$16,346,055 / 1,882,345 shares outstanding $8.68
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 15,859,131
EXPENSES:
Investment advisory fee $ 907,666
Administrative personnel and services fee 171,686
Custodian fees 42,408
Transfer and dividend disbursing agent fees and expenses 79,385
Directors'/Trustees' fees 5,013
Auditing fees 18,178
Legal fees 3,147
Portfolio accounting fees 75,009
Distribution services fee - Institutional Service Shares 49,730
Shareholder services fee - Institutional Shares 517,563
Shareholder services fee - Institutional Service Shares 49,730
Share registration costs 23,777
Printing and postage 18,319
Insurance premiums 6,905
Taxes 8,781
Miscellaneous 2,508
Total expenses 1,979,805
Waivers -
Waiver of investment advisory fee $ (82,939)
Waiver of distribution services fee - Institutional Service Shares (47,741)
Waiver of shareholder services fee -6Institutional Shares (517,563)
Waiver of shareholder services fee - Institutional Service Shares (1,989)
Total waivers (650,232)
Net expenses 1,329,573
Net investment income 14,529,558
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,061,785)
Net change in unrealized depreciation of investments 4,045,498
Net realized and unrealized gain on investments 1,983,713
Change in net assets resulting from operations $ 16,513,271

</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS -
Net investment income $ 14,529,558 $ 18,781,177
Net realized gain (loss) on investments ($10,784,773 net loss
and $5,572,713 net gain, respectively, as computed for federal
tax purposes) (2,061,785) (13,861,223)
Net change in unrealized appreciation (depreciation) 4,045,498 4,124,069
Change in net assets resulting from operations 16,513,271 9,044,023
DISTRIBUTIONS TO SHAREHOLDERS -
Distributions from net investment income
Institutional Shares (13,302,550) (17,312,790)
Institutional Service Shares (1,227,008) (1,468,387)
Change in net assets resulting from distributions to
shareholders (14,529,558) (18,781,177)
SHARE TRANSACTIONS -
Proceeds from sale of shares 109,565,191 62,830,948
Net asset value of shares issued to shareholders in payment
of distributions declared 2,706,717 3,515,879
Cost of shares redeemed (117,974,583) (212,625,473)
Change in net assets resulting from share transactions (5,702,675) (146,278,646)
Change in net assets (3,718,962) (156,015,800)
NET ASSETS:
Beginning of period 236,739,786 392,755,586
End of period $ 233,020,824 $ 236,739,786

</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996

1. ORGANIZATION

Federated Income Securities Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended (the "Act") as an
open-end, management investment company. The Trust consists of two
diversified portfolios. The financial statements included herein are
only those of Federated Short-Term Income Fund (the "Fund"), a
diversified portfolio. The financial statements of the other portfolio
are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which
shares are held.

The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.

The investment objective of the Fund is to seek to provide current
income.

2. SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT VALUATIONS - U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, unlisted
securities, and private placement securities are generally valued at
the mean of the latest bid and asked price as furnished by an
independent pricing service. Short-term securities are valued at the
prices provided by an independent pricing service. However, short-
term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which
approximates fair market value. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or,
if no market prices are available, at the fair value as determined by
the Fund's pricing committee.

REPURCHASE AGREEMENTS - It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under
repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market
value of each repurchase agreement's collateral to ensure that the
value of collateral at least equals the repurchase price to be paid
under the repurchase agreement transaction.

The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers,
which are deemed by the Fund's adviser to be creditworthy pursuant to
the guidelines and/or standards reviewed or established by the Board
of Trustees (the "Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.

FEDERATED SHORT-TERM INCOME FUND
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS - Interest income and
expenses are accrued daily. Bond premium and discount, if applicable,
are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex-
dividend date.

Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to
differing treatments for expiring capital loss carryforwards. The
following reclassifications have been made to the financial
statements.
<TABLE>
<CAPTION>

INCREASE (DECREASE)
ACCUMULATED
PAID-IN NET REALIZED
CAPITAL GAIN/LOSS
<C> <C>
($791,358) $791,358

</TABLE>

Net investment income, net realized gains/losses, and net assets were
not affected by this reclassification.

FEDERAL TAXES - It is the Fund's policy to comply with the provisions
of the Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its income.
Accordingly, no provisions for federal tax are necessary.

At April 30, 1996, the Fund, for federal tax purposes, had a capital
loss carryforward of $25,659,517, which will reduce the Fund's
taxable income arising from future net realized gain on investments,
if any, to the extent permitted by the Code, and thus will reduce the
amount of the distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal tax.
Pursuant to the Code, such capital loss carryforward will expire as
follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<C> <C>
1997 $ 3,077,752
1998 $ 316,627
1999 $ 1,132,354
2000 $ 4,105,766
2002 $ 669,532
2003 $ 5,572,713
2004 $ 10,784,773
</TABLE>

Additionally, net capital losses of $ 1,394,901 attributable to
security transactions incurred after October 31, 1995 are treated as
arising on the first day of the Fund's next taxable year.

FEDERATED SHORT-TERM INCOME FUND

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - The Fund may engage
in when-issued or delayed delivery transactions. The Fund records
when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on a
when-issued or delayed delivery basis are marked to market daily and
begin earning interest on the settlement date.

RESTRICTED SECURITIES - Restricted securities are securities that may
only be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer
of restricted securities has agreed to register such securities for
resale, at the issuer's expense either upon demand by the Fund or in
connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may
be determined to be liquid under criteria established by the Board of
Trustees. The Fund will not incur any registration costs upon such
resales.

Additional information on each restricted security held at April 30,
1996 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Encyclopedia Britannica Domestic Funding Corp. 3/21/1994 $ 1,635,000
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3 2/18/1994 1,999,719
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5 2/18/1994 3,315,537
Concord Leasing Grantor Trust 1992-C 8/14/1992 136,037
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 6,364,159
Greenwich Capital Associates REMIC PTC, 1991-4, Class B-1A 1/7/1993 2,392,735
Long Beach Bank Mortgage Series 1992-3, Class A 6/29/1992 717,099
</TABLE>

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 amounts
of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those
estimated.

OTHER - Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without
par value) for each class of shares.

FEDERATED SHORT-TERM INCOME FUND
Transactions in shares were as follows:
<TABLE>
<CAPTION>

YEAR ENDED APRIL 30,
1996 1995
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 10,873,366 $ 95,413,085 6,446,211 $ 55,884,659
Shares issued to shareholders in
payment of distributions declared 238,773 2,094,178 317,004 2,739,906
Shares redeemed (11,665,688) (102,282,720) (21,161,903) (183,228,360)
Net change resulting from
Institutional share transactions (553,549) ($ 4,775,457) (14,398,688) ($ 124,603,795)
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 1,615,112 $ 14,152,106 801,654 $ 6,946,289
Shares issued to shareholders in
payment of distributions declared 69,892 612,539 89,844 775,973
Shares redeemed (1,787,163) (15,691,863) (3,388,048) (29,397,113)
Net change resulting from
Institutional Service share
transactions (102,159) $ (927,218) (2,496,550) $ (21,674,851)
Net change resulting from
Fund share transactions (655,708) $ (5,702,675) (16,895,238) $ (146,278,646)
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE - Federated Management, the Fund's investment
adviser, (the "Adviser") , receives for its services an annual
investment advisory fee equal to 0.40% of the Fund's average daily
net assets. The Adviser may voluntarily choose to waive any portion of
its fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion.

ADMINISTRATIVE FEE - Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with
administrative personnel and services. The fee paid to FServ is based
on the level of average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative
Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.

FEDERATED SHORT-TERM INCOME FUND

DISTRIBUTION SERVICES FEE - The Fund has adopted a Distribution Plan
(the "Plan") pursuant to Rule 12b-1 under the Act. Under the terms of
the Plan, the Fund will compensate Federated Securities Corp.
("FSC"), the principal distributor, from the net assets of the Fund
to finance activities intended to result in the sale of the Fund's
Institutional Service shares. The Plan provides that the Fund may
incur distribution expenses up to .25 of 1% of the average daily net
assets of Institutional Service Shares annually, to compensate FSC. The
distributor may voluntarily choose to waive any portion of its fee. The
distributor can modify or terminate this voluntary waiver at any time
at its sole discretion.

SHAREHOLDER SERVICES FEE - Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will
pay FSS up to 0.25% of daily average net assets of the Fund shares
for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. FSS
may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole
discretion.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES - FServ, through
its subsidiary, Federated Shareholder Services Company serves as transfer
and dividend disbursing agent for the Fund. The fee paid to FServ is based
on the size, type, and number of accounts and transactions made by shareholders.

PORTFOLIO ACCOUNTING FEES - FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.

GENERAL - Certain of the Officers and Trustees of the Fund are Officers and
Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities,
for the period ended April 30, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 171,052,088
SALES $ 179,387,115
</TABLE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Trustees and Shareholders of

Federated Income Securities Trust:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Short-Term Income
Fund (one of the portfolios comprising Federated Income Securities
Trust) , as of April 30, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial
highlights (see pages 2 and 22 of this prospectus) for each of the
periods presented therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and 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 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. Our procedures included
confirmation of securities owned as of April 30, 1996, by correspondence
with the custodian and a broker. 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 and financial highlights
referred to above present fairly, in all material respects, the
financial position of Federated Short-Term Income Fund, a portfolio of
Federated Income Securities Trust, at April 30, 1996, the results of
its operations for the year then ended, the changes in its net assets
for each of the two years in each of the period then ended, and
financial highlights for the periods presented therein, in conformity
with generally accepted accounting principles.

ERNST & YOUNG LLP

Pittsburgh, Pennsylvania

June 14, 1996

ADDRESSES
<TABLE>
<S> <S> <S>

Federated Short-Term Income Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

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

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

Transfer Agent & Dividend Disbursing Agent
Federated Shareholder Federated Investors Tower
Services Company Pittsburgh, Pennsylvania 15222-3779

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
</TABLE>

FEDERATED SHORT-TERM
INCOME FUND

INSTITUTIONAL SHARES

PROSPECTUS

A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company

June 30, 1996

Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

Cusip 31420C209
1111903A-IS (6/96)

Federated Short-Term Income Fund
(A Portfolio of Federated Income Securities Trust)
Institutional Service Shares

Prospectus

The Institutional Service Shares of Federated Short-Term Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio
in Federated Income Securities Trust (the "Trust"), an open-end, management
investment company (a mutual fund).

The investment objective of the Fund is to seek to provide current income.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS NOR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED NOR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.

The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1996,
with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information, or a paper copy of this prospectus, if you have
received your prospectus electronically, free of charge by calling 1-800-341-
7400. To obtain other information, or make inquiries about the Fund, contact
the Fund at the address listed in the back of this prospectus. The Statement
of Additional Information, material incorporated by reference into this
document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated June 30, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS -
INSTITUTIONAL SERVICE SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Special Considerations 13
Portfolio Turnover 13
Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 14
Management of the Trust 14
Distribution of Institutional Service Shares 16
Administration of the Fund 17
NET ASSET VALUE 17
INVESTING IN INSTITUTIONAL SERVICE SHARES 17
Share Purchases 17
Exchange Privilege 18
Minimum Investment Required 18
What Shares Cost 18
Certificates and Confirmations 18
Dividends 18
Capital Gains 19
REDEEMING INSTITUTIONAL SERVICE SHARES 19
Telephone Redemption 19
Redeeming Shares by Mail 19
Accounts with Low Balances 20
SHAREHOLDER INFORMATION 20
Voting Rights 20
TAX INFORMATION 20
Federal Income Tax 20
State and Local Taxes 21
PERFORMANCE INFORMATION 21
OTHER CLASSES OF SHARES 21
FINANCIAL HIGHLIGHTS -
INSTITUTIONAL SHARES 22
FINANCIAL STATEMENTS 23
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 36
ADDRESSES 37
</TABLE>

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.36%
12b-1 Fee (after waiver)(2) 0.01%
Total Other Expenses 0.44%
Shareholder Services Fee (after waiver)(3) 0.24%
Total Operating Expenses(4) 0.81%
</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) The maximum 12b-1 fee is 0.25%.
(3) The maximum shareholder services fee is 0.25%.
(4) The total operating expenses would have been 1.10% absent the voluntary
waivers of portions of the management fee, the 12b-1 fee and the
shareholder services fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Service Shares
of the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Investing in
Institutional Service Shares" and "Federated Income Securities Trust
Information." Wire-transferred redemptions of less than $5,000 may be subject
to additional fees.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $8 $26 $45 $100
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 36.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.54 0.52 0.48 0.52 0.15
Net realized and unrealized
gain(loss) on investments 0.07 (0.24) (0.32) 0.19 (0.10)
Total from investment operations 0.61 0.28 0.16 0.71 0.05
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.52) (0.48) (0.52) (0.15)
NET ASSET VALUE, END OF PERIOD $ 8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98
TOTAL RETURN(B) 7.25% 3.29% 1.78% 8.12% 0.69%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.81% 0.81% 0.81% 0.76% 0.78%*
Net investment income 6.17% 5.90% 5.30% 5.82% 6.37%*
Expense waiver/
reimbursement(c) 0.29% 0.27% 0.13% 0.45% 0.98%*
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $16,346 $17,091 $39,649 $15,673 $778
Portfolio turnover 77% 38% 44% 62% 114%
</TABLE>

* Computed on an annualized basis.
(a) Reflects operations for the period from January 21, 1992 (date of initial
public investment) to April 30, 1992.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended April 30, 1996, which can be obtained
free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 24, 1986. On December 31, 1991, the
shareholders voted to permit the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of
securities. The shares in any one portfolio may be offered in separate
classes. With respect to this Fund, as of the date of this prospectus the
Board of Trustees ("Trustees") has established two classes of shares,
Institutional Service Shares and Institutional Shares. This prospectus
relates only to Institutional Service Shares of the Fund.

Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio
of U.S. government securities. A minimum initial investment of $25,000 over a
90-day period is required.
Shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Fund.

INVESTMENT INFORMATION
INVESTMENT OBJECTIVE

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

INVESTMENT POLICIES

The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities. The Fund may also invest in long-term
high grade debt securities to the extent consistent with its policies
regarding the Fund's average dollar-weighted portfolio maturity and duration.
This investment policy may not be changed without the prior approval of the
Fund's shareholders. Unless indicated otherwise, the other investment
policies described in this prospectus may be changed by the Trustees without
the approval of the Fund's shareholders. Shareholders will be notified before
any material changes in these policies become effective.

ACCEPTABLE INVESTMENTS. The high grade debt securities in which the Fund
invests include medium and long-term instruments rated by one or more
nationally recognized statistical rating organizations ("NRSROs") in one of
their three highest rating categories (e.g., AAA, AA or A by Standard &
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or
Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's") ) and short-term
instruments rated by one or more NRSROs in one of their two highest
categories (e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or
F-2 by Fitch). Although the Fund may invest in unrated debt securities that
are determined by the Fund's investment adviser to be of comparable quality
to instruments having such ratings, as a matter of operating policy, the Fund
will invest only in rated securities. Downgraded securities will be evaluated

* on a case by case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If
not, the security will be sold.
* Acceptable investments currently include the following:
* corporate debt obligations, including medium-term notes and variable rate
demand notes;
* asset-backed securities;
* commercial paper (including Canadian Commercial Paper and Europaper);
* certificates of deposit, demand and time deposits, bankers' acceptances,
deposit notes and other instruments of domestic and foreign banks and
other deposit institutions ("Bank Instruments");
* medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
* interest rate swaps, caps and floors;
* auction rate securities (see below);
* obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
* other money market instruments.

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

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

ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping
of certain governmental, government related, private loans, receivables or
other lender assets into pools. Interests in these pools are sold as
individual securities. Payments from the asset pools may be divided into
several different tranches of debt securities, with some tranches entitled to
receive regular installments of principal and interest, other tranches
entitled to receive regular installments of interest, with principal payable
at maturity or upon specified call dates, and other tranches only entitled to
receive payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear different
interest rates, which may be fixed or floating.

Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment risks
on mortgage-backed securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages to
take advantage of the more favorable rates. Prepayments on mortgage-backed
securities are also affected by other factors, such as the frequency with
which people sell their homes or elect to make unscheduled payments on their
mortgages. All asset-backed securities are subject to similar prepayment
risks, although they may be more or less sensitive to certain factors.
Depending upon market conditions, the yield that the Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments, may be
lower than the yield on the original asset-backed security. As a consequence,
mortgage securities may be a less effective means of "locking in" interest
rates than other types of debt securities having the same stated maturity and
may also have less potential for capital appreciation. For certain types of
asset pools, such as collateralized mortgage obligations, prepayments may be
allocated to one tranche of securities ahead of other tranches, in order to
reduce the risk of prepayment for the other tranches.

Prepayments may result in a capital loss to the Fund to the extent that the
prepaid asset-backed securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of asset-backed
securities purchased at a market discount from their stated principal amount
will accelerate the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the shareholders. The credit
characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement provided to
such securities.

MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an
interest in real estate mortgages (collectively, "mortgage
securities"). Mortgage securities are: (i) issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities; (iii) those issued by private issuers
that represent an interest in or are collateralized by whole loans or
mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately
issued securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government.

The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and principal. The
interest portion of these payments will be distributed by the Fund as
income, and the capital portion will be reinvested.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than
fixed interest rate mortgages. Typically, the ARMS in which the Fund
invests are issued by GNMA, FNMA, and FHLMC and are actively traded.
ARMS may be collateralized by whole loans or private pass-through
securities. The underlying mortgages which collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration
("FHA") or Veterans Administration ("VA"), while those collateralizing
ARMS issued by FHLMC or FNMA are typically conventional residential
mortgages conforming to strict underwriting size and maturity
constraints.

Unlike conventional bonds, ARMS pay back principal over the life of
the ARMS rather than at maturity. Thus, a holder of the ARMS, such as
the Fund, would receive monthly scheduled payments of principal and/or
interest and may receive unscheduled principal payments representing
payments on the underlying mortgages. At the time that a holder of the
ARMS reinvests the payments and any unscheduled prepayments of
principal that it receives, the holder may receive a rate of interest
which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of fixed-income
securities.

While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but may be collateralized by whole loans or private
pass-through securities.

The CMOs in which the Fund may invest may be: (a) collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment
of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
collateralized by pools of mortgages without a government guarantee as
to payment of principal and interest, but which have some form of
credit enhancement.

The following example illustrates how mortgage cash flows are
prioritized in the case of CMOs. Most of the CMOs in which the Fund
invests use the same basic structure.

(1) Several classes of securities are issued against a pool of
mortgage collateral. The most common structure contains four
tranches of securities: The first three (A, B, and C bonds) pay
interest at their stated rates beginning with the issue date; the
final tranche (Z bond) typically receives any excess income from
the underlying investments after payments are made to the other
tranches and receives no principal or interest payments until the
shorter maturity tranches have been retired, but then receives all
remaining principal and interest payments.
(2) The cash flows from the underlying mortgages are applied first
to pay interest and then to retire securities.
(3) The tranches of securities are retired sequentially. All
principal payments are directed first to the shortest-maturity
tranche (or A bonds). When those securities are completely
retired, all principal payments are then directed to the next-
shortest-maturity security tranche (or B bond). This process
continues until all of the tranches have been completely retired.

Because the cash flow is distributed sequentially instead of pro rata,
as with pass-through securities, the cash flows and average lives of
CMOs are more predictable, and there is a period of time during which
the investors in the longer-maturity classes receive no principal
paydowns. One or more of the tranches often bear interest at an
adjustable rate. The interest portion of these payments is distributed
by the Fund as income, and the principal portion is reinvested.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which
the Fund may invest are offerings of multiple class real estate
mortgage-backed securities which qualify and elect treatment as such
under provisions of the Internal Revenue Code, as amended. Issuers of
REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity
and is taxed to the person or persons who hold interests in the REMIC.
A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and
a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly
or indirectly secured principally by real property.

To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility
than adjustable rate mortgage securities that closely mirror the
market. Certain residual interest tranches of CMO's may have
adjustable interest rates that deviate significantly from prevailing
market rates, even after the interest rate is reset, and are subject
to correspondingly increased price volatility. In the event that the
Fund purchases such residual interest mortgage securities, it will
factor in the increased interest and price volatility of such
securities when determining its dollar-weighted average portfolio
maturity and duration.

CAPS AND FLOORS. The underlying mortgages which collateralize the
ARMS, CMOs, and REMICs in which the Fund invests will frequently have
caps and floors which limit the maximum amount by which the loan rate
to the residential borrower may change up or down: (1) per reset or
adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may
result in negative amortization.

The value of mortgage securities in which the Fund may invest may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities, including interests in
pools of receivables, such as credit card and accounts receivable and
motor vehicle and other installment purchase obligations and leases.
These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities are structured similarly to
collateralized mortgage obligations and mortgage pass-through
securities, which are described above. Also, these securities may be
issued either by nongovernmental entities and carry no direct or
indirect governmental guarantees, or by governmental entities (i.e.,
Small Business Administration) and carry varying degrees of
governmental support.

Non-mortgage related asset backed securities have structural
characteristics similar to mortgage-related asset-backed securities
but have underlying assets that are not mortgage loans or interests in
mortgage loans. The Fund may invest in non-mortgage related asset-
backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations
and credit card receivables. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect
government guarantee.

Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time the
Fund reinvests the payments and any unscheduled prepayments of
principal received, the Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Although non-mortgage related asset-backed
securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities, certain
of the factors that affect the rate of prepayments on mortgage-related
asset-backed securities also affect the rate of prepayments on non-
mortgage related asset-backed securities.

Non-mortgage related asset-backed securities present certain risks
that are not presented by mortgage-related asset-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to
another state, such registration could defeat the original security
interest in the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset-
backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.

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

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

CREDIT FACILITIES. Demand notes are borrowing arrangements between a
corporation and an institutional lender (such as the Fund) payable upon
demand by either party. The notice period for demand typically ranges from
one to seven days, and the party may demand full or partial payment.
Revolving credit facilities are borrowing arrangements in which the lender
agrees to make loans up to a maximum amount upon demand by the borrower
during a specified term. As the borrower repays the loan, an amount equal to
the repayment may be borrowed again during the term of the facility. The Fund
generally acquires a participation interest in a revolving credit facility
from a bank or other financial institution. The terms of the participation
require the Fund to make a pro rata share of all loans extended to the
borrower and entitles the Fund to a pro rata share of all payments made by
the borrower. Demand notes and revolving facilities usually provide for
floating or variable rates of interest.
INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed-rate payments) on a notional principal
amount. The principal amount of an interest rate swap is notional in that it
only provides the basis for determining the amount of interest payments under
the swap agreement, and does not represent an actual loan. For example, a $10
million LIBOR swap would require one party to pay the equivalent of the
London Interbank Offer Rate on $10 million principal amount in exchange for
the right to receive the equivalent of a fixed rate of interest on $10
million principal amount. Neither party to the swap would actually advance
$10 million to the other.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of the amount of excess interest on a notional principal amount from
the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of the amount of the
interest shortfall on a notional principal amount from the party selling the
interest rate floor.

The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest
based on a market index. Interest accrued on the hedged note would then equal
or exceed the Fund's obligations under the swap, while changes in the market
value of the swap would largely offset any changes in the market value of the
note. The Fund may also enter into swaps and caps to preserve or enhance a
return or spread on a portfolio security. The Fund does not intend to use
these transactions in a speculative manner.

The Fund will usually enter into interest rate swaps on a net basis (i.e.,
the two payment streams are netted out), with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. The net amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis, and the
Fund will segregate liquid assets in an aggregate net asset value at least
equal to the accrued excess, if any, on each business day. If the Fund enters
into an interest rate swap on other than a net basis, the Fund will segregate
liquid assets in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent interest rate swaps, caps or floors are
determined by the investment adviser to be illiquid, they will be included in
the Fund's limitation on investments in illiquid securities. To the extent
the Fund sells caps and floors, it will maintain in a segregated account cash
and/or U.S. government securities having an aggregate net asset value at
least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors.

The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Fund's investment adviser
is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
utilized. Moreover, even if the Fund's investment adviser is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly
with the price of the portfolio security being hedged.

There is no limit on the amount of interest rate swap transactions that may
be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk
of loss with respect to a default on an interest rate swap is limited to the
net asset value of the swap together with the net amount of interest payments
owed to the Fund by the defaulting party. A default on a portfolio security
hedged by an interest rate swap would also expose the Fund to the risk of
having to cover its net obligations under the swap with income from other
portfolio securities. The Fund may purchase and sell caps and floors without
limitation, subject to the segregated account requirement described above.

AUCTION RATE SECURITIES. The Fund may invest in auction rate municipal
securities and auction rate preferred securities (collectively, "auction rate
securities"). Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at
par value at specified intervals. The interest rate or dividend is reset by
"Dutch" auction in which bids are made by broker-dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The interest rate or dividend rate set by the auction is the lowest interest
or dividend rate that covers all securities offered for sale. While this
process is designed to permit auction rate securities to be traded at par
value, there is some risk that an auction will fail due to insufficient
demand for the securities. If so, the securities may become illiquid and
subject to the Fund's 15% limitation on illiquid securities.

AVERAGE PORTFOLIO MATURITY AND DURATION. Although the Fund will not maintain
a stable net asset value, the adviser will seek to limit, to the extent
consistent with the Fund's investment objective of current income, the
magnitude of fluctuations in the Fund's net asset value by limiting the
dollar-weighted average maturity and duration of the Fund's portfolio.
Securities with shorter maturities and durations generally have less volatile
prices than securities of comparable quality with longer maturities or
durations. The Fund should be expected to maintain a higher average maturity
and duration during periods of lower expected market volatility, and a lower
average maturity and duration during periods of higher expected market
volatility. In any event, the Fund's dollar-weighted average maturity will
not exceed three years, and its dollar-weighted average duration will not
exceed three years.

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

DEMAND FEATURES. The Fund may acquire securities that are subject to puts
and standby commitments ("demand features") to purchase the securities at
their principal amount (usually with accrued interest) within a fixed period
following a demand by the Fund. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities or by another
third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the
demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable
even after a payment default on the underlying security are treated as a form
of credit enhancement.

RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in restricted
and illiquid securities. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. The Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.

The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must
be in an exempt transaction. Section 4(2) commercial paper is normally resold
to other institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Fund intends, therefore, to treat the restricted securities which meet
the criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by the Fund's investment adviser, as
liquid and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.

REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities in which the
Fund may invest to the Fund and agree at the time of sale to repurchase them
at a mutually agreed upon time and price.

REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into reverse
repurchase agreements. This transaction is similar to borrowing cash. In a
reverse repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker, or
dealer, in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.

When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.

During the period any reverse repurchase agreements are outstanding, but only
to the extent necessary to assure completion of the reverse repurchase
agreements, the Fund will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements. This policy may not be changed without the
approval of the Fund's shareholders.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or long-term basis, or
both, up to one-third of the value of its total assets, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will limit
the amount of portfolio securities it may lend to not more than one-third of
its total assets. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the investment adviser has
determined are creditworthy under guidelines established by the Trustees and
will receive collateral equal to at least 100% of the value of the securities
loaned. This policy may not be changed without the approval of the Fund's
shareholders.

There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, the disposition of the securities may be
delayed pending court action.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time. The seller's failure to complete these
transactions may cause the Fund to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may
vary from the purchase prices. Accordingly, the Fund may pay more/less than
the market value of the securities on the settlement date. The Fund will
limit its purchase of securities on a when-issued or delayed delivery basis
to no more than 20% of the value of its total assets. This policy may not be
changed without the approval of the Fund's shareholders.

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

SPECIAL CONSIDERATIONS

In the debt market, prices move inversely to interest rates. A
decline in market interest rates results in a rise in the market
prices of outstanding debt obligations. Conversely, an increase in
market interest rates results in a decline in market prices of
outstanding debt obligations. In either case, the amount of change
in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt
obligations: the debt obligations with the longest maturities will
experience the greatest market price changes.

The market value of debt obligations, and therefore the Fund's net asset
value, will fluctuate due to changes in economic conditions and other market
factors such as interest rates which are beyond the control of the Fund's
investment adviser. The Fund's investment adviser could be incorrect in its
expectations about the direction or extent of these market factors. Although
debt obligations with longer maturities offer potentially greater returns,
they have greater exposure to market price fluctuation. Consequently, to the
extent the Fund is significantly invested in debt obligations with longer
maturities, there is a greater possibility of fluctuation in the Fund's net
asset value.

PORTFOLIO TURNOVER

While the Fund does not intend to engage in substantial short-term trading,
from time to time it may sell portfolio securities for investment reasons
without considering how long they have been held. For example, the Fund would
do this:

* to take advantage of short-term differentials in yields or market values;
* to take advantage of new investment opportunities;
* to respond to changes in the creditworthiness of an issuer; or
* to try to preserve gains or limit losses.

Any such trading would increase the Fund's portfolio turnover and its
transaction costs. However, the Fund will not attempt to set or meet any
arbitrary turnover rate since turnover is incidental to transactions
considered necessary to achieve the Fund's investment objective.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the
value of its total assets to secure such borrowings;
* lend any of its assets except portfolio securities up to one-third of the
value of its total assets;
* sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value
of its net assets is held as collateral for those positions;
* underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933 in connection with the sale
of restricted securities which the Fund may purchase pursuant to its
investment objective, policies, and limitations;
* invest more than 5% of its total assets in securities of issuers that
have records of less than three years of continuous operations; or
* with respect to 75% of its assets, invest more than 5% of the value of
its total assets in securities of one issuer (except U.S. government
obligations), or purchase more than 10% of the outstanding voting
securities of any one issuer. For these purposes the Fund takes all
common stock and all preferred stock of an issuer each as a single class,
regardless of priorities, series, designations, or other differences.

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

The Fund will not:

* invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.

FEDERATED INCOME SECURITIES TRUST INFORMATION
MANAGEMENT OF THE TRUST

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

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

ADVISORY FEES. The Fund's Adviser receives an annual investment
advisory fee equal to .40% of the Fund's average daily net assets.
Under the investment advisory contract, the Adviser may voluntarily
reimburse some of the operating expenses of the Fund. The Adviser can
terminate this voluntary reimbursement of expenses at any time at its
sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain
states.

Federated Management and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With over
$80 billion invested across more than 250 funds under management
and/or administration by its subsidiaries, as of December 31, 1995,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 1,800 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,000 financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.

Deborah A. Cunningham has been the Fund's portfolio manager since July
1991. Ms. Cunningham joined Federated Investors in 1981 and has been a
Vice President of the Fund's investment adviser since 1993. Ms.
Cunningham served as an Assistant Vice President of the investment
adviser from 1989 until 1992. Ms. Cunningham is a Chartered Financial
Analyst and received her M.S.B.A. in Finance from Robert Morris
College.

Randall S. Bauer has been the Fund's portfolio manager since October
1995. Mr. Bauer joined Federated Investors in 1989 and has been a Vice
President of the Fund's investment adviser since 1994. Mr. Bauer was
an Assistant Vice President of the Fund's investment adviser from 1989
to 1993. Mr. Bauer is a Chartered Financial Analyst and received his
M.B.A. in Finance from Pennsylvania State University.

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

Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan
adopted in accordance with Rule 12b-1 under the Investment Company Act of
1940, (the "Plan") the distributor may be paid a fee by the Fund in an
amount, computed at an annual rate of .25% of the average daily net assets of
the Shares. The distributor may select financial institutions such as banks,
fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide sales services or distribution-related support
services as agents for their clients or customers.

The Plan is a compensation-type plan. As such, the Fund makes no payments to
the distributor except as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by
the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor
may be able to recover such amount or may earn a profit from future payments
made by the Fund under the Plan.

In addition, the Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Fund may make payments up to .25% of the average daily net asset
value of Shares to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as
deemed appropriate, the amount stated above may be reduced voluntarily. Under
the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will
be determined from time to time by the Trust and Federated Shareholder
Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments
made pursuant to the Distribution Plan and Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance
of substantial sales services, distribution-related support services, or
shareholder services.

The support may include sponsoring sales, educational and training seminars
for their employees, providing sales literature, and engineering computer
software programs that emphasize the attributes of the Fund. Such assistance
will be predicated upon the amount of Shares the financial institution sells
or may sell, and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the distributor
may be reimbursed by the Fund's investment adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual rate
which relates to the average aggregate daily net assets of all funds advised
by affiliates of Federated Investors as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>

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

NET ASSET VALUE

The Fund's net asset value per Share fluctuates. The net asset value for
Shares is determined by adding the interest of the Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of
the Shares in the liabilities of the Fund and those attributable to Shares,
and dividing the remainder by the total number of Shares outstanding.

INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open. Shares
may be purchased either by wire or by mail.

To purchase Shares of the Fund, open an account by calling Federated
Securities Corp. Information needed to establish the account will be taken
over the telephone. The Fund reserves the right to reject any purchase request.

BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the
Fund before 4:00 p.m. (Eastern time) to place an order. The order is
considered received immediately. Payment by federal funds must be received
before 3:00 p.m. (Eastern time) on the next business day following the order.
Federal funds should be wired as follows: Federated Shareholder Services
Company, c/o State Street Bank and Trust Company, Boston, MA; Attention:
EDGEWIRE; For Credit to: Federated Short-Term Income Fund-Institutional
Service Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee
or Institution Name; and ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire
purchases shouldbe directed to your shareholder services representative at
the telephone number listed on your account statement.

BY MAIL. To purchase Shares of the Fund by mail, send a check made payable
to Federated Short-Term Income Fund-Institutional Service Shares to:
Federated Shareholder Services Company, c/o State Street Bank and Trust
Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered
received after payment by check is converted by the transfer agent's bank,
State Street Bank, into federal funds. This is normally the next business day
after State Street Bank receives the check.

EXCHANGE PRIVILEGE

Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their Shares
for Institutional Shares of the Trust.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount
as long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank
or broker may be subject to a smaller minimum investment.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Fund. Investors who
purchase Shares through a non-affiliated bank or broker may be charged an
additional service fee by that bank or broker.

The net asset value is determined as of the close of trading (normally 4:00
p.m. Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company
maintains a Share account for each shareholder. Share certificates are not
issued unless requested by contacting the Fund.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
the month.

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on
the business day wire payment is received by State Street Bank. If the order
for Shares and payment by wire are received on the same day, Shares begin
earning dividends on the next business day. Shares purchased by check begin
earning dividends on the business day after the check is converted upon
instruction of the transfer agent into federal funds. Dividends are
automatically reinvested on payment dates in additional Shares of the Fund
unless cash payments are requested by contacting the Fund.

CAPITAL GAINS

Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.

REDEEMING INSTITUTIONAL SERVICE SHARES

The Fund redeems Shares at their net asset value next determined after the
Fund receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests must be
received in proper form and can be made by telephone request or by written
request.

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business
day, but in no event more than seven days, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If
at any time the Fund shall determine it is necessary to terminate or modify
this method of redemption, shareholders would be promptly notified. Proceeds
from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. Questions about
telephone redemptions on days when wire transfers are restricted should be
directed to your shareholder services representative at the telephone number
listed on your account statement.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions. In the event of drastic economic or market changes, a
shareholder may experience difficulty in redeeming by telephone. If such a
case should occur, another method of redemption, such as "Redeeming Shares by
Mail," should be considered.

REDEEMING SHARES BY MAIL

Shares may redeemed in any amount by mailing a written request to Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.

The written request should state: the Fund Name and the Share Class name;
the account name as registered with the Fund; the account number; and the
number of Shares to be redeemed or the dollar amount requested. All owners of
the account must sign the request exactly as the Shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.

Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than
to the shareholder of record must have signatures on written redemption
requests guaranteed by a commercial or savings bank, trust company or savings
association whose deposits are insured by an organization which is
administered by the Federal Deposit Insurance Corporation; a member firm of a
domestic stock exchange; or any other "eligible guarantor institution," as
defined in the Secrities Exchange Act of 1934. The Fund does not accept
signatures guaranteed by a notary public.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified
in writing and allowed 30 days to purchase additional Shares to meet the
minimum requirement.

SHAREHOLDER INFORMATION

VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders of the Trust for vote. All shares
of each portfolio in the Trust have equal voting rights, except that, in
matters affecting only a particular fund or class, only shares of that
particular fund or class are entitled to vote. As of May 31, 1996, Trust
Company of St. Joseph, St. Joseph, MO, owned 34.80% of the voting securities
of the Fund's Institutional Service Shares, and, therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.

As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of
Trustees under certain circumstances.

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

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.

The Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses realized
by the Trust's other portfolios, if any, will not be combined for tax
purposes with those realized by the Fund.

Unless otherwise exempt, shareholders are required to pay federal income
tax on any dividends and other distributions received. This applies whether
dividends and distributions are received in cash or as additional shares.
Information on the tax status of dividends and distributions is provided
annually.

STATE AND LOCAL TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Fund, Shares
may be subject to personal property taxes imposed by counties, municipalities,
and school districts in Pennsylvania to the extent that the portfolio
securities in the Fund would be subject to such taxes if owned directly by
residents of those jurisdictions. Shareholders are urged to consult their
own tax advisers regarding the status of their accounts under state and
local laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for
Institutional Service Shares.

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

The yield of Institutional Service Shares is calculated by dividing the net
investment income per Share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period
by the maximum offering price per Share of Institutional Service Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned
by Institutional Service Shares and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

The Institutional Service Shares are sold without any sales charge or
other similar non-recurring charges other than a Rule 12b-1 fee.

Total return and yield will be calculated separately for Institutional
Service Shares and Institutional Shares.

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

OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Institutional Shares.
Institutional Shares are sold to banks and other institutions that hold
assets as principals or in a fiduciary capacity for individuals, trusts,
estates or partnerships and are subject to a minimum initial investment
of $25,000.

Institutional Service Shares and Institutional Shares are subject to
certain of the same expenses; however, Institutional Service Shares
are distributed under a 12b-1 Plan adopted by the Trust. Expense
differences between Institutional Service Shares and Institutional
Shares may affect the performance of each class.

To obtain more information and a prospectus for Institutional Shares,
investors may call 1-800-235-4669.

FEDERATED SHORT-TERM INCOME FUND
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors,
on page 36.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994 1993 1992(A) 1991 1990 1989 1988 1987(B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.57 0.54 0.51 0.58 0.60 0.83 0.93 0.94 0.94 0.74
Net realized and unrealized
gain (loss) on investments 0.07 (0.24) (0.32) 0.16 (0.07) (0.08) (0.25) (0.15) (0.42) (0.02)
Total from investment
operations 0.64 0.30 0.19 0.74 0.53 0.75 0.68 0.79 0.52 0.72
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.54) (0.51) (0.55) (0.60) (0.83) (0.93) (0.94) (0.94) (0.74)
Distributions in excess
of net investment income(c) - - - - (0.02) (0.01) - - - -
Total distributions (0.57) (0.54) (0.51) ( 0.55) (0.62) (0.84) (0.93) (0.94) (0.94) (0.74)
NET ASSET VALUE, END OF PERIOD $8.68 $ 8.61 $ 8.85 $ 9.17 $ 8.98 $ 9.07 $ 9.16 $ 9.41 $ 9.56 $ 9.98
TOTAL RETURN(D) 7.51% 3.55% 2.04% 8.39% 5.94% 8.80% 7.52% 8.69% 5.43% 7.40%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.56% 0.56% 0.56% 0.51% 0.53% 0.52% 0.52% 0.51% 0.50% 0.50%*
Net investment income 6.43% 6.22% 5.55% 6.07% 6.71% 9.33% 9.95% 9.90% 9.59% 9.58%*
Expense waiver/
reimbursement(e) 0.29% 0.03% 0.08% 0.45% 0.98% 0.92% 0.75% 0.76% 0.59% 0.60%*
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $216,675 $219,649 $353,106 $144,129 $36,047 $47,223 $65,429 $69,904 $90,581 $80,073
Portfolio turnover 77% 38% 44% 62% 114% 23% 34% 38% 77% 82%
</TABLE>

* Computed on an annualized basis.
(a) On December 31, 1991, the shareholders approved a change in the
fundamental investment policies which state that the Fund will be
invested in high-grade as opposed to lower-rated debt securities, and
as a result, investment income per share is lower.
(b) Reflects operations for the period from July 1, 1986 (date of initial
public investment) to April 30, 1987.
(c) Distributions in excess of net investment income for the years
ended April 30, 1992 and 1991, were a result of certain book and tax
timing differences. These distributions did not represent a return of
capital for federal income tax purposes for the year ended April 30,
1992 and 1991.
(d) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(e) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended April 30, 1996, which can be
obtained free of charge.

FEDERATED SHORT-TERM INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996
<TABLE>
<Caption)
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES-60.6%
AUTOMOTIVE-10.6%
$ 4,062,996 Chevy Chase Auto Trust 1995-1, Class A, 6.00%, 12/15/2001 $ 4,065,556
1,300,000 Chrysler Corp., 10.95%, 8/1/2017 1,437,228
2,451,452 Daimler-Benz Auto Grantor Trust 1995, Class A-1, 5.85%,
5/15/2002 2,444,833
5,000,000 Ford Credit Auto Loan Master Trust 1992-2, Class A, 7.38%,
4/15/1999 5,074,150
6,000,000 Navistar Dealer Note Trust 1990, Class A-3, Floating Rate Pass
Thru Certificate, 1/25/2003 6,093,780
2,730,000 Navistar Financial Owner Trust 1995-A, Class B, 6.85%, 11/20/2001 2,735,214
3,000,000 Premier Auto Trust 1995-3, Class B, 6.25%, 8/6/2001 2,957,970
Total 24,808,731
BANKING-15.1%
3,000,000 (a)BankAmerica Corp., FRN, 6.69%, 6/25/2003 2,917,500
2,000,000 Chase Manhattan Credit Card Master Trust 1991-1, Class A, 8.75%,
8/15/1999 2,017,580
5,000,000 Chase Manhattan Credit Card Master Trust 1992-1, Class A, 7.40%,
5/15/2000 5,058,200
4,000,000 Chemical Master Credit Card Trust 1996-1, Class A, 5.55%,
9/15/2003 3,829,476
5,000,000 (a)Citibank Sub., FRN, 5.85%, 10/25/2005 4,912,500
4,000,000 (a)First USA Credit Card Master Trust, Class B, 6.40%, 12/15/1999 4,005,000
1,000,000 (a)J.P. Morgan & Co., Inc., FRN, 5.75%, 8/19/2002 982,500
3,000,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 3,144,960
4,000,000 Standard Credit Card Master Trust 1994-4, Class A, 8.25%,
11/7/2003 4,256,240
4,000,000 Toronto Dominion Bank, Sub. Note, 7.88%, 8/15/2004 4,084,760
Total 35,208,716
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<Caption)
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES-CONTINUED
FINANCE - AUTOMOTIVE-1.3%
$ 3,000,000 Ford Motor Credit Corp., MTN, 5.83%, 6/29/1998 $ 2,951,250
FINANCE - RETAIL-6.7%
5,000,000 Discover Card Trust 1991-B, Class A, 8.63%, 7/16/1998 5,016,150
5,000,000 Discover Credit Card Trust 1992-B, Class A, 6.80%, 6/16/2000 5,037,550
1,635,000 (b)Encyclopedia Britannica Domestic Funding Corp., Series 1994-1,
6.76%, 3/15/2002 1,630,406
2,000,000 Household Credit Card Trust 1991-1, Class B, 8.13%, 10/15/1997 2,000,000
2,000,000 Household Private Label Credit Card Trust 1994-1, Class B, 7.55%,
1/1/1999 2,026,920
Total 15,711,026
GAS & ELECTRIC UTILITIES-1.8%
1,000,000 Big Rivers Electric Corp., Trust Certificate, 10.70%, 9/15/2017 1,108,720
1,750,000 Kansas Electric Power Cooperative, Trust Certificate, 9.73%,
12/15/2017 1,900,955
1,000,000 Soyland Power Cooperative, 9.70%, 3/20/1997 1,086,720
Total 4,096,395
GOVERNMENT AGENCY-1.6%
3,380,000 Swedish Export Credit Corp., 9.88%, 3/15/2038 3,716,885
HOME EQUITY LOAN RECEIVABLES-11.1%
2,297,952 AFC Home Equity Loan Trust 1992-3, Class A, 7.05%, 8/15/2007 2,296,964
4,001,709 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%,
9/25/2008 4,023,758
2,000,000 (b)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3,
6.07%, 11/15/2013 1,940,000
3,316,248 (b)Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5, 6.12%,
1/15/2024 3,175,308
1,065,906 GE Capital Home Equity Loan 1991-1, Class A, 7.20%, 9/15/2011 1,066,236
4,000,000 GE Capital Home Equity Loan 1991-1, Class B, 8.70%, 9/15/2011 4,039,160
1,913,244 HFC Home Equity Loan Trust 1992-2, Class A, 6.65%, 11/20/2012 1,882,537
3,854,181 Merrill Lynch Home Equity Loan Trust 1991-2, Class B, 6.19%,
4/15/2006 3,873,452
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<Caption)
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS/ASSET-BACKED SECURITIES-CONTINUED
HOME EQUITY LOAN RECEIVABLES-CONTINUED
$ 3,631,308 Merrill Lynch Home Equity Loan Trust 1993-1, Class B, 6.50%,
2/15/2003 $ 3,657,453
Total 25,954,868
INSURANCE-3.5%
4,000,000 American General Co., 9.63%, 2/1/2018 4,356,120
3,346,000 American Reinsurance Corp., 10.88%, 9/15/2004 3,678,091
Total 8,034,211
LEASING-0.1%
136,674 (b)Concord Leasing Grantor Trust 1992-C, Class A-1, 5.31%, 1/20/1999 135,527
MANUFACTURED HOUSING RECEIVABLES-4.5%
3,716,788 Merrill Lynch Mortgage Investments, Inc. 1991-I, Class A, 7.65%,
1/15/2012 3,750,908
436,001 Merrill Lynch Mortgage Investments, Inc. 1992-B, Class B,
8.50%, 4/15/2012 445,196
6,265,285 (b)Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B, 9.25%,
5/15/2011 6,345,543
Total 10,541,647
RECREATIONAL VEHICLE RECEIVABLES-0.6%
1,293,395 Fleetwood Credit Corp. 1992-A, Class A, 7.10%, 2/15/2007 1,301,129
TELECOMMUNICATIONS-2.3%
2,000,000 British Telecom Finance, 9.63%, 2/15/2019 2,223,560
3,000,000 Southwestern Bell Capital Corp., MTN, 8.81%, 12/16/2004 3,188,580
Total 5,412,140
UTILITIES-1.4%
2,000,000 Duke Power Co., Mortgage, 8.63%, 3/1/2022 2,059,920
1,300,000 Philadelphia Electric Co., Mortgage, 8.63%, 6/1/2022 1,318,655
Total 3,378,575
TOTAL CORPORATE BONDS/ASSET-BACKED SECURITIES
(IDENTIFIED COST $142,645,433) 141,251,100
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<Caption)
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
GOVERNMENT AGENCIES-5.1%
$ 2,000,000 Federal Home Loan Bank System, 7.25%, 3/4/2011 $ 1,888,340
10,000,000 United States Treasury Note, 5.88%, 3/31/1999 9,915,900
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $11,985,904) 11,804,240
MORTGAGE-BACKED SECURITIES-29.5%
GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES-7.0%
2,930,063 GNMA 7.50%, 2/15/2024 2,896,133
11,976,623 GNMA 11.00%, 4/15/2026 13,436,334
Total 16,332,467
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES-22.5%
39,074 Citicorp Mortgage Securities Inc., Series 1992-5, Class A-1, 8.00%,
9/25/2021 39,105
2,354,781 (a)Greenwich Capital Associates 1993-AFI, Class B-1, 7.90%,
9/25/2023 2,278,250
4,530,285 (a)Greenwich Capital Associates 1993-LB2, Class A-1, 7.80%,
8/25/2023 4,564,262
2,478,155 (a)Greenwich Capital Associates 1993-LB3, Class A-1, 7.66%,
1/25/2024 2,496,741
2,366,441 (a)(b)Greenwich Capital Associates REMIC PTC, 1991-4, Class B-1A,
8.53%, 7/1/2019 2,342,777
3,927,304 (a)Greenwich Capital Associates REMIC Trust V, Class B, 5.96%,
5/1/2020 3,672,029
7,852,324 (a)Greenwich Capital Associates Sub. Mortgage Securities Trust
1994-B, Class A, 7.72%, 1/25/2018 7,773,801
1,783,450 (a)Glendale Federal Bank 1988-1, Class A, 7.47%, 11/25/2027 1,792,367
676,908 (b)Long Beach Bank Mortgage Series 1992-3, Class A, 9.60%,
7/15/2022 702,292
1,000,000 Prudential Home Mortgage 1992-32, Class A-6, 7.50%, 10/25/2022 980,120
6,000,000 Prudential Home Mortgage 1992-5, Class A-6, 7.50%, 4/25/2007 5,985,900
4,000,000 Residential Acredit Loans, Inc., Series 1995-QS1, Class A-2, 6.90%,
1/25/2020 3,967,640
341,053 Residential Funding Mortgage Securities Inc., 1992-S43, Class A-4,
8.00%, 12/25/2022 340,418
</TABLE>

FEDERATED SHORT-TERM INCOME FUND
<TABLE>
<Caption)
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MORTGAGE-BACKED SECURITIES-CONTINUED
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES-CONTINUED
$ 424,983 Residential Funding Mortgage Securities, Inc. 1993-S18, Class A-2,
7.50%, 5/25/2023 $ 425,663
2,000,018 (a)Resolution Trust Corp. 1992-12, Class B-3, 7.85%, 1/25/2025 1,971,898
945,122 Resolution Trust Corp. 1992-7, Class B-2B, 8.35%, 6/25/2029 942,173
12,000,000 Salomon Brothers Mortgage Securities VII, Inc., 1993-5, Class A-3C,
7.37%, 10/25/2023 12,090,000
Total 52,365,436
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $69,232,798) 68,697,903

(c)REPURCHASE AGREEMENT-4.5%
10,455,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(AT AMORTIZED COST) 10,455,000
TOTAL INVESTMENTS (IDENTIFIED COST $234,319,135)(D) $ 232,208,243
</TABLE>

(a) Denotes variable rate and floating rate obligations for which the
current rate is shown.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At April 30, 1996, these securities amounted
to $16,271,853 which represents 6.98% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreement is through
participation in a joint account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts to
$234,319,135. The net unrealized depreciation of investments on a
federal tax basis amounts to $2,110,892 which is comprised of
$1,327,681 appreciation and $3,438,573 depreciation at April 30, 1996.
Note: The categories of investments are shown as a percentage of net
assets ($233,020,824) at April 30, 1996.
The following acronyms are used throughout this portfolio:
FRN - Floating Rate Note
GNMA - Government National Mortgage Association
MTN - Medium Term Note
PTC - Put-Conditional
REMIC - Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $234,319,135) $ 232,208,243
Income receivable 2,112,820
Receivable for shares sold 195,112
Total assets 234,516,175
LIABILITIES:
Payable to Bank $ 154,937
Income distribution payable 1,041,772
Payable for shares redeemed 261,795
Accrued expenses 36,847
Total liabilities 1,495,351
Net Assets for 26,833,429 shares outstanding $ 233,020,824
NET ASSETS CONSIST OF:
Paid-in capital $ 262,186,134
Net unrealized depreciation of investments (2,110,892)
Accumulated net realized loss on investments (27,054,418)
Total Net Assets $ 233,020,824
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$216,674,769/24,951,084 shares outstanding $8.68
INSTITUTIONAL SERVICE SHARES:
$16,346,055/1,882,345 shares outstanding $8.68
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF OPERATIONS
Year Ended April 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 15,859,131
EXPENSES:
Investment advisory fee $ 907,666
Administrative personnel and services fee 171,686
Custodian fees 42,408
Transfer and dividend disbursing agent fees and expenses 79,385
Directors'/Trustees' fees 5,013
Auditing fees 18,178
Legal fees 3,147
Portfolio accounting fees 75,009
Distribution services fee-Institutional Service Shares 49,730
Shareholder services fee-Institutional Shares 517,563
Shareholder services fee-Institutional Service Shares 49,730
Share registration costs 23,777
Printing and postage 18,319
Insurance premiums 6,905
Taxes 8,781
Miscellaneous 2,508
Total expenses 1,979,805
Waivers -
Waiver of investment advisory fee $ (82,939)
Waiver of distribution services fee-Institutional Service Shares (47,741)
Waiver of shareholder services fee - Institutional Shares (517,563)
Waiver of shareholder services fee-Institutional Service Shares (1,989)
Total waivers (650,232)
Net expenses 1,329,573
Net investment income 14,529,558
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,061,785)
Net change in unrealized depreciation of investments 4,045,498
Net realized and unrealized gain on investments 1,983,713
Change in net assets resulting from operations $ 16,513,271
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS-
Net investment income $ 14,529,558 $ 18,781,177
Net realized gain (loss) on investments ($10,784,773 net loss
and $5,572,713 net gain, respectively, as computed for federal
tax purposes) (2,061,785) (13,861,223)
Net change in unrealized appreciation (depreciation) 4,045,498 4,124,069
Change in net assets resulting from operations 16,513,271 9,044,023
DISTRIBUTIONS TO SHAREHOLDERS-
Distributions from net investment income
Institutional Shares (13,302,550) (17,312,790)
Institutional Service Shares (1,227,008) (1,468,387)
Change in net assets resulting from distributions to
shareholders (14,529,558) (18,781,177)
SHARE TRANSACTIONS-
Proceeds from sale of shares 109,565,191 62,830,948
Net asset value of shares issued to shareholders in payment
of distributions declared 2,706,717 3,515,879
Cost of shares redeemed (117,974,583) (212,625,473)
Change in net assets resulting from share transactions (5,702,675) (146,278,646)
Change in net assets (3,718,962) (156,015,800)
NET ASSETS:
Beginning of period 236,739,786 392,755,586
End of period $ 233,020,824 $ 236,739,786
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED SHORT-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS

APRIL 30, 1996

1. ORGANIZATION

Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of two diversified
portfolios. The financial statements included herein are only those of
Federated Short-Term Income Fund (the "Fund"), a diversified portfolio.
The financial statements of the other portfolio are presented separately.
The assets of each portfolio are segregated and a shareholder's interest
is limited to the portfolio in which shares are held.

The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares.

The investment objective of the Fund is to seek to provide current
income.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
These policies are in conformity with generally accepted accounting
principles.
INVESTMENT VALUATIONS-U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, unlisted
securities, and private placement securities are generally valued
at the mean of the latest bid and asked price as furnished by an
independent pricing service. Short-term securities are valued at
the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less
at the time of purchase may be valued at amortized cost, which
approximates fair market value. The Fund's restricted securities
are valued at the price provided by dealers in the secondary market
or, if no market prices are available, at the fair value as determined
by the Fund's pricing committee.

REPURCHASE AGREEMENTS-It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in
the Federal Reserve Book Entry System, or to have segregated within
the custodian bank's vault, all securities held as collateral under
repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value
of each repurchase agreement's collateral to ensure that the value
of collateral at least equals the repurchase price to be paid under
the repurchase agreement transaction.

The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which
are deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Trustees (the "Trustees"). Risks may arise from the potential inability
of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price
on the sale of collateral securities.

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS-Interest income and
expenses are accrued daily. Bond premium and discount, if applicable,
are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the
ex-dividend date.

Net investment income, net realized gains/losses, and net assets
were not affected by this reclassification.

FEDERAL TAXES - It is the Fund's policy to comply with the
provisions of the Code applicable to regulated investment companies
and to distribute to shareholders each year substantially all of its
income. Accordingly, no provisions for federal tax are necessary.

At April 30, 1996, the Fund, for federal tax purposes, had a
capital loss carryforward of $25,659,517, which will reduce the Fund's
taxable income arising from future net realized gain on investments,
if any, to the extent permitted by the Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise
be necessary to relieve the Fund of any liability for federal tax.
Pursuant to the Code, such capital loss carryforward will expire
as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR EXPIRATION AMOUNT
<C> <C>
1997 $ 3,077,752
1998 $ 316,627
1999 $ 1,132,354
2000 $ 4,105,766
2002 $ 669,532
2003 $ 5,572,713
2004 $ 10,784,773
</TABLE>

Additionally, net capital losses of $ 1,394,901 attributable to
security transactions incurred after October 31, 1995 are treated
as arising on the first day of the Fund's next taxable year.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - The Fund may engage
in when-issued or delayed delivery transactions. The Fund records
when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to
make payment for the securities purchased. Securities purchased on
a when-issued or delayed delivery basis are marked to market daily
and begin earning interest on the settlement date.

RESTRICTED SECURITIES - Restricted securities are securities that
may only be resold upon registration under federal securities laws
or in transactions exempt from such registration. In some cases,
the issuer of restricted securities has agreed to register such
securities for resale, at the issuer's expense either upon demand
by the Fund or in connection with another registered offering of
the securities. Many restricted securities may be resold in the
secondary market in transactions exempt from registration. Such
restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any
registration costs upon such resales.

Additional information on each restricted security held at
April 30, 1996 is as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION
SECURITY DATE COST
<S> <C> <C>
Encyclopedia Britannica Domestic Funding Corp. 3/21/1994 $ 1,635,000
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-3 2/18/1994 1,999,719
Conti Mortgage Home Equity Loan Trust 1994-1, Class A-5 2/18/1994 3,315,537
Concord Leasing Grantor Trust 1992-C 8/14/1992 136,037
Merrill Lynch Mortgage Investments, Inc., 1991-A, Class B 11/23/1994 6,364,159
Greenwich Capital Associates REMIC PTC, 1991-4, Class B-1A 1/7/1993 2,392,735
Long Beach Bank Mortgage Series 1992-3, Class A 6/29/1992 717,099
</TABLE>

OTHER - Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value)
for each class of shares.

Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 10,873,366 $95,413,085 6,446,211 $ 55,884,659
Shares issued to shareholders in
payment of distributions declared 238,773 2,094,178 317,004 2,739,906
Shares redeemed (11,665,688) (102,282,720) (21,161,903) (183,228,360)
Net change resulting from
Institutional share transactions (553,549) ($ 4,775,457) (14,398,688) ($124,603,795)
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C> <C> <C>
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 1,615,112 $14,152,106 801,654 $ 6,946,289
Shares issued to shareholders in
payment of distributions declared 69,892 612,539 89,844 775,973
Shares redeemed (1,787,163) (15,691,863) (3,388,048) (29,397,113)
Net change resulting from
Institutional Service share
transactions (102,159) $ (927,218) (2,496,550) $ (21,674,851)
Net change resulting from
Fund share transactions (655,708) $(5,702,675) (16,895,238) $(146,278,646)
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE-Federated Management, the Fund's investment
adviser, (the "Adviser"), receives for its services an annual
investment advisory fee equal to 0.40% of the Fund's average daily
net assets. The Adviser may voluntarily choose to waive any portion
of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.

ADMINISTRATIVE FEE - Federated Services Company ("FServ"), under
the Administrative Services Agreement, provides the Fund with
administrative personnel and services. The fee paid to FServ is
based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period.
The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.

DISTRIBUTION SERVICES FEE-The Fund has adopted a Distribution Plan
(the "Plan") pursuant to Rule 12b-1 under the Act. Under the
terms of the Plan, the Fund will compensate Federated Securities
Corp. ("FSC"), the principal distributor, from the net assets of
the Fund to finance activities intended to result in the sale of
the Fund's Institutional Service shares. The Plan provides that
the Fund may incur distribution expenses up to .25 of 1% of the
average daily net assets of Institutional Service Shares annually, to
compensate FSC. The distributor may voluntarily choose to waive any
portion of its fee. The distributor can modify or terminate this
voluntary waiver at any time at its sole discretion.

SHAREHOLDER SERVICES FEE-Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund
will pay FSS up to 0.25% of daily average net assets of the Fund
shares for the period. The fee paid to FSS is used to finance
certain services for shareholders and to maintain shareholder
accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time
at its sole discretion.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES-FServ,
through its subsidiary, Federated Shareholder Services Company
serves as transfer and dividend disbursing agent for the Fund.
The fee paid to FServ is based on the size, type, and number of
accounts and transactions made by shareholders.

PORTFOLIO ACCOUNTING FEES-FServ maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level
of the Fund's average daily net assets for the period, plus
out-of-pocket expenses.

GENERAL-Certain of the Officers and Trustees of the Fund are
Officers and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for
the period ended April 30, 1996, were as follows:
<TABLE>
<S> <C>
PURCHASES $ 171,052,088
SALES $ 179,387,115
</TABLE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Income Securities Trust:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Short-Term Income
Fund (one of the portfolios comprising Federated Income Securities
Trust), as of April 30, 1996, and the related statement of operations
for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the financial highlights
(see page 2 and 22 of this prospectus) for each of the periods presented
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and 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 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. Our procedures included
confirmation of securities owned as of April 30, 1996, by correspondence
with the custodian and a broker. 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 and financial highlights
referred to above present fairly, in all material respects, the
financial position of Federated Short-Term Income Fund, a portfolio
of Federated Income Securities Trust, at April 30, 1996, the results
of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and
financial highlights for each of the periods presented therein,
in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Pittsburgh, Pennsylvania
June 14, 1996

ADDRESSES

Federated Short-Term Income Fund
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

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

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

Transfer Agent & Dividend Disbursing Agent
Federated Shareholder Services Federated Investors Tower
Company Pittsburgh, Pennsylvania 15222-3779
Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219

Federated Short-Term
Income Fund
Institutional Service Shares

Prospectus

A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management
Investment Company

June 30, 1996

Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
Cusip 31420C308
1111903A-SS (6/96)

FEDERATED SHORT-TERM INCOME FUND
(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectuses of Federated Short-Term Income Fund (the "Fund"), a
portfolio of Federated Income Securities Trust (the "Trust") dated June
30, 1996. This Statement is not a prospectus. You may request a copy of
a prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated June 30, 1996

FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 1522-3779

Federated Securities Corp is the distributor of the Fund
and is a subsidiary of Federated Investors
Cusip 31420C209
Cusip 31420C308
G00181-04 (6/96)

GENERAL INFORMATION ABOUT THE FUND 2

INVESTMENT OBJECTIVE AND POLICIES 2

U.S. Government Securities 2
Weighted Average Portfolio Maturity 3
Weighted Average Portfolio Duration 4
When-Issued and Delayed Delivery
Transactions 5
Repurchase Agreements 5
Lending of Portfolio Securities 6
Reverse Repurchase Agreements 6
Privately Issued Mortgage-Related
Securities 3
Portfolio Turnover 7
Investment Limitations 7
FEDERATED INCOME SECURITIES TRUST MANAGEMENT
12

Fund Ownership 21
Trustees Compensation 22
Trustee Liability 24
INVESTMENT ADVISORY SERVICES 24

Adviser to the Fund 24
BROKERAGE TRANSACTIONS 25

Other Advisory Services 27
Other Related Services 27

OTHER SERVICES 27

Custodian and Portfolio Accountant 28
Transfer Agent 28
Independent Auditors 28
PURCHASING SHARES 29

Distribution Plan (Institutional Service
Shares only) and Shareholder Services 29
Conversion to Federal Funds 30
DETERMINING NET ASSET VALUE 30

Determining Value of Securities 30
REDEEMING SHARES 31

Redemption in Kind 31
TAX STATUS 32

The Fund's Tax Status 32
Shareholders' Tax Status 32
TOTAL RETURN 33

YIELD 34

PERFORMANCE COMPARISONS 34

ABOUT FEDERATED INVESTORS 37

APPENDIX 39

GENERAL INFORMATION ABOUT THE FUND
The Fund is a portfolio of Federated Income Securities Trust (the "Trust"),
which was established as a Massachusetts business trust under a Declaration
of Trust dated January 24, 1986. On December 31, 1991, the shareholders
voted to permit the Trust to offer one or more separate series and classes
of shares and to change the name of the Trust from "Federated Floating Rate
Trust" to "Federated Income Securities Trust."
Shares of the Fund are offered in two classes, Institutional Shares and
Institutional Service Shares (individually and collectively referred to as
the "Shares"). This Statement of Additional Information relates to both
classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek to provide current income. The
Fund will pursue this objective by investing primarily in a diversified
portfolio of short and medium-term high grade debt securities. The
foregoing investment objective and policy may not be changed without the
prior approval of the Fund's shareholders.
U.S. GOVERNMENT SECURITIES
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities may be
backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
o Federal Home Loan Banks;
o The Student Loan Marketing Association;
o Federal Home Loan Mortgage Corporation; and
o Federal National Mortgage Association.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata
market value of such portfolio security in comparison to the market value
of the entire portfolio. The remaining maturity of each portfolio security
is then multiplied by its weight, and the results are added together to
determine the weighted average maturity of the portfolio. For purposes of
calculating its dollar-weighted average portfolio maturity, the Fund will
treat (a) asset- backed securities as having a maturity equal to their
estimated weighted- average maturity and (b) variable and floating rate
instruments as having a remaining maturity commensurate with the period
remaining until the next scheduled adjustment to the instrument's interest
rate. The average maturity of asset-backed securities will be calculated
based upon assumptions established by the investment adviser as to the
probable amount of the principal prepayments weighted by the period until
such prepayments are expected to be received.
Fixed rate securities hedged with interest rate swaps or caps will be
treated as floating or variable rate securities based upon the interest
rate index of the swap or cap; floating and variable rate securities hedged
with interest rate swaps or floors will be treated as having a maturity

equal to the term of the swap or floor. In the event that the Fund holds an
interest rate swap, cap or floor that is not hedging another portfolio
security, the swap, cap or floor will be treated as having a maturity equal
to its term and a weight equal to its notional principal amount for such
term.
WEIGHTED AVERAGE PORTFOLIO DURATION
Duration is a commonly used measure of the potential volatility of the
price of a debt security, or the aggregate market value of a portfolio of
debt securities, prior to maturity. Duration measures the magnitude of the
change in the price of a debt security relative to a given change in the
market rate of interest. The duration of a debt security depends upon three
primary variables: the security's coupon rate, maturity date and the level
of market interest rates for similar debt securities. Generally, debt
securities with lower coupons or longer maturities will have a longer
duration than securities with higher coupons or shorter maturities. For
purposes of calculating its dollar-weighted average portfolio duration, the
Fund will treat variable and floating rate instruments as having a
remaining duration commensurate with the period remaining until the next
scheduled adjustment to the instrument's interest rate.
Duration is calculated by dividing the sum of the time-weighted values of
cash flows of a security or portfolio of securities, including principal
and interest payments, by the sum of the present values of the cash flows.
Certain debt securities, such as asset-backed securities, may be subject to
prepayment at irregular intervals. The duration of these instruments will
be calculated based upon assumptions established by the investment adviser
as to the probable amount and sequence of principal prepayments.
The duration of interest rate agreements, such as interest rates swaps,
caps and floors, is calculated in the same manner as other securities.

However, certain interest rate agreements have negative durations, which
the Fund may use to reduce its weighted average portfolio duration.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Fund's
investment objective and policies, not for investment leverage. These
transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than
20% of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions such as

broker/dealers which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Board of Trustees ("Trustees").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.
REVERSE REPURCHASE AGREEMENTS
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase
agreements does not ensure that the Fund will be able to avoid selling
portfolio instruments at a disadvantageous time.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an
ownership interest in federal agency mortgage pass-through securities such
as those issued by Government National Mortgage Association as well as
those issued by non-government related entities. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities

dealers and other investors makes government-related and non-government
related pools highly liquid.
PORTFOLIO TURNOVER
For the fiscal years ended April 30, 1996, and 1995, the portfolio turnover
rates were 77% and 38%, respectively.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if as a result of such purchase
25% or more of the value of its total assets would be invested in any
one industry.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts,
including futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate including limited
partnership interests in real estate, although it may invest in the
securities of companies whose business involves the purchase or sale
of real estate or in securities which are secured by real estate or
interests in real estate.
BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain
such short-term credits as are necessary for the clearance of
transactions.
SELLING SHORT
The Fund will not sell securities short unless:
oduring the time the short position is open, it owns an equal amount
of the securities sold or securities readily and freely convertible
into or exchangeable, without payment of additional consideration,

for securities of the same issue as, and equal in amount to, the
securities sold short; and
onot more than 10% of the Fund's net assets (taken at current value)
is held as collateral for such sales at any one time.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
borrowings, other than reverse repurchase agreements, are outstanding.
During the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to assure completion of the reverse
repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or
before the expiration date of the reverse repurchase agreements.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10%
of the value of total assets at the time of the borrowing.

LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities
up to one-third of the value of its total assets. This shall not
prevent the purchase or holding of corporate bonds, debentures, notes,
certificates of indebtedness or other debt securities of an issuer,
repurchase agreements or other transactions which are permitted by the
Fund's investment objective and policies or Declaration of Trust. The
Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which investment adviser has determined
are creditworthy under guidelines established by the Trustees and will
receive collateral equal to at least 100% of the value of the
securities loaned.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
onnection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
imitations.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have
been in operation for less than three years.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the officers and Trustees of the Fund or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together
own more than 5% of the issuer's securities.
DIVERSIFICATION OF INVESTMENTS
The Fund will not purchase the securities of any one issuer (other
than the U.S. government, its agencies, or instrumentalities or
instruments secured by the securities of such issuers, such as
repurchase agreements) if, as a result, more than 5% of the value of
its assets would be invested in the securities of such issuer with
respect to 75% of its total assets, or acquire more than 10% of any
class of voting securities of any issuer. For these purposes the Fund
takes all common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.
ACQUIRING SECURITIES
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in this limitation becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements

providing for settlement in more than seven days after notice, to 15%
of its net assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
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.
During the fiscal year ended April 30, 1996, the Fund did not borrow money,
invest in reverse repurchase agreements or sell securities short in excess
of 5% of the value of its net assets. The Fund does not intend to borrow
money, invest in reverse repurchase agreements, or sell securities short in
excess of 5% of the value of its net assets during the coming year.
In order to comply with certain state restrictions, the Fund will limit its
investment in securities of other investment companies to those with sales
charges of less than 1.00% of the offering price of such securities. The
Fund will purchase securities of closed-end investment companies only in
open market transactions involving any customary brokers' commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, reorganization, or acquisition of
assets. While it is a policy to waive advisory fees on Fund assets invested
in securities of other open-end investment companies, it should be noted

that investment companies incur certain expenses such as custodian and
transfer agency fees and, therefore, any investment by the Fund in shares
of another investment company would be subject to such duplicate expenses.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."

FEDERATED INCOME SECURITIES TRUST MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Income Securities Trust, and principal
occupations.

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

Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the

Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust .

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934

Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937

Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918

Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922

Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA

Birthdate: October 11, 1932

Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924

Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc., and Statewide Settlement Agency, Inc.; formerly,
Counsel, Horizon Financial, F.A., Western Region; Director or Trustee of
the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942

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

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926

Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932

Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

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

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

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

Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949

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

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

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

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

Executive Vice President, Treasurer and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;

Director, Federated Securities Corp.; Executive Vice President, Treasurer
and Secretary of the Funds.

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

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

* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board
of Trustees handles the responsibilities of the Board between meetings of
the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;

Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term
Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash
Trust; Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. -
1999; Liberty U.S. Government Money Market Trust; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of May 31, 1996, no shareholder of record owned 5% or more of the
outstanding Institutional Shares of the Fund. As of May 31, 1996, the
following shareholders of record owned 5% or more of the outstanding

Institutional Service Shares of the Fund: Heritage Trust Company, Grand
Junction, Colorado, owned approximately 104,043 shares (5.70%); Charles
Schwab & Co., Inc., San Francisco, California, owned approximately 245,723
shares (13.47%); Moce & Co., Mattoon, Illinois, owned approximately 308,364
shares (16.91%); and Trust Company of St. Joseph, St. Joseph, Missouri,
owned approximately 634,710 shares (34.80%).

TRUSTEES COMPENSATION

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

John F. Donahue $0 $ 0 for the Trust and
Chairman and Trustee 54 other investment companies in the Fund
Complex
Thomas G. Bigley++ $429.39 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John T. Conroy, Jr. $786.54 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
William J. Copeland $786.54 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund
Complex
James E. Dowd $786.54 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D. $725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr. $786.54 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Peter E. Madden $725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Gregor F. Meyer $725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John E. Murray, Jr. $725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Wesley W. Posvar $725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Marjorie P. Smuts$725.39 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex

*Information is furnished for the fiscal year ended April 30, 1996.
#The aggregate compensation is provided for the Trust which is comprised of
two portfolios.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1, through September 30, 1995. On October 1, 1995, he
was appointed a Director or Trustee on 15 additional Federated Funds.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It
is a subsidiary of Federated Investors. All of the voting securities of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder
of the Fund for any losses that may be sustained in the purchase, holding,
or sale of any security, or for anything done or omitted by it, except acts
or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.

ADVISORY FEES
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus. During the fiscal years
ended April 30, 1996, 1995, and 1994, the Fund's Adviser earned
$907,666, $1,212,210, and $1,269,273, respectively. Fees of $82,939,
$84,776 and $259,625, respectively for 1996, 1995 and 1994, were
waived because of undertakings to limit the Fund's expenses.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.

BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of th order can be obtained
elsewhere. The Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Fund
or to the Adviser and 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 provided by brokers and dealers may be
used by the Adviser or by affiliates of Federated Investors in advising
Federated Funds and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates
might otherwise have paid, it would tend to reduce their expenses. The
Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of the
brokerage and research services provided. During the fiscal years ended
April 30, 1996, 1995 and 1994, no brokerage commissions were paid by the
Fund.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available

investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or recieved by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER ADVISORY SERVICES
Federated Research Corp. receives fees from certain depository institutions
for providing consulting and portfolio advisory services relating to each
institution's program of asset management. Federated Research Corp. may
advise such clients to purchase or redeem shares of investment companies,
such as the Fund, which are managed, for a fee, by Federated Research Corp.
or other affiliates of Federated Investors, such as the Adviser, and may
advise such clients to purchase and sell securities in the direct markets.
Further, Federated Research Corp., and other affiliates of the Adviser,
may, from time to time, provide certain consulting services and equipment
to depository institutions in order to facilitate the purchase of shares of
funds offered by Federated Securities Corp.
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 shares of funds offered by Federated Securities
Corp.

OTHER SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
each prospectus. From March 1, 1994 to March 1, 1996, Federated

Adminstrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc., served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Adminstrative Services, and Federated
Adminstrative Services, Inc. may hereinafter collectively be referred to as
the "Adminstrators." For the fiscal years ended April 30, 1996, 1995, and
1994, the Adminstrators earned $171,686, $229,413, and $383,643,
respectively. Dr. Henry J. Gailliot, an officer of Federated Management,
the Adviser to the Fund, holds approximately 20% of the outstanding common
stock and serves as a Director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Services Company.

CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Trust. Federated Services Company, Pittsburgh,
PA, provides certain accounting and recordkeeping services with respect to
the Trust's portfolio investments. The fee paid for this service is based
upon the level of the Trust's average net assets for the period plus out-
of-pocket expenses.

TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based upon the
level of the Trust's average net assets for the period plus out-of-pocket
expenses.

INDEPENDENT AUDITORS
The independent auditors for the Trust are Ernst and Young LLP.
PURCHASING SHARES
Shares are sold at their net asset value without a sales charge on days on
which the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Fund is explained in the respective prospectus
under "Investing in Institutional Shares" and "Investing in Institutional
Service Shares."

DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER
SERVICES
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Plan (Institutional Service Shares only), the Trustees
expect that the Fund will be able to achieve a more predictable flow of
cash for investment purposes and to meet redemptions. This will facilitate
more efficient portfolio management and assist the Fund in pursuing its
investment objectives. By identifying potential investors whose needs are

served by the Fund's objectives, and properly servicing these accounts, it
may be possible to curb sharp fluctuations in rates of redemptions and
sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended April 30, 1996, payments in the amount of $49,730
were made pursuant to the Distribution Plan (Institutional Service Shares
only), all of which was paid to fiinancial institutions. In addition, for
this period, the Trust paid shareholder service fees in the amount of
$517,563 (Institutional Shares) and $49,730 (Institutional Service Shares)
of which $517,563 (Institutional Shares) and $1,989 (Institutional Service
Shares) were waived.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing checks and converting
them to federal funds.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING VALUE OF SECURITIES
The values of the Fund's portfolio securities are determined as follows:
o according to prices provided by independent pricing services, which
may be determined without exclusive reliance on quoted prices from

dealers but which use market prices when most representative, and
which may take into account appropriate factors such as yield,
quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data employed in determining
valuations for such securities; or
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase, at amortized cost unless the Trustees
determine that particular circumstances of the security indicate
otherwise.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectuses under "Redeeming Institutional Shares" and
"Redeeming Institutional Service Shares." Although State Street Bank does
not charge for telephone redemptions, it reserves the right to charge a fee
for the cost of wire-transferred redemptions of less than $5,000.
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. 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 their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value

employed in determining net asset value and selecting the securities in a
manner the Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the
respective class's net asset value during any 90-day period.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is expected to be eligible for the dividends
received deduction available to corporations. These dividends, and any
short-term capital gains, are taxable as ordinary income.

CAPITAL GAINS
Fixed income securities offering the current income sought by the Fund
are often purchased at a discount from par value. Because the total
yield on such securities when held to maturity and retired may include
an element of capital gain, the Fund may achieve capital gains.
However, he Fund will not hold securities to maturity for the purpose
of ealizing capital gains unless current yields on those securities
remain attractive.
Capital gains or losses may also be realized on the sale of
securities. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distributions of long-term capital gains are taxed as such, whether
they are taken in cash or reinvested, and regardless of the length of
time the shareholder has owned the Shares.
TOTAL RETURN
The Fund's average annual total returns for the one-year and five year
periods ended April 30, 1996, and for the period from July 1, 1986 (date of
initial public investment) to April 30, 1996 were 7.51%, 5.46%, and 6.62%,
respectively, for Institutional Shares. The Fund's average annual total
returns for the one-year period ended April 30, 1996, and for the period
from January 24, 1992 (start of performance) to April 30, 1996, were 7.25%
and 4.91%, respectively, for Institutional Service Shares.
The average annual total return for both classes of Shares of the Fund is
the average compounded rate of return for a given period that would equate

a $1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the net asset value per
Share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, adjusted over the period by any additional Shares,
assuming the monthly reinvestment of all dividends and distributions.
YIELD
The Fund's yield for the thirty-day period ended April 30, 1996, was 6.88%
and 6.62% for Institutional Shares and Institutional Service Shares,
respectively. The yield for both classes of Shares of the Fund is
determined by dividing the net investment income per Sshare (as defined by
the Securities and Exchange Commission) earned by either class of Shares
over a thirty-day period by the maximum offering price per Share of either
class of Shares on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated
each month over a twelve-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in
either class of Shares, performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS
The performance of both classes of shares depends upon such variables as:

o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or either class of Share's expenses; and
o various other factors.
Either class of Share's performance fluctuates on a daily basis largely
because net earnings and the maximum offering price per Share fluctuate
daily. Both net earnings and offering price per Share are factors in the
computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
O LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the "short-term investment
grade debt funds" category in advertising and sales literature.
O MERRILL LYNCH TOTAL RETURN INVESTMENT GRADE CORPORATE INDEX (SHORT-
TERM 1-2.99 YEARS) is comprised of over 400 issues of investment grade
corporate debt securities with remaining maturities from 1 to 2.99
years.

O MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk- adjusted returns. The maximum rating is five stars, and ratings
are effective for two weeks.
Advertisements and other sales literature for both classes of Shares may
quote total returns which are calculated on non-standardized base periods.
These total returns also represent the historic change in the value of an
investment in the either class of Shares based on monthly reinvestment of
dividends over a specified period of time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in
which it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.
Economic and Market Information
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by Fund portfolio managers and their views and analysis
on how such developments could affect the Fund. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.

ABOUT FEDERATED INVESTORS
Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making - structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the corporate bond sector, as of December 31, 1995, Federated Investors
managed 10 money market funds, and 14 bond funds with assets approximating
$11.5 billion, and $2.7 billion, respectively. Federated's corporate bond
decision making - based on intensive, diligent credit analysis - is backed
by over 20 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the
industry. In 17 years ending December 1995, Federated's high-yield
porftolios experienced a default rate of just 1.86%, versus 3.10% for the
market as a whole. In 983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market totaling more
than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.

MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:

INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide including 200 New York Stock Exchange firms supported by
more wholesalers than any other mutual fund distributor. Federated's
service to financial professionals and institutions has earned it high

rankings in several DALBAR Surveys. The marketing effort to these firms is
headed by James F. Getz, President, Broker/Dealer Division.
* Source: Investment Company Institute.

APPENDIX
STANDARD & POOR'S RATINGS GROUP ("S&P") LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may

be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
P-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning

coverage of fixed financial charges and high internal cash generation; well
established access to a range of financial markets and assured sources of
alternative liquidity; high rates of return on funds employed; and leading
market positions in well established industries.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS DEFINITIONS
F-1--(Very Strong Credit Quality) Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
F- 1+.
F-2--(Good Credit Quality) Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SHARES
PROSPECTUS

The Institutional Shares of Federated Intermediate Income Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio in Federated Income Securities
Trust (the "Trust"), an open-end, management investment company (a mutual
fund).

The investment objective of the Fund is to provide current income.

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

This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future

reference.

The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1996,
with the Securities and Exchange Commission (SEC). The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information or a paper copy of this prospectus, if you have received it
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact the Fund at the
address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).

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

Prospectus dated June 30, 1996

TABLE OF CONTENTS

SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS-

INSTITUTIONAL SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Special Considerations 14
Weighted Average Portfolio Duration 14
Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 15
Management of the Trust 15
Distribution of Institutional Shares 16
ADMINISTRATION OF THE FUND 16
NET ASSET VALUE 17
INVESTING IN INSTITUTIONAL SHARES 17
Share Purchases 17
Minimum Investment Required 18
What Shares Cost 18
Exchanging Securities for Fund Shares 18
Exchange Privilege 19
Certificates and Confirmations 19
Dividends 19
Capital Gains 19
REDEEMING INSTITUTIONAL SHARES 19
Telephone Redemption 19
Redeeming Shares By Mail 20
Accounts with Low Balances 20
SHAREHOLDER INFORMATION 20

Voting Rights 20
TAX INFORMATION 21
Federal Income Tax 21
State and Local Taxes 21
PERFORMANCE INFORMATION 22
OTHER CLASSES OF SHARES 22
FINANCIAL HIGHLIGHTS-
INSTITUTIONAL SERVICE SHARES 23
FINANCIAL STATEMENTS 24
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 38
ADDRESSES 39

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES

(As a percentage of average net assets)
Management Fee (after waiver) (1) 0.00%
12b-1 Fee None
Total Other Expenses (after expense reimbursement) 0.55%
Shareholder Services Fee (after waiver) (2) 0.00%
Total Operating Expenses (3) 0.55%
</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver of
the management fee. The adviser can terminate this voluntary waiver at
any time at its sole discretion. The maximum management fee is 0.50%.

(2) The maximum shareholder services fee is 0.25%.

(3) The total operating expenses and would have been 1.40% absent the
voluntary waivers of the management fee and the shareholder services fee
and the voluntary reimbursement of certain other operating expenses.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Shares of the
Trust will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Federated Income
Securities Trust Information" and "Investing in Institutional Shares." Wire-
transferred redemptions of less than $5,000 may be subject to additional
fees.
<TABLE>
<CAPTION>

EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $6 $18 $31 $69

</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent
Auditors, on page 37.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.55 $ 9.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.66 0.66 0.23
Net realized and unrealized gain (loss) on
investments 0.22 0.02 (0.47)
Total from investment operations 0.88 0.68 (0.24)
LESS DISTRIBUTIONS
Distributions from net investment income (0.66) (0.66) (0.23)
NET ASSET VALUE, END OF PERIOD $ 9.77 $ 9.55 $ 9.53
TOTAL RETURN(B) 9.13% 7.53% (2.48%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.55% 0.48% 0.00%*
Net investment income 6.52% 7.12% 6.36%*
Expense waiver/reimbursement(c) 0.85% 1.22% 1.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $87,493 $32,508 $17,702
Portfolio turnover 66% 88% 0%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from December 15, 1993 (date of
initial public offering) to April 30, 1994.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1996, which can be
obtained free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 24, 1986. At a meeting of the Board of
Trustees ("Trustees") on February 26, 1996, the Trustees approved an
amendment to the Declaration of Trust to change the name of Intermediate
Income Fund to Federated Intermediate Income Fund. The Trust may offer
separate series of shares of beneficial interest representing interests in

separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus the Trustees
have established two classes of shares of Federated Intermediate Income Fund:
Institutional Shares and Institutional Service Shares. This prospectus
relates only to Institutional Shares of the Fund.

Institutional Shares ("Shares") are sold primarily to accounts for which
financial institutions act in a fiduciary or agency capacity, or other
accounts where the financial institution maintains master accounts with an
aggregate investment of at least $400 million in certain funds which are
advised or distributed by affiliates of Federated Investors. Shares are also
made available to financial intermediaries, and public and private
organizations. An investment in the Fund serves as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio
of U.S. government, corporate and asset-backed securities. A minimum initial
investment of $25,000 over a 90-day period is required.

Shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Fund.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

objective, it endeavors to do so by following the investment policies
described in this prospectus.

INVESTMENT POLICIES

The Fund pursues its investment objective by investing in a diversified
portfolio of high grade debt securities, which are securities rated in one of
the three highest categories (A or better) by a nationally recognized
statistical rating organization ("NRSRO") (for example, rated Aaa, Aa, or A
by Moody's Investors Service, Inc. ("Moody's") or AAA, AA or A by Standard &
Poor's Ratings Group ("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff
& Phelps Rating Service (Duff & Phelps)) or if unrated, of comparable quality
as determined by the Fund's adviser. If a security is subsequently
downgraded, the adviser will determine whether it continues to be an
acceptable investment; if not, the security will be sold. A description of
the rating categories is contained in the Appendix to the Statement of
Additional Information. Under normal market conditions, the dollar-weighted
average portfolio maturity of the Fund will be between three and ten years,
and the Fund's average-weighted duration will be between three and seven
years.

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

invest in derivative instruments of such securities, including instruments
with demand features or credit enhancement, as well as money market
instruments.

The securities in which the Fund invests are:
* obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of
U.S. government agencies or instrumentalities, such as the: Farm
Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; Export-Import
Bank of the United States; Commodity Credit Corporation; Federal
Financing Bank; The Student Loan Marketing Association; National Credit
Union Administration; and Tennessee Valley Authority.

* domestic and foreign issues of corporate and sovereign debt obligations
(including Eurobonds, Medium Term Notes and Deposit Notes) having
floating or fixed rates of interest;

* asset-backed securities, including mortgage-related securities;

* commercial paper (including Europaper and Canadian Commercial Paper)
which matures in 270 days or less so long as at least two ratings are
high quality ratings by an NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;

* municipal securities;

* foreign currency transactions (including spot, futures, options and
swaps);

* time and savings deposits and deposit notes and bankers acceptances
(including certificates of deposit) in commercial or savings banks whose
accounts are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by
the Federal Deposit Insurance Corporation ("FDIC"), including
certificates of deposit issued by and other time deposits in foreign
branches of FDIC insured banks or who have at least $100,000,000 in
capital; and

* repurchase agreements collateralized by eligible investments.

U.S. GOVERNMENT OBLIGATIONS. The types of U.S. government obligations in
which the Fund may invest generally include direct obligations of the
U.S. Treasury (such as U.S. Treasury Bills, notes, and bonds) and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by:

* the full faith and credit of the U.S. Treasury;

* the issuer's right to borrow from the U.S. Treasury;

* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

* the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

* Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;

* Federal Home Loan Banks;

* The Student Loan Marketing Association;

* Federal Home Loan Mortgage Corporation; and

* Federal National Mortgage Association.

CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.

FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Fund may invest in floating
rate corporate debt obligations, including increasing rate securities.
Floating rate securities are generally offered at an initial interest rate
which is at or above prevailing market rates. The interest rate paid on these
securities is then reset periodically (commonly every 90 days) to an
increment over some predetermined interest rate index. Commonly utilized
indices include the three-month Treasury Bill rate, the 180-day Treasury Bill

rate, the one-month or three-month London Interbank Offered Rate ("LIBOR"),
the prime rate of a bank, the commercial paper rates, or the longer-term
rates on U.S. Treasury securities.

Some of the floating rate corporate debt obligations in which the Fund may
invest include floating rate corporate debt securities issued by savings
associations and collateralized by adjustable rate mortgage loans, also known
as collateralized thrift notes. Many of these collateralized thrift notes
have received AAA ratings from recognized rating agencies. Collateralized
thrift notes differ from traditional "pass through" certificates in which
payments made are linked to monthly payments made by individual borrowers net
of any fees paid to the issuer or guarantor of such securities.
Collateralized thrift notes pay a floating interest rate which is tied to a
predetermined index, such as the 180-day Treasury Bill rate. Floating rate
corporate debt obligations also include securities issued to fund commercial
real estate construction.

Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at an
initial interest rate which is at or above prevailing market rates. Interest
rates are reset periodically (most commonly every 90 days) at different
levels on a predetermined scale. These levels of interest are ordinarily set
at progressively higher increments over time. Some increasing rate securities
may, by agreement, revert to a fixed rate status. These securities may also
contain features which allow the issuer the option to convert the increasing
rate of interest to a fixed rate under such terms, conditions, and
limitations as are described in each issue's prospectus.

FIXED RATE CORPORATE DEBT OBLIGATIONS. The Fund may also invest in fixed rate
securities, including fixed rate securities with short-term characteristics.
Fixed rate securities with short-term characteristics are long-term debt
obligations but are treated in the market as having short maturities because
call features of the securities may make them callable within a short period
of time. A fixed rate security with short-term characteristics would include
a fixed income security priced close to call or redemption price or a fixed
income security approaching maturity, where the expectation of call or
redemption is high.

Fixed rate securities tend to exhibit more price volatility during times of
rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above,
behave like short-term instruments in that the rate of interest they pay is
subject to periodic adjustments based on a designated interest rate index.
Fixed rate securities pay a fixed rate of interest and are more sensitive to
fluctuating interest rates. In periods of rising interest rates the value of
a fixed rate security is likely to fall. Fixed rate securities with short-
term characteristics are not subject to the same price volatility as fixed
rate securities without such characteristics. Therefore, they behave more
like floating rate securities with respect to price volatility.

adjusted at regular intervals (ranging from daily to annually), and is
normally based on a published interest rate or interest rate index.
Many variable rate demand notes allow the Fund to demand the
repurchase of the security on not more than seven days' prior notice.
Other notes only permit the Fund to tender the security at the time of
each interest rate adjustment or at other fixed intervals. See "Demand
Features."

several different tranches of debt securities, with some tranches entitled to
receive regular installments of principal and interest, other tranches
entitled to receive regular installments of interest, with principal payable
at maturity or upon specified call dates, and other tranches only entitled to
receive payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear different
interest rates, which may be fixed or floating.

Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment risks
on mortgage securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Payments on mortgage-backed securities
are also affected by other factors, such as the frequency with which people
sell their homes or elect to make unscheduled payments on their mortgages.
All asset-backed securities are subject to similar prepayment risks, although
they may be more or less sensitive to certain factors. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield
on the original mortgage security. As a consequence, mortgage securities may
be a less effective means of "locking in" interest rates than other types of
debt securities having the same stated maturity and may also have less
potential for capital appreciation. For certain types of asset pools, such as
collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.

Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased at
a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as ordinary
income when distributed to the shareholders.

The credit characteristics of asset-backed securities also differ in a number
of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.

agencies or instrumentalities; (iii) those issued by private issuers
that represent an interest in or are collateralized by whole loans or
mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately
issued securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than
fixed interest rate mortgages. Typically, the ARMS in which the Fund
may invest are issued by GNMA, FNMA, and FHLMC and are actively
traded. ARMS may be collateralized by whole loans or private pass-
through securities. The underlying mortgages which collateralize ARMS
issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.

interest and may receive unscheduled principal payments representing
payments on the underlying mortgages. At the time that a holder of the
ARMS reinvests the payments and any unscheduled prepayments of
principal that it receives, the holder may receive a rate of interest
which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of fixed-income
securities.

While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt

obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but may be collateralized by whole loans or private
pass-through securities.

The CMOs in which the Fund may invest may be: (a) collateralized by
pools of mortgages in which each mortgage is guaranteed as to payment
of principal and interest by an agency or instrumentality of the U.S.
government; (b) collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
collateralized by pools of mortgages without a government guarantee as
to payment of principal and interest, but which have some form of
credit enhancement.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which
the Fund may invest are offerings of multiple class real estate
mortgage-backed securities which qualify and elect treatment as such
under provisions of the Internal Revenue Code, as amended. Issuers of
REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity
and is taxed to the person or persons who hold interests in the REMIC.
A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and
a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly

or indirectly secured principally by real property.

To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility
than adjustable rate mortgage securities that closely mirror the
market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market
rates, even after the interest rate is reset, and are subject to

correspondingly increased price volatility. In the event that the Fund
purchases such residual interest mortgage securities, it will factor
in the increased interest and price volatility of such securities when
determining its dollar-weighted average portfolio maturity and
duration.

motor vehicle and other installment purchase obligations and leases.
These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities are structured similarly to
collateralized mortgage obligations and mortgage pass-through
securities, which are described above. Also, these securities may be
issued either by non-governmental entities and carry no direct or
indirect governmental guarantees, or by governmental entities (i.e.,
Small Business Administration) and carry varying degrees of
governmental support.

prepayments than are mortgage-related asset-backed securities, certain
of the factors that affect the rate of prepayments on mortgage-related
asset-backed securities also affect the rate of prepayments on non-
mortgage related asset-backed securities.

Non-mortgage related asset-backed securities present certain risks
that are not presented by mortgage-related asset-backed securities.
Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to
another state, such registration could defeat the original security
interest in the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset-
backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support

payments on these securities.

BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued by
an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Eurodollar Time Deposits ("ETDs").

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

floating rate payments for fixed-rate payments) on a notional principal
amount. The principal amount of an interest rate swap is notional in that it
only provides the basis for determining the amount of interest payments under
the swap agreement, and does not represent an actual loan. For example, a $10
million LIBOR swap would require one party to pay the equivalent of the
London Interbank Offer Rate on $10 million principal amount in exchange for
the right to receive the equivalent of a fixed rate of interest on $10
million principal amount. Neither party to the swap would actually advance
$10 million to the other.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of the amount of excess interest on a notional principal amount from
the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of the amount of the
interest shortfall on a notional principal amount from the party selling the
interest rate floor.

The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest
based on a market index. Interest accrued on the hedged note would then equal
or exceed the Fund's obligations under the swap, while changes in the market
value of the swap would largely offset any changes in the market value of the

note. The Fund may also enter into swaps and caps to preserve or enhance a
return or spread on a portfolio security. The Fund does not intend to use
these transactions in a speculative manner.

The Fund will usually enter into interest rate swaps on a net basis (i.e.,
the two payment streams are netted out), with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. The net amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis, and the
Fund will segregate liquid assets in an aggregate net asset value at least
equal to the accrued excess, if any, on each business day. If the Fund enters
into an interest rate swap on other than a net basis, the Fund will segregate
liquid assets in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent interest rate swaps, caps or floors are
determined by the investment adviser to be illiquid, they will be included in
the Fund's limitation on investments in illiquid securities. To the extent
the Fund sells caps and floors, it will maintain in a segregated account cash
and/or U.S. government securities having an aggregate net asset value at

least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors.

The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Fund's investment adviser
is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
utilized. Moreover, even if the Fund's investment adviser is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly
with the price of the portfolio security being hedged.

There is no limit on the amount of interest rate swap transactions that may
be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk
of loss with respect to a default on an interest rate swap is limited to the
net asset value of the swap together with the net amount of interest payments
owed to the Fund by the defaulting party. A default on a portfolio security
hedged by an interest rate swap would also expose the Fund to the risk of
having to cover its net obligations under the swap with income from other
portfolio securities. The Fund may purchase and sell caps and floors without
limitation, subject to the segregated account requirement described above.

providing the credit enhancement (the "credit enhancer"), rather than the
issuer. Generally, the Fund will not treat credit enhanced securities as
having been issued by the credit enhancer for diversification purposes.
However, under certain circumstances applicable regulations may require the
Fund to treat the securities as having been issued by both the issuer and the
credit enhancer. The bankruptcy, receivership or default of the credit
enhancer will adversely affect the quality and marketability of the
underlying security.

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period
following a demand by the Fund. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities or by another
third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the
demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable
even after a payment default on the underlying security are treated as a form
of credit enhancement.

securities that incorporate the performance characteristics of these
contracts are also referred to as "derivatives." The term has also been
applied to securities "derived" from cash flows from underlying securities,
mortgages or other obligations.

Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response
of certain derivative contracts and securities to market changes may differ
from traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, such as asset-backed
securities and mortgage-backed securities, including CMOs, it will only do so
in a manner consistent with its investment objectives, policies and
limitations.

such securities by the Fund might be delayed pending court action. The Fund
believes that under the regular procedures normally in effect for custody of
the Fund's portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's adviser to be creditworthy
pursuant to guidelines established by the Trustees.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but which
are subject to restriction on resale under federal securities law. The Fund
will limit investments in illiquid securities, including certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, certain interest rate swaps, caps and floors determined by the
Fund's investment adviser to be illiquid, and repurchase agreements providing
for settlement in more than seven days after notice, to 15% of the value of
its net assets.

of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Fund intends, therefore, to treat the restricted securities which meet
the criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by the Fund's investment adviser, as
liquid and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis, or
both, up to one-third of the value of its total assets to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only
enter into loan arrangements with broker/dealers, banks, or other
institutions which the investment adviser has determined are creditworthy
under guidelines established by the Trustees. In these loan arrangements, the
Fund will receive collateral in the form of cash or U.S. government
securities equal to at least 100% of the value of the securities loaned.

There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.

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

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

SPECIAL CONSIDERATIONS

In the debt market, prices move inversely to interest rates. A decline in
market interest rates results in a rise in the market prices of outstanding
debt obligations. Conversely, an increase in market interest rates results in
a decline in market prices of outstanding debt obligations. In either case,
the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the
debt obligations: the debt obligations with the longest maturities will
experience the greatest market price changes.

The market value of debt obligations, and therefore the Fund's net asset
value, will fluctuate due to changes in economic conditions and other market
factors such as interest rates which are beyond the control of the Fund's
investment adviser. The Fund's investment adviser could be incorrect in its
expectations about the direction or extent of these market factors. Although
debt obligations with longer maturities offer potentially greater returns,
they have greater exposure to market price fluctuation. Consequently, to the
extent the Fund is significantly invested in debt obligations with longer
maturities, there is a greater possibility of fluctuation in the Fund's net
asset value.

WEIGHTED AVERAGE PORTFOLIO DURATION

Duration is a commonly used measure of the potential volatility of the price
of a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change
in the price of a debt security relative to a given change in the market rate
of interest. The duration of a debt security depends upon three primary
variables: the security's coupon rate, maturity date, and the level of market
interest rates for similar debt securities. Generally, debt securities with
lower coupons or longer maturities will have a longer duration than
securities with higher coupons or shorter maturities. For purposes of
calculating its dollar-weighted average portfolio duration, the Fund will
treat variable and floating rate instruments as having a remaining duration
commensurate with the period remaining until the next scheduled adjustment to
the instrument's interest rate.

INVESTMENT LIMITATIONS

The Fund will not:
* borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up
to one-third of the value of its total assets and pledge up to 15% of
the value of its total assets to secure such borrowings;

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

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

FEDERATED INCOME SECURITIES TRUST INFORMATION

MANAGEMENT OF THE TRUST

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

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

ADVISORY FEES. The Fund's Adviser receives an annual investment
advisory fee equal to .50% of the Fund's average daily net assets.
Under the investment advisory contract, the Adviser may voluntarily
reimburse some of the operating expenses of the Fund. The Adviser can
terminate this voluntary reimbursement of expenses at any time in its
sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain
states.

are owned by a trust, the trustees of which are John F. Donahue,
Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and
Trustee of Federated Investors.

Joseph M. Balestrino has been the Fund's portfolio manager since
January, 1994. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser since 1995.
Mr. Balestrino served as an Assistant Vice President of the investment
adviser from 1991 to 1995. Mr. Balestrino is a Chartered Financial
Analyst and received his Masters Degree in Urban and Regional Planning
from the University of Pittsburgh.

Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a

Vice President of the Fund's investment adviser since 1993. Ms. Nason
served as an Assistant Vice President of the investment adviser from
1990 until 1992. Ms. Nason is a Chartered Financial Analyst and
received her M.S. in Industrial Administration from Carnegie Mellon
University.

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

DISTRIBUTION OF INSTITUTIONAL SHARES

Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

ADMINISTRATION OF THE FUND

MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million

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

Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will
be paid will be determined from time to time by the Trust and Federated
Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp.
and Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or shareholder services.

The support may include sponsoring sales, educational and training seminars
for their employees, providing sales literature, and engineering computer
software programs that emphasize the attributes of the Fund. Such assistance
will be predicated upon the amount of Shares the financial institution sells
or may sell, and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the distributor
may be reimbursed by the Fund's investment adviser or its affiliates.

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for
Shares is determined by adding the interest of the Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of
the Shares in the liabilities of the Fund and those attributable to Shares,
and dividing the remainder by the total number of Shares outstanding.

INVESTING IN INSTITUTIONAL SHARES

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or by mail.

To purchase Shares of the Fund, open an account by calling Federated
Securities Corp. Information needed to establish the account will be taken
over the telephone. The Fund reserves the right to reject any purchase
request.

BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the
Fund before 4:00 p.m. (Eastern time) to place an order. The order is
considered received immediately. Payment by federal funds must be received
before 3:00 p.m. (Eastern time) on the next business day following the order.
Federal funds should be wired as follows: Federated Shareholder Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Intermediate Income Fund-
Institutional Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee
or Institution Name; ABA Number 011000028. Shares cannot be purchased by wire
on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the
telephone number listed on your account statement.

BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to

Federated Intermediate Income Fund-Institutional Shares to: Federated
Shareholder Services Company, c/o State Street Bank and Trust Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are considered
received after payment by check is converted by the transfer agentis bank,
State Street Bank, into federal funds. This is normally the next business day
after State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in shares is $25,000 plus any financial
intermediaryis fee. However, an account may be opened with a smaller amount
as long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a financial
intermediary may be subject to a smaller minimum investment.

WHAT SHARES COST

orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.

EXCHANGING SECURITIES FOR FUND SHARES

The Fund may accept securities in exchange for Fund Shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.

Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, and must be liquid.
The market value of any securities exchanged in an initial investment, plus
any cash, must be at least equal to the minimum investment in the Fund. The
Fund acquires the exchanged securities for investment and not for resale.

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for the equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of the Fund,
along with the securities.

If an exchange is permitted, it will be treated as a sale for federal income

tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.

EXCHANGE PRIVILEGE

Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset
value (plus a sales charge, if applicable). The ability to exchange shares
is available to shareholders residing in any state in which the shares being
acquired may be legally sold and the exchange is subject to any initial or
subsequent investment amounts of the fund being acquired. Prior to any
exchange, the shareholder must receive a copy of the current prospectus of
the fund or class thereof into which an exchange is to be effected. A
shareholder may obtain further information on the exchange privilege by
calling Federated Securities Corp. or the shareholder's financial
institution.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company
maintains a Share account for each shareholder. Share certificates are not
issued unless requested by contacting the Fund.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
the month.

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on
the business day wire payment is received by State Street Bank. If the order
for Shares and payment by wire are received on the same day, Shares begin
earning dividends on the next business day. Shares purchased by check begin
earning dividends on the business day after the check is converted upon
instruction of the transfer agent into federal funds. Dividends are
automatically reinvested on payment dates in additional Shares of the Fund
unless cash payments are requested by contacting the Fund.

CAPITAL GAINS

Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.

REDEEMING INSTITUTIONAL SHARES

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business
day, but in no event more than seven days, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If
at any time the Fund shall determine it is necessary to terminate or modify
this method of redemption, shareholders would be promptly notified. Proceeds
from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. Questions about
telephone redemptions on days when wire transfers are restricted should be
directed to your shareholder services representative at the telephone number
listed on your account statement.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions. In the event of drastic economic or market changes, a
shareholder may experience difficulty in redeeming by telephone. If such a
case should occur, another method of redemption, such as "Redeeming Shares By
Mail," should be considered.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600.
If share certificates have been issued, they should be sent unendorsed with
the written request by registered or certified mail to the address noted

above.

The written request should state: the Fund name and the Share Class
designation the account name as registered with the Fund; the account number;
and the number of shares to be redeemed or the dollar amount requested. All
owners of the account must sign the request exactly as the shares are
registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper
written redemption request. Dividends are paid up to and including the day
that a redemption request is processed.

Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a
commercial or savings bank, trust company or savings association whose
deposits are insured by an organization which is administered by the Federal
Deposit Insurance Corporation; a member firm of a domestic stock exchange; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934. The Fund does not accept signatures guaranteed by a
notary public.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified
in writing and allowed 30 days to purchase additional Shares to meet the
minimum requirement.

SHAREHOLDER INFORMATION

VOTING RIGHTS

As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of
Trustees under certain circumstances.

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

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.

Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions received. This applies whether
dividends and distributions are received in cash or as additional shares.
Information on the tax status of dividends and distributions is provided
annually.

There are tax uncertainties with respect to whether increasing rate
securities will be treated as having an original issue discount. If it is
determined that the increasing rate securities have original issue discount,
a holder will be required to include as income in each taxable year, in
addition to interest paid on the security for that year, an amount equal to
the sum of the daily portions of original issue discount for each day during
the taxable year that such holder holds the security. There may also be tax
uncertainties with respect to whether an extension of maturity on an
increasing rate note will be treated as a taxable exchange. In the event it
is determined that an extension of maturity is a taxable exchange, a holder
will recognize a taxable gain or loss, which will be a short-term capital

gain or loss if he holds the security as a capital asset, to the extent that
the value of the security with an extended maturity differs from the adjusted
basis of the security deemed exchanged therefor.

STATE AND LOCAL TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Fund
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Fund would be subject to such taxes if owned
directly by residents of those jurisdictions.

Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for
Institutional Shares.

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

The yield of Institutional Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Shares over a thirty-day period by the

maximum offering price per share of Institutional Shares on the last day of
the period. This number is then annualized using semi-annual compounding. The
yield does not necessarily reflect income actually earned by Institutional
Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.

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

OTHER CLASSES OF SHARES

The Fund also offers one other class of shares called Institutional Service
Shares.

Institutional Service Shares are sold primarily to banks and other
institutions that hold assets in an agency capacity. Institutional Service
Shares are sold at net asset value and are subject to a minimum initial
investment of $25,000. Institutional Service Shares are distributed pursuant
to a 12b-1 Plan adopted by the Trust.

Shares and Institutional Service Shares are subject to certain of the same
expenses. Expense differences, however, between Shares and Institutional
Service Shares may affect the performance of each class.

To obtain more information and a prospectus for Institutional Service Shares,
investors may call 1-800-235-4669 or contact their financial institution.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SERVICE SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors,
on page 38.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.55 $ 9.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.63 0.64 0.22
Net realized and unrealized gain (loss) on
investments 0.21 0.02 (0.47)
Total from investment operations 0.84 0.66 (0.25)
LESS DISTRIBUTIONS
Distributions from net investment income (0.63) (0.64) (0.22)
NET ASSET VALUE, END OF PERIOD $ 9.76 $ 9.55 $ 9.53
TOTAL RETURN(B) 8.86% 7.27% (2.57%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.72% 0.25%*
Net investment income 6.31% 6.85% 6.12%*
Expense waiver/reimbursement(c) 0.85% 1.22% 1.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $508 $276 $225
Portfolio turnover 66% 88% 0%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from December 15, 1993 (date of
initial public offering) to April 30, 1994.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1996, which can be obtained
free of charge.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
PORTFOLIO OF INVESTMENTS
APRIL 30, 1996

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
ASSET-BACKED SECURITIES-3.9%
AUTOMOTIVE-0.2%
$ 58,168 Midlantic Auto Grantor Trust 1992-1, Class B, 5.15%, 9/15/1997 $ 58,147
107,435 Premier Auto Trust 1992-3, Class B, 6.25%, 11/15/1997 107,435
Total 165,582
FINANCE-RETAIL-1.1%
1,000,000 Discover Card Trust 1991-B, Class B, 8.85%, 7/16/1998 1,003,580
HOME EQUITY RECEIVABLES-0.2%
159,258 TMS Home Equity Loan Trust 1992-B, Class A, 6.90%, 7/15/2007 157,191
NON-GOVERNMENT AGENCY-MORTGAGE-BACKED SECURITIES-2.4%
400,000 Prudential Bache, Series 8, Class F, 7.97%, 3/1/2019 414,020
1,000,000 Prudential Home Mortgage Security 1993-32, Series 1992-32,
Class A-6, 7.50%, 10/25/2022 980,120
500,000 Residential Funding Corp. 1993-S26, Class A10, 7.50%, 7/25/2023 467,810
300,000 Residential Funding Corp. 1993-S31, Class A7, 7.00%, 9/25/2023 262,809
Total 2,124,759
TOTAL ASSET-BACKED SECURITIES (IDENTIFIED COST $3,523,713) 3,451,112
CORPORATE BONDS-62.0%
AUTOMOTIVE-1.6%
1,000,000 Chrysler Corp., Deb., 12.00%, 5/1/2020 1,444,640
BANKING-9.4%
1,000,000 African Development Bank, Note, 6.88%, 10/15/2015 936,260
1,000,000 Banco Santander, Bank Guarantee, 7.88%, 4/15/2005 1,033,540

1,000,000 Bank of Montreal, Sub. Note, 7.80%, 4/1/2007 1,034,610
1,750,000 Bayerische Landesbank-NY, Note, 6.20%, 2/9/2006 1,628,252
920,000 Chase Manhattan Corp., Sub. Note, 8.00%, 5/1/2005 943,120
1,750,000 Export-Import Bank Korea, Sr. Unsub., 6.38%, 2/15/2006 1,631,023
</TABLE>

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-CONTINUED
BANKING-CONTINUED
$ 1,000,000 National Bank of Canada, Montreal, Sub. Note, 8.13%, 8/15/2004 $ 1,044,920
Total 8,251,725
CHEMICALS & PLASTICS-2.8%
2,500,000 (a)Bayer Corp., Deb., 6.50%, 10/1/2002 2,456,025
ECOLOGICAL SERVICES & EQUIPMENT-1.8%
1,500,000 WMX Technologies, Inc., Deb., 8.75%, 5/1/2018 1,623,900
EDUCATION-2.4%
1,000,000 Columbia University, Medium Term Note, 8.62%, 2/21/2001 1,072,500
1,000,000 Harvard University, Revenue Bonds, 8.13% Bonds, 4/15/2007 1,078,220
Total 2,150,720
ELECTRONICS-1.9%
1,450,000 Harris Corp., Deb., 10.38%, 12/1/2018 1,624,536
FINANCE - RETAIL-1.3%
140,000 Household Finance Corp., Deb., 8.95%, 9/15/1999 149,267
1,000,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 996,440
Total 1,145,707
FINANCIAL INTERMEDIARIES-4.7%
2,000,000 American General Corp., S.F. Deb., 9.63%, 2/1/2018 2,178,060
1,000,000 Donaldson, Lufkin and Jenrette Securities Corp., Note, 6.88%,
11/1/2005 958,840
1,000,000 Merrill Lynch & Co., Inc., Medium Term Note, 7.25%, 6/14/2004 1,010,160

Total 4,147,060
FOOD PRODUCTS-1.2%
1,000,000 Grand Metropolitan Investment Corp., Company Guarantee, 7.00%,
6/15/1999 1,012,260
</TABLE>

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-CONTINUED
FOREST PRODUCTS-1.3%
$ 500,000 Smurfit Capital, Deb., 7.50%, 11/20/2025 $ 465,000
750,000 Smurfit Capital, Note, 6.75%, 11/20/2005 713,475
Total 1,178,475
HEALTH SERVICES-1.6%
1,500,000 Columbia/HCA Healthcare Corp., Deb., 7.19%, 11/15/2015 1,420,995
INSURANCE-8.3%
1,500,000 Allmerica Financial Corp., Sr. Note, 7.63%, 10/15/2025 1,423,845
1,000,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 910,120
1,000,000 GE Global Insurance, Note, 7.00%, 2/15/2026 931,150
1,000,000 GEICO Corp., Deb., 9.15%, 9/15/2021 1,090,930
1,500,000 (a)Reinsurance Group of America, Sr. Note, 7.25%, 4/1/2006 1,470,000
1,500,000 Sunamerica, Inc., Medium Term Note, 7.34%, 8/30/2005 1,494,988
Total 7,321,033
LEISURE & ENTERTAINMENT-2.2%
2,000,000 Disney (Walt) Co., Bond, 6.38%, 3/30/2001 1,970,240
METALS & MINING-1.2%
1,000,000 Alcan Aluminum Ltd., Deb., 9.20%, 3/15/2001 1,046,440
MUNICIPAL SERVICES-3.7%
1,325,000 Kansas City, MO Redevelopment Authority, 7.65% Bonds
(FSA LOC), 11/1/2018 1,272,954
1,000,000 Miami Florida Revenue Pension Obligation, 7.20% Bonds

(AMBAC LOC), 12/1/2025 901,440
1,000,000 Pittsburgh, PA Urban Redevelopment Authority, 9.07% Bonds
(CGIC GTD), 9/1/2014 1,106,810
Total 3,281,204
RAIL INDUSTRY-1.1%
1,000,000 Atchison Topeka & SF RR, Equip. Trust, 6.55%, 1/6/2013 944,030
</TABLE>

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS-CONTINUED
RETAILERS-2.5%
$ 1,000,000 May Department Stores Co., Deb., 8.13%, 8/15/2035 $ 993,170
1,070,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,163,197
Total 2,156,367
SOVEREIGN GOVERNMENT-5.9%
1,000,000 Canada-Govt. of, Deb., 6.38%, 7/21/2005 963,125
1,000,000 (a)Freeport Terminal (Malta) Ltd., Gtd. Global Note, 7.50%, 3/29/2009 990,460
1,000,000 Kingdom of Sweden, Deb., 10.25%, 11/1/2015 1,247,820
1,000,000 Quebec, Province of, Deb., 7.50%, 7/15/2023 955,490
1,000,000 Victoria Public Authority, Local Gov't. Guarantee, 8.25%, 1/15/2002 1,061,875
Total 5,218,770
TELECOMMUNICATIONS & CELLULAR-1.0%
800,000 New England Telephone & Telegraph, Deb., 8.63%, 8/1/2001 862,120
UTILITIES-6.1%
850,000 Hydro-Quebec, Deb., 7.375%, 2/1/2003 863,124
1,000,000 Kansas Electric Power Co-op, Collateral Trust, 9.73%, 12/15/2017 1,086,260
180,000 Minnesota Power and Light Co., 1st Mtg. Bond, 7.75%, 6/1/2007 184,349
975,000 Pedernales Electric Co-op, 10.88% Bonds (MBIA INS), 9/1/2017 1,081,285
1,750,000 (a)Tenaga Nasional Berhad, Deb., 7.50%, 11/1/2025 1,642,077
500,000 Wisconsin Telephone Co., Deb., 6.25%, 8/1/2004 476,585
Total 5,333,680
TOTAL CORPORATE BONDS (IDENTIFIED COST $55,422,593) 54,589,927

</TABLE>

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
GOVERNMENT AGENCIES-7.1%
$ 1,000,000 Federal Home Loan Mortgage Corp., Note, 7.61%, 9/1/2004 $ 998,900
500,000 Federal National Mortgage Association, Note, 8.59%, 2/3/2005 514,395
750,000 Federal National Mortgage Association, Medium Term Note,
7.43%, 8/4/2005 742,695
4,500,000 Federal National Mortgage Association, 0/8.62%, 3/9/2022 3,953,565
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $6,110,587) 6,209,555
MORTGAGE-BACKED SECURITIES-11.1%
FEDERAL HOME LOAN MORTGAGE CORPORATION-6.2%
180,604 8.50%, 6/1/1996 181,787
291,684 8.50%, 12/1/1996 293,595
30,695 8.50%, 6/1/1997 30,896
1,972,138 Pool C00426, 7.00%, 10/1/2025 1,903,705
3,030,311 Pool D64184, 8.00%, 10/1/2025 3,064,341
Total 5,474,324
FEDERAL NATIONAL MORTGAGE ASSOCIATION-2.7%
1,413,973 Pool 250412, 7.00%, 12/1/2010 1,398,490
1,008,560 Pool 317255, 7.00%, 7/1/2025 972,615
Total 2,371,105
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-2.2%
1,088,665 Pool 379983, 7.50%, 2/15/2024 1,076,058
940,224 Pool 780204, 7.00%, 7/15/2025 906,132
Total 1,982,190

TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $9,920,047) 9,827,619
</TABLE>

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
TREASURY SECURITIES-10.1%
U.S. TREASURY NOTES-10.1%
$ 3,000,000 5.00%, 1/31/1998 $ 2,950,500
3,000,000 5.00%, 2/15/1999 2,911,770
1,500,000 6.88, 3/31/2000 1,527,030
1,500,000 6.50%, 8/15/2005 1,480,065
TOTAL TREASURY SECURITIES (IDENTIFIED COST $9,026,233) 8,869,365
(B) REPURCHASE AGREEMENT-4.4%
3,845,000 BT Securities Corporation, 5.35%, dated 4/30/1996, due 5/1/1996
(AT AMORTIZED COST) 3,845,000
TOTAL INVESTMENTS (IDENTIFIED COST $87,848,173)(C) $ 86,792,578
</TABLE>

(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At April 30, 1996, these securities
amounted to $6,558,562 which represents 7.5% of net assets.

(b) The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investment in the repurchase agreement is through
participation in a joint account with other Federated funds.

(c) The cost of investments for federal tax purposes amounts to $87,848,173.
The net unrealized depreciation of investments on a federal tax basis
amounts to $1,055,595 which is comprised of $722,245 appreciation and
$1,777,840 depreciation at April 30, 1996.

Note: The categories of investments are shown as a percentage of net
assets ($88,001,246) at April 30, 1996.

The following acronyms are used throughout this portfolio:
AMBAC - American Municipal Bond Assurance Corporation
CGIC - Capital Guaranty Insurance Corporation
FSA - Financial Security Assurance
GTD - Guaranty
INS - Insured
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance

(See Notes which are an integral part of the Financial Statements)

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1996

<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $87,848,173) $ 86,792,578
Income receivable 1,405,957
Receivable for shares sold 525,113
Deferred expenses 23,185
Total assets 88,746,833
LIABILITIES:
Payable for shares redeemed $ 38,210
Income distribution payable 336,564
Payable to Bank 352,965
Payable for taxes withheld 2,523
Accrued expenses 15,325
Total liabilities 745,587
NET ASSETS for 9,011,885 shares outstanding $ 88,001,246
NET ASSETS CONSIST OF:
Paid in capital $ 88,998,844
Net unrealized depreciation of investments (1,055,595)
Accumulated net realized gain on investments 57,997
Total Net Assets $ 88,001,246
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$87,493,366 / 8,959,874 shares outstanding $9.77
INSTITUTIONAL SERVICE SHARES:
$507,880 / 52,011 shares outstanding $9.76
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 1996

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 4,019,948
EXPENSES:
Investment advisory fee $ 283,938
Administrative personnel and services fee 155,000
Custodian fees 24,389
Transfer and dividend disbursing agent fees and expenses 32,568
Directors'/Trustees' fees 3,931
Auditing fees 17,970
Legal fees 5,366
Portfolio accounting fees 63,539
Distribution services fee-Institutional Service Shares 937
Shareholder services fee-Institutional Shares 141,032
Shareholder services fee-Institutional Service Shares 937
Share registration costs 21,096
Printing and postage 26,466
Insurance premiums 4,467
Taxes 936
Miscellaneous 14,230
Total expenses 796,802
Waivers and reimbursements-
Waiver of investment advisory fee $ (283,938)
Waiver of distribution services fee-Institutional Service Shares (210)
Waiver of shareholder services fee-Institutional Shares (141,032)
Waiver of shareholder services fee-Institutional Service Shares (727)
Reimbursement of other operating expenses (55,252)

Total waivers and reimbursements (481,159)
Net expenses 315,643
Net investment income 3,704,305
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 592,904
Net change in unrealized depreciation of investments (1,216,895)
Net realized and unrealized loss on investments (623,991)
Change in net assets resulting from operations $ 3,080,314
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS-
Net investment income $ 3,704,305 $ 1,919,206
Net realized gain (loss) on investments
($57,997 net gain and $380,818 net loss,respectively,
as computed for federal tax purposes) 592,904 (527,053)
Net change in unrealized appreciation (depreciation) of
investments (1,216,895) 848,090
Change in net assets resulting from operations 3,080,314 2,240,243
DISTRIBUTIONS TO SHAREHOLDERS-
Distributions from net investment income
Institutional Shares (3,680,651) (1,903,482)
Institutional Service Shares (23,654) (15,724)
Change in net assets resulting from distributions to
shareholders (3,704,305) (1,919,206)
SHARE TRANSACTIONS-
Proceeds from sale of shares 73,115,997 21,784,834
Net asset value of shares issued to shareholders in payment
of distributions declared 566,067 238,460
Cost of shares redeemed (17,840,975) (7,487,433)
Change in net assets resulting from share transactions 55,841,089 14,535,861
Change in net assets 55,217,098 14,856,898
NET ASSETS:

Beginning of period 32,784,148 17,927,250
End of period $ 88,001,246 $ 32,784,148
</TABLE>

(See Notes which are an integral part of the Financial Statements)

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996

1. ORGANIZATION

Federated Income Securities Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Trust consists of two portfolios. The
financial statements included herein are only those of Federated Intermediate
Income Fund (the "Fund"), a diversified portfolio. The investment objective
of the Fund is current income. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held.

The Fund offers two classes of shares: Institutional Shares and Institutional
Service Shares.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently

followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

INVESTMENT VALUATIONS-U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, unlisted
securities, and private placement securities are generally valued at
the mean of the latest bid and asked price as furnished by an
independent pricing service. Short-term securities are valued at the
prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time
of purchase may be valued at amortized cost, which approximates fair
market value. The Fund's restricted securities are valued at the price
provided by dealers in the secondary market or, if no market prices
are available, at the fair value as determined by the Fund's pricing
committee.

REPURCHASE AGREEMENTS-It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under
repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value
of each repurchase agreement's collateral to ensure that the value of
collateral at least equals the repurchase price to be paid under the
repurchase agreement transaction.

The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which

are deemed by the Fund's adviser to be creditworthy pursuant to the
guidelines and/or standards reviewed or established by the Board of
Trustees (the "Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.

FEDERAL TAXES-It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its income.
Accordingly, no provisions for federal tax are necessary.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS-The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-
issued securities on the trade date and maintains security positions
such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.

DEFERRED EXPENSES-The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the

initial expense of registering its shares, have been deferred and are
being amortized using the straight-line method over a period of five
years from the Fund's commencement date.

RESTRICTED SECURITIES-Restricted securities are securities that may
only be resold upon registration under federal securities laws or in
transactions exempt from such registration. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. In some cases, the restricted securities may be resold
without registration upon exercise of a demand feature. Such
restricted securities may be determined to be liquid under criteria
established by the Board of Trustees. The Fund will not incur any
registration costs upon such resales.

Additional information on each restricted security held at April 30,
1996 is as follows:

<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
<S> <C> <C>
Bayer Corp., Deb. 3/21/96 $2,492,198
Freeport Terminal (Malta) Ltd., Gtd Global Note 3/17/94-7/19/94 972,965
Reinsurance Group of America, Sr. Note 3/19/96 1,495,410
Tenaga Nasional Berhad, Deb. 2/16/96-4/3/96 1,750,907
</TABLE>

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 amounts of assets,
liabilities, expenses and revenues reported in the financial
statements. Actual results could differ from those estimated.

OTHER-Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value) for each class of shares.

Transactions in shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 7,294,867 $ 72,842,163 2,305,891 $ 21,616,701
Shares issued to shareholders in payment of
distributions declared 55,479 553,522 25,256 236,376
Shares redeemed (1,794,289) (17,784,858) (785,508) (7,366,801)
Net change resulting from Institutional
share transactions 5,556,057 $ 55,610,827 1,545,639 $ 14,486,276

<CAPTION>
YEAR ENDED APRIL 30,
1996 1995
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 28,008 $ 273,834 17,937 $ 168,133
Shares issued to shareholders in payment of
distributions declared 1,255 12,545 223 2,084
Shares redeemed (6,200) (56,117) (12,830) (120,632)
Net change resulting from Institutional Service
share transactions 23,063 $ 230,262 5,330 $ 49,585
Net change resulting from
share transactions 5,579,120 $ 55,841,089 1,550,969 $ 14,535,861
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE-Federated Management, the Fund's investment
adviser, (the "Adviser"), receives for its services an annual
investment advisory fee equal to 0.50% of the Fund's average daily net
assets. The Adviser may voluntarily choose to waive any portion of its
fee and reimburse certain operating expenses of the Fund. The Adviser
can modify or terminate this voluntary waiver and reimbursement at any
time at its sole discretion.

ADMINISTRATIVE FEE-Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with
administrative personnel and services. The fee paid to FServ is based
on the level of average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative
Services Agreement shall be at least $125,000 per portfolio and
$30,000 per each additional class of shares.

expenses up to 0.25% of average daily net assets of the Institutional
Service shares, annually, to compensate FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor
can modify or terminate this voluntary waiver at any time at its sole
discretion.

SHAREHOLDER SERVICES FEE-Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will
pay FSS up to 0.25% of average daily net assets of the Fund for the
period. The fee paid to FSS is used to finance certain services for
shareholders and to maintain shareholder accounts. FSS may voluntarily
choose to waive any portion of its fee. For the fiscal year ended
April 30, 1996, Institutional Shares fully waived its shareholder
service fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES-FServ,
through its subsidiary, Federated Shareholder Services Company serves
as transfer and dividend disbursing agent for the Fund. The fee paid
to FServ is based on the size, type, and number of accounts and
transactions made by shareholders.

PORTFOLIO ACCOUNTING FEES-FServ maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level of
the Fund's average daily net assets for the period, plus out-of-pocket
expenses.

ORGANIZATIONAL EXPENSES-Organizational expenses $47,948 and start-up

administrative service expenses of $38,751 were borne initially by
Adviser. The Fund has agreed to reimburse Adviser for the
organizational and start-up administrative expenses during the five-
year period following effective date. For the period ended April 30,
1996, the Fund paid $7,725 and $6,243, respectively, pursuant to this
agreement.

GENERAL-Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended April 30, 1996, were as follows:

<TABLE>
<S> <C>
PURCHASES $ 88,811,321
SALES $ 35,102,294
</TABLE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of

FEDERATED INCOME SECURITIES TRUST:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated Intermediate Income Fund
(one of the portfolios comprising Federated Income Securities Trust), as of
April 30, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended and the financial highlights (see pages 2 and 23 of
this prospectus) for each of the periods presented therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and 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
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. Our procedures included confirmation of
securities owned as of April 30, 1996, by correspondence with the custodian
and a broker. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Intermediate Income Fund, a portfolio of Federated Income
Securities Trust, at April 30, 1996, and the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and financial highlights for each of the periods
presented therein, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 14, 1996

ADDRESSES

Federated Intermediate Income Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

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

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

Transfer Agent and Dividend Disbursing Agent
Federated Shareholder P.O. Box 8600
Services Company Boston, Massachusetts 02266-8600

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

INSTITUTIONAL SHARES

PROSPECTUS

A Diversified Portfolio of Federated
Income Securities Trust,
An Open-End, Management

Investment Company

June 30, 1996

[Graphic]

Cusip 31420C407
3090804A-IS (6/96)

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)

(A PORTFOLIO OF FEDERATED INCOME SECURITIES TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS

The Institutional Service Shares of Federated Intermediate Income Fund (the
"Fund") offered by this prospectus represent interests in a diversified
portfolio of securities which is an investment portfolio in Federated Income
Securities Trust (the "Trust"), an open-end, management investment company
(a mutual fund).

The investment objective of the Fund is to provide current income.

This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.

The Fund has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated June 30, 1996,
with the Securities and Exchange Commission (SEC). The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information or a paper copy of this prospectus, if you have received it
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact the Fund at the
address listed in the back of this prospectus. The Statement of Additional
Information, material incorporated by reference into this document, and other
information regarding the Fund is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).

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

IS A CRIMINAL OFFENSE.

Prospectus dated June 30, 1996

TABLE OF CONTENTS

SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS-
INSTITUTIONAL SERVICE SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Special Considerations 14
Weighted Average Portfolio Duration 14
Investment Limitations 14
FEDERATED INCOME SECURITIES
TRUST INFORMATION 15
Management of the Trust 15
Distribution of Institutional Service Shares 16
ADMINISTRATION OF THE FUND 17
NET ASSET VALUE 17
INVESTING IN INSTITUTIONAL SERVICE SHARES 17
Share Purchases 17
Minimum Investment Required 18
What Shares Cost 18
Exchanging Securities for Fund Shares 18
Exchange Privilege 19

Certificates and Confirmations 19
Dividends 19
Capital Gains 19
REDEEMING INSTITUTIONAL SERVICE SHARES 20
Telephone Redemption 20
Redeeming Shares by Mail 20
Accounts with Low Balances 21
SHAREHOLDER INFORMATION 21
Voting Rights 21
TAX INFORMATION 21
Federal Income Tax 21
State and Local Taxes 22
PERFORMANCE INFORMATION 22
OTHER CLASSES OF SHARES 22
FINANCIAL HIGHLIGHTS-
INSTITUTIONAL SHARES 23
FINANCIAL STATEMENTS 24
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 38
ADDRESSES 39

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
as applicable) None
Redemption Fee (as a percentage of amount
redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1) 0.00%
12b-1 Fee(2) 0.16%
Total Other Expenses (after expense reimbursement) 0.64%
Shareholder Services Fee (after waiver) (3) 0.09%
Total Operating Expenses (4) 0.80%
</TABLE>

(2) The maximum 12b-1 fee is 0.25%.

(3) The maximum shareholder services fee is 0.25%.

(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending April 30, 1997. The total
operating expenses were 0.80% for the fiscal year ended April 30, 1996
and would have been 1.65% absent the voluntary waivers of the management
fee, a portion of the shareholder services fee, a portion of the 12b-1
fee and the voluntary reimbursement of certain other operating expenses.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Service Shares
of the Trust will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Federated Income
Securities Trust Information" and "Investing in Institutional Service
Shares." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

,/table>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors,
on page 38.

</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1996 1995 1994(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.55 $ 9.53 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.63 0.64 0.22
Net realized and unrealized gain (loss) on
investments 0.21 0.02 (0.47)
Total from investment operations 0.84 0.66 (0.25)
LESS DISTRIBUTIONS
Distributions from net investment income (0.63) (0.64) (0.22)
NET ASSET VALUE, END OF PERIOD $ 9.76 $ 9.55 $ 9.53
TOTAL RETURN(B) 8.86% 7.27% (2.57%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.72% 0.25%*
Net investment income 6.31% 6.85% 6.12%*
Expense waiver/reimbursement(c) 0.85% 1.22% 1.40%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $508 $276 $225
Portfolio turnover 66% 88% 0%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from December 15, 1993 (date of
initial public offering) to April 30, 1994.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(See Notes which are an integral part of the Financial Statements)

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended April 30, 1996, which can be obtained
free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated January 24, 1986. At a meeting of the Board of
Trustees ("Trustees") held on February 26, 1996, the Trustees approved an
amendment to the Declaration of Trust to change the name of Intermediate
Income Fund to Federated Intermediate Income Fund. The Trust may offer
separate series of shares of beneficial interest representing interests in

separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Trustees
have established two classes of shares of Federated Intermediate Income Fund:
Institutional Service Shares and Institutional Shares. This prospectus
relates only to Institutional Service Shares of the Fund.

Shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Fund.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

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

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS. The Fund invests primarily in a professionally
managed, diversified portfolio consisting of U.S. government obligations,
corporate debt obligations, and asset-backed securities. The Fund may also
invest in derivative instruments of such securities, including instruments
with demand features or credit enhancement, as well as money market
instruments.

The securities in which the Fund invests are:

* obligations issued or guaranteed as to payment of principal and interest
by the U.S. government, its agencies and instrumentalities including
bills, notes, bonds, and discount notes of the U.S. Treasury and of U.S.
government agencies or instrumentalities, such as the: Farm Credit
System, including the National Bank for Cooperatives, Farm Credit Banks
and Banks for Cooperatives; Federal Home Loan Banks; Federal Home Loan
Mortgage Corporation; Federal National Mortgage Association; Government
National Mortgage Association; Export-Import Bank of the United States;
Commodity Credit Corporation; Federal Financing Bank; The Student Loan
Marketing Association; National Credit Union Administration; and
Tennessee Valley Authority.

* domestic and foreign issues of corporate and soverign debt obligations
(including Eurobonds, Medium Term Notes and Deposit Notes) having
floating or fixed rates of interest;

* asset-backed securities, including mortgage-related securities;

* municipal securities;

* foreign currency transactions (including spot, futures, options and
swaps);

* repurchase agreements collateralized by eligible investments.

* the full faith and credit of the U.S. Treasury;

* the issuer's right to borrow from the U.S. Treasury;

* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

* the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive

financial support from the U.S. government are:

* Farm Credit System, including the National Bank for Cooperatives,
Farm Credit Banks and Banks for Cooperatives;

* Federal Home Loan Banks;

* The Student Loan Marketing Association;

* Federal Home Loan Mortgage Corporation; and

* Federal National Mortgage Association.

CORPORATE DEBT OBLIGATIONS. The Fund invests in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating or
fixed rates of interest.

call features of the securities may make them callable within a short period
of time. A fixed rate security with short-term characteristics would include
a fixed income security priced close to call or redemption price or a fixed
income security approaching maturity, where the expectation of call or
redemption is high.

VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term
corporate debt instruments that have variable or floating interest
rates and provide the Fund with the right to tender the security for
repurchase at its stated principal amount plus accrued interest. Such
securities typically bear interest at a rate that is intended to cause
the securities to trade at par. The interest rate may float or be
adjusted at regular intervals (ranging from daily to annually), and is
normally based on a published interest rate or interest rate index.
Many variable rate demand notes allow the Fund to demand the
repurchase of the security on not more than seven days' prior notice.

Other notes only permit the Fund to tender the security at the time of
each interest rate adjustment or at other fixed intervals. See "Demand
Features."

ASSET-BACKED SECURITIES. Asset-backed securities are created by the grouping
of certain governmental, government related and private loans, receivables
and other lender assets into pools. Interests in these pools are sold as
individual securities. Payments from the asset pools may be divided into
several different tranches of debt securities, with some tranches entitled to
receive regular installments of principal and interest, other tranches
entitled to receive regular installments of interest, with principal payable
at maturity or upon specified call dates, and other tranches only entitled to

receive payments of principal and accrued interest at maturity or upon
specified call dates. Different tranches of securities will bear different
interest rates, which may be fixed or floating.

Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment risks
on mortgage securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to take
advantage of the more favorable rates. Depending upon market conditions, the
yield that the Fund receives from the reinvestment of such prepayments, or
any scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools, such as
collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.

The credit characteristics of asset-backed securities also differ in a number

of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.

MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage-related asset-backed securities. These types of
investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment
conduits, or other securities collateralized by or representing an
interest in real estate mortgages (collectively, "mortgage
securities"). Mortgage securities are: (i) issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"); (ii) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities; (iii) those issued by private issuers
that represent an interest in or are collateralized by whole loans or
mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement; and (iv) privately
issued securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and
interest by an agency of instrumentality of the U.S. government.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than
fixed interest rate mortgages. Typically, the ARMS in which the Fund
may invest are issued by GNMA, FNMA, and FHLMC and are actively
traded. ARMS may be collateralized by whole loans or private pass-
through securities. The underlying mortgages which collateralize ARMS
issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.

Unlike conventional bonds, ARMS pay back principal over the life of
the ARMS rather than at maturity. Thus, a holder of the ARMS, such as
the Fund, would receive monthly scheduled payments of principal and/or
interest and may receive unscheduled principal payments representing
payments on the underlying mortgages. At the time that a holder of the
ARMS reinvests the payments and any unscheduled prepayments of
principal that it receives, the holder may receive a rate of interest
which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of fixed-income
securities.

While ARMS generally entail less risk of a decline during periods of
rapidly rising rates, ARMS may also have less potential for capital
appreciation than other similar investments (e.g., investments with
comparable maturities) because, as interest rates decline, the
likelihood increases that mortgages will be prepaid. Furthermore, if
ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal
investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total
returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but may be collateralized by whole loans or private
pass-through securities.

government; (b) collateralized by pools of mortgages in which payment
of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
collateralized by pools of mortgages without a government guarantee as
to payment of principal and interest, but which have some form of
credit enhancement.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs in which
the Fund may invest are offerings of multiple class real estate
mortgage-backed securities which qualify and elect treatment as such
under provisions of the Internal Revenue Code, as amended. Issuers of
REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity
and is taxed to the person or persons who hold interests in the REMIC.
A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and
a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly
or indirectly secured principally by real property.

rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-
month LIBOR, the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury
Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to have
somewhat less volatile interest rates.

To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, adjustable rate mortgage securities which use indices that lag
changes in market rates should experience greater price volatility
than adjustable rate mortgage securities that closely mirror the
market. Certain residual interest tranches of CMOs may have adjustable
interest rates that deviate significantly from prevailing market
rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event that the Fund
purchases such residual interest mortgage securities, it will factor
in the increased interest and price volatility of such securities when
determining its dollar-weighted average portfolio maturity and
duration.

CAPS AND FLOORS. The underlying mortgages which collateralize the
ARMS, CMOs, and REMICs in which the Fund may invest will frequently

have caps and floors which limit the maximum amount by which the loan
rate to the residential borrower may change up or down: (1) per reset
or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may
result in negative amortization.

The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.

governmental support.

Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time the
Fund reinvests the payments and any unscheduled prepayments of
principal received, the Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Although non-mortgage related asset-backed
securities generally are less likely to experience substantial
prepayments than are mortgage-related asset-backed securities, certain
of the factors that affect the rate of prepayments on mortgage-related
asset-backed securities also affect the rate of prepayments on non-
mortgage related asset-backed securities.

Non-mortgage related asset-backed securities present certain risks
that are not presented by mortgage-related asset-backed securities.
Primarily, these securities do not have the benefit of the same

security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to
another state, such registration could defeat the original security
interest in the vehicle in certain cases. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of asset-
backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.

INTEREST RATE SWAPS, CAPS AND FLOORS. The Fund may enter into interest rate
swaps and may purchase or sell (i.e., write) interest rate caps and floors.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed-rate payments) on a notional principal
amount. The principal amount of an interest rate swap is notional in that it
only provides the basis for determining the amount of interest payments under
the swap agreement, and does not represent an actual loan. For example, a $10
million LIBOR swap would require one party to pay the equivalent of the
London Interbank Offer Rate on $10 million principal amount in exchange for
the right to receive the equivalent of a fixed rate of interest on $10
million principal amount. Neither party to the swap would actually advance

$10 million to the other.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of the amount of excess interest on a notional principal amount from
the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of the amount of the
interest shortfall on a notional principal amount from the party selling the
interest rate floor.

The Fund expects to enter into interest rate transactions primarily to hedge
against changes in the price of other portfolio securities. For example, the
Fund may hedge against changes in the market value of a fixed rate note by
entering into a concurrent swap that requires the Fund to pay the same or a
lower fixed rate of interest on a notional principal amount equal to the
principal amount of the note in exchange for a variable rate of interest
based on a market index. Interest accrued on the hedged note would then equal
or exceed the Fund's obligations under the swap, while changes in the market
value of the swap would largely offset any changes in the market value of the
note. The Fund may also enter into swaps and caps to preserve or enhance a
return or spread on a portfolio security. The Fund does not intend to use
these transactions in a speculative manner.

respect to each interest rate swap will be accrued on a daily basis, and the
Fund will segregate liquid assets in an aggregate net asset value at least
equal to the accrued excess, if any, on each business day. If the Fund enters
into an interest rate swap on other than a net basis, the Fund will segregate
liquid assets in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant
to the agreements related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and agents
utilizing standardized swap documentation. The Fund's investment adviser has
determined that, as a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less
liquid than swaps. To the extent interest rate swaps, caps or floors are
determined by the investment adviser to be illiquid, they will be included in
the Fund's limitation on investments in illiquid securities. To the extent
the Fund sells caps and floors, it will maintain in a segregated account cash
and/or U.S. government securities having an aggregate net asset value at
least equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to the caps or floors.

compared with what it would have been if these investment techniques were not
utilized. Moreover, even if the Fund's investment adviser is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly
with the price of the portfolio security being hedged.

There is no limit on the amount of interest rate swap transactions that may
be entered into by the Fund. These transactions do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk
of loss with respect to a default on an interest rate swap is limited to the
net asset value of the swap together with the net amount of interest payments
owed to the Fund by the defaulting party. A default on a portfolio security
hedged by an interest rate swap would also expose the Fund to the risk of
having to cover its net obligations under the swap with income from other
portfolio securities. The Fund may purchase and sell caps and floors without
limitation, subject to the segregated account requirement described above.

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

DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period
following a demand by the Fund. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities or by another
third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the
demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable
even after a payment default on the underlying security are treated as a form
of credit enhancement.

DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
been applied to certain contracts (including futures, forward, option and
swap contracts) that "derive" their value from changes in the value of an
underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these
contracts are also referred to as "derivatives." The term has also been
applied to securities "derived" from the cash flows from underlying
securities, mortgages or other obligations.

from traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Fund will only use derivative contracts for the purposes disclosed in the
applicable prospectus sections above. To the extent that the Fund invests in
securities that could be characterized as derivatives, such as asset-backed
securities and mortgage-backed securities, including CMOs, it will only do so
in a manner consistent with its investment objectives, policies and
limitations.

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

The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Fund, who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must
be in an exempt transaction. Section 4(2) commercial paper is normally resold
to other institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. The Fund believes that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Fund intends, therefore, to treat the restricted securities which meet
the criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by the Fund's investment adviser, as
liquid and not subject to the investment limitation applicable to illiquid

securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund intends to not subject such paper to the limitation applicable to
restricted securities.

There is the risk that, when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.

vary from the purchase prices. Accordingly, the Fund may pay more/less than
the market value of the securities on the settlement date.

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

SPECIAL CONSIDERATIONS

In the debt market, prices move inversely to interest rates. A decline in
market interest rates results in a rise in the market prices of outstanding
debt obligations. Conversely, an increase in market interest rates results in
a decline in market prices of outstanding debt obligations. In either case,
the amount of change in market prices of debt obligations in response to
changes in market interest rates generally depends on the maturity of the
debt obligations: the debt obligations with the longest maturities will
experience the greatest market price changes.

The market value of debt obligations, and therefore the Fund's net asset
value, will fluctuate due to changes in economic conditions and other market
factors such as interest rates which are beyond the control of the Fund's
investment adviser. The Fund's investment adviser could be incorrect in its
expectations about the direction or extent of these market factors. Although
debt obligations with longer maturities offer potentially greater returns,
they have greater exposure to market price fluctuation. Consequently, to the

extent the Fund is significantly invested in debt obligations with longer
maturities, there is a greater possibility of fluctuation in the Fund's net
asset value.

WEIGHTED AVERAGE PORTFOLIO DURATION

INVESTMENT LIMITATIONS

The Fund will not:

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

The Fund will not:

* invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, certain
interest rate swaps, caps and floors determined by the investment adviser
to be illiquid, and certain restricted securities not determined by the
Trustees to be liquid.

FEDERATED INCOME SECURITIES TRUST INFORMATION

MANAGEMENT OF THE TRUST

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

responsibilities between meetings of the Board.

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

Federated Management and other subsidiaries of Federated Investors

serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With over
$80 billion invested across more than 250 funds under management
and/or administration by its subsidiaries, as of December 31, 1995,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 1,800 employees,
Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through
4,000 financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.

Susan M. Nason has been the Fund's portfolio manager since the Fund's
inception. Ms. Nason joined Federated Investors in 1987 and has been a
Vice President of the Fund's investment adviser since January, 1993.
Ms. Nason served as an Assistant Vice President of the investment
adviser from 1990 until 1992. Ms. Nason is a Chartered Financial
Analyst and received her M.S. in Industrial Administration from
Carnegie Mellon University.

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

DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES

Federated Securities Corp. is the principal distributor for shares of the
Fund. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Rule 12b-1 under the Investment Company Act of 1940, (the
"Plan"), the distributor may be paid a fee by the Fund in an amount, computed
at an annual rate of .25% of the average daily net asset value of Shares. The
distributor may select financial institutions such as banks, fiduciaries,

custodians for public funds, investment advisers, and broker/dealers to
provide sales services or distribution-related support services as agents for
their clients or customers.

The Plan is a compensation-type plan. As such, the Fund makes no payments to
the distributor expect as described above. Therefore, the Fund does not pay
for unreimbursed expenses of the distributor, including amounts expended by
the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts
expended, or the distributor's overhead expenses. However, the distributor
may be able to recover such amount or may earn a profit from future payments
made by the Fund under the Plan.

In addition, the Trust has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Trust may make payments up to .25% of the average daily net asset
value of Shares to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as
deemed appropriate, the amount stated above may be reduced voluntarily. Under
the Shareholder Services Agreement Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions
to perform shareholder services. Financial institutions will receive fees
based upon Shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be determined from
time to time by the Trust and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp.

and Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or shareholder services.

The support may include sponsoring sales, educational and training seminars
for their employees, providing sales literature and engineering computer
software programs that emphasize the attributes of the Fund. Such assistance
will be predicated upon the amount of Shares the financial institution sells
or may sell, and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the distributor
may be reimbursed by the Fund's investment adviser or its affiliates.

ADMINISTRATION OF THE FUND

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>

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

NET ASSET VALUE

INVESTING IN INSTITUTIONAL SERVICE SHARES

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or by mail.

To purchase Shares of the Fund, open an account by calling Federated
Securities Corp. Information needed to establish the account will be taken
over the telephone. The Fund reserves the right to reject any purchase
request.

BY WIRE. To purchase Shares of the Fund by Federal Reserve wire, call the

Fund before 4:00 p.m. (Eastern time) to place an order. The order is
considered received immediately. Payment by federal funds must be received
before 3:00 p.m. (Eastern time) on the next business day following the order.
Federal funds should be wired as follows: Federated Shareholder Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Intermediate Income Fund-
Institutional Service Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased
by wire on holidays when wire transfers are restricted. Questions on wire
purchases should be directed to your shareholder services representative at
the telephone number listed on your account statement.

BY MAIL. To purchase Shares of the Fund by mail, send a check made payable to
Federated Intermediate Income Fund-Institutional Service Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-
8600. Orders by mail are considered received after payment by check is
converted by the transfer agent's bank, State Street Bank, into federal
funds. This is normally the next business day after State Street Bank
receives the check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $25,000 plus any financial
intermediary's fee. However, an account may be opened with a smaller amount
as long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a financial

intermediary may be subject to a smaller minimum investment.

WHAT SHARES COST

EXCHANGING SECURITIES FOR FUND SHARES

any cash, must be at least equal to the minimum investment in the Fund. The
Fund acquires the exchanged securities for investment and not for resale.

If an exchange is permitted, it will be treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.

EXCHANGE PRIVILEGE

Shares in certain Federated Funds which are advised by subsidiaries or
affiliates of Federated Investors may be exchanged for Shares at net asset
value (plus a sales charge, if applicable). The ability to exchange shares is
available to shareholders residing in any state in which the shares being
acquired may be legally sold and the exchange is subject to any minimum
initial or subsequent investment amounts of the fund being acquired. Prior to
any exchange, the shareholder must receive a copy of the current prospectus
of the fund or class thereof into which an exchange is to be effected. A
shareholder may obtain further information on the exchange privilege by

calling Federated Securities Corp. or the shareholder's financial
institution.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company
maintains a Share account for each shareholder. Share certificates are not
issued unless requested by contacting the Fund.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
the month.

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. If an order for Shares is placed on the
preceding business day, Shares purchased by wire begin earning dividends on
the business day wire payment is received by State Street Bank. If the order
for Shares and payment by wire are received on the same day, Shares begin
earning dividends on the next business day. Shares purchased by check begin
earning dividends on the business day after the check is converted upon
instruction of the transfer agent into federal funds. Dividends are
automatically reinvested on payment dates in additional Shares of the Fund
unless cash payments are requested by contacting the Fund.

CAPITAL GAINS

Capital gains realized by the Fund, if any, will be distributed at least once
every 12 months.

REDEEMING INSTITUTIONAL SERVICE SHARES

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). The proceeds will normally be wired the following business
day, but in no event more than seven days, to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. If
at any time the Fund shall determine it is necessary to terminate or modify
this method of redemption, shareholders would be promptly notified. Proceeds
from redemption requests received on holidays when wire transfers are
restricted will be wired the following business day. Questions about
telephone redemptions on days when wire transfers are restricted should be
directed to your shareholder services representative at the telephone number
listed on your account statement.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are

available from Federated Securities Corp. Telephone redemption instructions
may be recorded. If reasonable procedures are not followed by the Fund, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions. In the event of drastic economic or market changes, a
shareholder may experience difficulty in redeeming by telephone. If such a
case should occur, another method of redemption, such as "Redeeming Shares By
Mail," should be considered.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600.
If share certificates have been issued, they should be sent unendorsed with
the written request by registered or certified mail to the address noted
above.

The written request should state: the Fund name and Share Class designation;
the account name as registered with the Fund; the account number; and the
number of shares to be redeemed or the dollar amount requested. All owners of
the account must sign the request exactly as the shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.

commercial or savings bank, trust company or savings association whose
deposits are insured by an organization which is administered by the Federal
Deposit Insurance Corporation: a member firm of a domestic stock exchange; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934. The Fund does not accept signatures guaranteed by a
notary public.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified
in writing and allowed 30 days to purchase additional Shares to meet the
minimum requirement.

SHAREHOLDER INFORMATION

VOTING RIGHTS

As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of
Trustees under certain circumstances.

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

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because the Fund expects to meet
requirements of the Internal Revenue Code, as amended, applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios, if any, will not be combined for tax purposes with
those realized by the Fund.

Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions received. This applies whether
dividends and distributions are received in cash or as additional Shares.

Information on the tax status of dividends and distributions is provided
annually.

STATE AND LOCAL TAXES

Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for
Institutional Service Shares.

The yield of Institutional Service Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by Institutional Service Shares over a thirty-day period
by the maximum offering price per share of Institutional Service Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Institutional Service Shares and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

The Institutional Service Shares are sold without any sales charge or other
similar non-recurring charges other than a Rule 12b-1 fee.

Total return and yield will be calculated separately for Institutional
Service Shares and Institutional Shares.

From time to time, advertisements for the Fund may refer to ratings,
rankings, and other information in certain financial publications and/or

compare the Fund's performance to certain indices.

OTHER CLASSES OF SHARES

The Fund also offers one other class of shares called Institutional Shares.

Institutional Shares are sold to banks and other institutions that hold
assets as principals or in a fiduciary capacity for individuals, trusts,
estates or partnerships and are subject to a minimum initial investment of
$25,000. Institutional Shares are sold at net asset value and are distributed
without a Rule 12b-1 Plan.

Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences, however, between Shares and Institutional Shares may
affect the performance of each class.

To obtain more information and a prospectus for Institutional Shares,
investors may call 1-800-235-4669 or contact their financial institution.

FEDERATED INTERMEDIATE INCOME FUND
(FORMERLY, INTERMEDIATE INCOME FUND)
FINANCIAL HIGHLIGHTS-INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors, on
page 38.