FEDERATED INCOME SECURITIES TRUST, 485APOS, 1999-06-25

FEDERATED INCOME SECURITIES TRUST
485APOS, 1999-06-25

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1933 Act File No. 33-3164
1940 Act File No. 811-4577

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ........................

Post-Effective Amendment No. 31 ....................... X
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and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
------

Amendment No. 24 ...................................... X
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FEDERATED INCOME SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b).
__ on _________________ pursuant to paragraph (b).
60 days after filing pursuant to paragraph (a)(i).
x on August 31, 1999 pursuant to paragraph (a)(i).
75 days after filing pursuant to paragraph (a)(ii).
on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

Copies To: Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037

Prospectus

FEDERATED INTERMEDIATE INCOME FUND

A Portfolio of Federated Income Securities Trust

institutional shares

A mutual fund seeking to provide current income by investing in a diversified
portfolio of investment grade securities, which are rated in one of the four
highest categories by a nationally recognized statistical rating organization.

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

Contents
Risk/Return Summary
What are the Fund's Fees and Expenses?
What are the Fund's Investment Strategies?
What are the Principal Securities in Which the Fund Invests?
What are the Specific Risks of Investing in the Fund?
What do Shares Cost?
How is the Fund Sold?
How to Purchase Shares
How to Redeem Shares
Account and Share Information
Who Manages the Fund?
Financial Information

August 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide current income. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified portfolio of investment grade fixed income
securities consisting primarily of corporate debt securities; U.S. government
and privately issued mortgage backed securities; and U.S. treasury and agency
securities. The Adviser seeks to enhance the Fund's performance by allocating
relatively more of its portfolio to the security type that the Adviser expects
to offer the best balance between current income and risk.

Although the value of the Fund's shares will fluctuate, the Adviser will seek to
manage the magnitude of fluctuation by limiting the Fund's dollar weighted
average maturity to between three and ten years and duration to between three
and seven years. Maturity reflects the time until a fixed income security
becomes payable. Duration measures the price sensitivity of a fixed income
security to changes in interest rates.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

o Interest Rate Risk. Prices of fixed income securities generally fall when
interest rates rise.

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

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

<PAGE>

Risk/Return Bar Chart and Table
The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Shares as of the calendar
year-end for each of five years.

The `y' axis reflects the "% Total Return" beginning with "-5.00%" and
increasing in increments of 5.00% up to 25.00%.

The `x' axis represents calculation periods from the earliest calendar year end
of the Fund's start of business through the calendar year ended 1998. The light
gray shaded chart features five distinct vertical bars, each shaded in charcoal,
and each visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentage for the Fund's Institutional Shares for each calendar year is stated
directly at the top of each respective bar, for the calendar years 1994 through
1998, The percentages noted are: -2.12%, 20.26%, 3.34%, 8.60% and 7.83%
respectively.

The bar chart shows the variability of the Fund's Institutional Shares total
returns on a calendar year-end basis.

The Fund's shares are not sold subject to a sales charge (load). The total
returns displayed above are based upon net asset value.

The Fund's total return from January 1, 1999 to June 30, 1999 was -0.71%.

Within the period shown in the Chart, the Fund's Institutional Shares highest
quarterly return was 6.69% (quarter ended June 30, 1995). Its lowest quarterly
return was -2.22% (quarter ended March 31, 1996).

Average Annual Total Return Table

The following table represents the Fund's Institutional Shares Average Annual
Total Returns for the calendar periods ending December 31, 1998. The table shows
the Fund's total returns averaged over a period of years relative to the Lehman
Brothers Government/Corporate Total Index (LBGCTI), a broad-based market index
and the Lipper Intermediate-Term Investment Grade Debt Funds Average (LIIGDFA),
an average of funds with similar investment objectives. Total returns for the
index and average shown do not reflect sales charges, expenses or other fees
that the SEC requires to be reflected in the Fund's performance. Indexes are
unmanaged, and it is not possible to invest directly in an index.

Institutional LBGCTI LIIGDFA
Calendar Period Shares
1 Year 7.83% 6.92% 7.27%
5 Years 7.34% 7.30% 6.37%
Start of Performance1 7.34% 8.42% 6.37%

1 The Fund's Institutional Shares' start of performance date was December 20,
1993.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
rewards.

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED INTERMEDIATE INCOME FUND

<S> <C>

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold the Fund's Institutional Shares.
Shareholder Fees
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions)
(as a percentage of offering price). None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

Annual Fund Operating Expenses (Before Waivers)1
Expenses That are Deducted From Fund Assets ( as a percentage of average net assets)
Management Fee 2 0.50%
Distribution (12b-1) Fee None
Shareholder Services Fee 3 0.25%
Other Expenses 0.23%
Total Annual Fund Operating Expenses 0.98%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

1 Although not contractually obligated to do so, the Adviser and shareholder
services provider waived certain amounts. These are shown below along with the
net expenses the Fund's Institutional Shares actually paid for the fiscal year
ended April 30, 1999. Total Waiver of Fund's Institutional Shares Expenses 0.43%
Total Annual Institutional Shares Operating Expenses (after waiver) 0.55% 2 The
Adviser voluntarily waived a portion of the management fee. The Adviser can
terminate this voluntary waiver at any time. The management fee paid by the
Fund's Institutional Shares (after the voluntary waiver) was 0.32% for the year
ended April 30, 1999. 3 The shareholder services fee has been voluntarily
reduced. This voluntary reduction can be terminated at any time. The shareholder
services fee paid by the Fund's Institutional Shares (after the voluntary
reduction) was 0.00% for the year ended April 30, 1999.

<PAGE>

EXAMPLE
The Example is intended to help you compare the cost of investing in the Fund's
Institutional Shares with the cost of investing in other mutual funds.

1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
Institutional Shares
- -------------------------------------------------------------------------------
$100 $312 $542 $1,201
- --------------------------------------------------------------------------------

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

<PAGE>

The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage
backed securities with characteristics that make prepayment fluctuations less
likely. Characteristics that the Adviser may consider in selecting securities
include the average interest rates of the underlying mortgages and the federal
agencies (if any) that support the mortgages. The Adviser attempts to assess the
relative returns and risks for mortgage backed securities by analyzing how the
timing, amount and division of cash flows might change in response to changing
economic and market conditions. In addition to managing the Fund's portfolio to
seek enhanced current income while minimizing credit and prepayment risk, the
Adviser also seeks to limit the magnitude of fluctuation of the value of the
Fund's shares. The Adviser attempts to manage price fluctuation by limiting the
Fund's dollar weighted average maturity to between three and ten years, and the
dollar weighted average duration to between three and seven years. The Adviser
may lengthen or shorten duration from time-to-time based on its interest rate
outlook. If the Adviser expects interest rates to decline, it will generally
lengthen the Fund's duration, and if the Adviser expects interest rates to
increase, it will generally shorten the Fund's duration. The Adviser formulates
its interest rate outlook and otherwise attempts to anticipate changes in
economic and market conditions by analyzing a variety of factors, such as: o
current and expected U.S. growth; o current and expected interest rates and
inflation; o the U.S. Federal Reserve Board's monetary policy; and o changes in
the supply of or demand for U.S. government securities There is no assurance
that the Adviser's efforts to forecast market interest rates and assess the
impact of market interest rates on particular securities will be successful.
TEMPORARY DEFENSIVE INVESTMENTS The Fund may temporarily depart from its
principal investment strategies by investing its assets in cash, cash items, and
shorter-term, higher quality debt securities and similar obligations. It may do
this to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This may cause the Fund to give up
greater investment returns to maintain the safety of principal, that is, the
original amount invested by shareholders.

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

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

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

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

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

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

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

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

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

<PAGE>

Collateralized Mortgage Obligations (CMOs)
CMOs, including interests in real estate mortgage investment
conduits (REMICs), allocate payments and prepayments from an
underlying pass-through certificate among holders of different
classes of mortgage backed securities. This creates different
prepayment and interest rate risks for each CMO class. The
degree of increased or decreased prepayment risks depends upon
the structure of the CMOs. However, the actual returns on any
type of mortgage backed security depend upon the performance
of the underlying pool of mortgages, which no one can predict
and will vary among pools.
Investment Ratings for Investment Grade Securities
The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A, and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. Lower credit ratings correspond to higher credit risk. If
a security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment grade.

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

Interest Rate Risks
o Prices of fixed income securities rise and fall in response to changes in
the interest rate paid by similar securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market
factors, such as the demand for particular fixed income securities, may
cause the price of certain fixed income securities to fall while the prices
of other securities rise or remain unchanged.
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.
Credit Risks
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.
o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
Prepayment Risks

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

WHAT DO SHARES COST?

You can purchase or redeem Shares any day the New York Stock Exchange (NYSE) is
open. When the Fund receives your transaction request in proper form, it is
processed at the next calculated net asset value (NAV). The Fund does not charge
a front-end sales charge. NAV is determined at the end of regular trading
(normally 4:00 p.m. Eastern time) each day the NYSE is open.

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

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 is
calculated by combining all accounts it maintains with the Fund. Accounts
established through investment professionals may be subject to a smaller minimum
investment amount. Keep in mind that investment professionals may charge you
fees for their services in connection with your Share transactions.

HOW IS THE FUND SOLD?

The Fund offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Shares. Each share class has
different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.

The Fund's Distributor markets the Shares described in this prospectus to
accounts for which financial institutions act in a fiduciary or agency capacity.
Shares are also made available to public and private organizations or
individuals, directly or through investment professionals.

The Distributor and its affiliates may pay out of their assets other amounts
(including items of material value) to investment professionals for marketing
and servicing Shares. The Distributor is a subsidiary of Federated Investors,
Inc. (Federated).

HOW TO PURCHASE SHARES

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL
o Establish an account with the investment professional; and

o Submit your purchase order to the investment professional before the end of
regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will
receive the next calculated NAV if the investment professional forwards the
order to the Fund on the same day and the Fund receives payment within one
business day. You will become the owner of Shares and receive dividends when
the Fund receives your payment.

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

o Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees the Fund or its transfer agent incurs.

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

By Wire Send your wire to:

State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number
You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

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

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

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

HOW TO REDEEM SHARES

You should redeem Shares:

o through an investment professional if you purchased Shares through an
investment professional; or

o directly from the Fund if you purchased Shares directly from the Fund.

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

DIRECTLY FROM THE FUND

By Telephone
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.

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

By Mail
You may redeem Shares by mailing a written request to the Fund.

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317 All requests must include:

o Fund Name and Share Class, account number and account registration;

o amount to be redeemed; and

o signatures of all shareholders exactly as registered.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees Signatures must be guaranteed if:

o your redemption will be sent to an address other than the address of
record;

o your redemption will be sent to an address of record that was changed
within the last 30 days;

o a redemption is payable to someone other than the shareholder(s) of record.

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

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

o an electronic transfer to your account at a financial institution that is
an ACH member; or

o wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

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

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

o to allow your purchase to clear;

o during periods of market volatility; or

o when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

ADDITIONAL CONDITIONS

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

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

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases, redemptions. In addition, you will
receive periodic statements reporting all account activity, including dividends
and capital gains paid.

DIVIDENDS AND CAPITAL GAINS
The Fund declares any dividends daily and pays them monthly to shareholders. If
you purchase Shares by wire, you begin earning dividends on the day your wire is
received. If you purchase Shares by check, you begin earning dividends on the
business day after the Fund receives your check. In either case, you earn
dividends through the day your redemption request is received.

In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.

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

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

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

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

WHO MANAGES THE FUND?

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

The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which total approximately $111 billion in assets as
of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees. More than 4,000 investment professionals make Federated Funds
available to their customers.

The Fund's portfolio managers are:

Joseph M. Balestrino

Joseph M. Balestrino has been the Fund's portfolio manager since January 1994.
He is Vice President of the Trust. Mr. Balestrino joined Federated in 1986 and
has been a Senior Portfolio Manager and Senior Vice President of the Fund's
Adviser since 1998. He was a Portfolio Manager and a Vice President of the
Fund's Adviser from 1995 to 1998. Mr. Balestrino served as a Portfolio Manager
and an Assistant Vice President of the Adviser from 1993 to 1995. Mr. Balestrino
is a Chartered Financial Analyst and received his Master's Degree in Urban and
Regional Planning from the University of Pittsburgh.

John T. Gentry

John T. Gentry has been the Fund's portfolio manager since August 1997. Mr.
Gentry joined Federated in 1995 as an Investment Analyst and has been a Senior
Investment Analyst and an Assistant Vice President of the Fund's Adviser since
1997. Mr. Gentry served as a Senior Treasury Analyst at Sun Company, Inc. from
1991 to 1995. Mr. Gentry is a Chartered Financial Analyst and earned his M.B.A.,
with concentrations in Finance and Accounting, from Cornell University.

Susan M. Nason

Susan M. Nason has been the Fund's portfolio manager since December 1993. Ms.
Nason joined Federated in 1987 and has been a Senior Portfolio Manager and
Senior Vice President of the Fund's Adviser since 1997. Ms. Nason served as a
Portfolio Manager and Vice President of the Adviser from 1993 to 1997. Ms. Nason
is a Chartered Financial Analyst and received her M.S.I.A. concentrating in
Finance from Carnegie Mellon University.

Advisory Fees
The Adviser receives an annual investment advisory fee of 0.50% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.

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

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

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

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
funds dealing with foreign service providers or investing in foreign securities
will have difficulty determining the Year 2000 readiness of those entities. This
is especially true of entities or issuers in emerging markets.The financial
impact of these issues for the Fund is still being determined. There can be no
assurance that potential Year 2000 problems would not have a material adverse
effect on the Fund.

FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS

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

(Financial Statements to be filed by Amendment)

<PAGE>

FEDERATED INTERMEDIATE INCOME FUND

A Portfolio of Federated Income Securities Trust

Institutional SHares

A Statement of Additional Information (SAI) dated August 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and Semi-Annual Reports to
shareholders as they become available. The Annual Report discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year. To obtain the SAI, the Annual Report,
Semi-Annual Report and other information without charge, and make inquires, call
your investment professional or the Fund at 1-800-341-7400.

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

Investment Company Act File No.811-4577

Cusip 31420C407

3090804A-IS (8/99)

Prospectus

FEDERATED INTERMEDIATE INCOME FUND

A Portfolio of Federated Income Securities Trust

Institutional service shares

august 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:

o Interest Rate Risk. Prices of fixed income securities generally fall when
interest rates rise.

<PAGE>

Risk/Return Bar Chart and Table
The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Service Shares as of the
calendar year-end for each of five years.

The `y' axis reflects the "% Total Return" beginning with "-5.00%" and
increasing in increments of 5.00% up to 25.00%.

The `x' axis represents calculation periods from the earliest calendar year end
of the Fund's start of business through the calendar year ended 1998. The light
gray shaded chart features five distinct vertical bars, each shaded in charcoal,
and each visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentage for the Fund's Institutional Service Shares for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1994
through 1998, The percentages noted are: -2.36%, 19.96%, 3.09%, 8.36% and 7.56%
respectively.

The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a calendar year-end basis.

The Fund's shares are not sold subject to a sales charge (load). The total
returns displayed above are based upon net asset value.

The Fund's total return from January 1, 1999 to June 30, 1999 was -0.78%.

Within the period shown in the Chart, the Fund's Institutional Service Shares
highest quarterly return was 6.62% (quarter ended June 30, 1995). Its lowest
quarterly return was -2.28% (quarter ended March 31, 1996).

Average Annual Total Return Table

The following table represents the Fund's Institutional Service Shares Average
Annual Total Returns for the calendar periods ending December 31, 1998. The
table shows the Fund's total returns averaged over a period of years relative to
the Lehman Brothers Government/Corporate Total Index (LBGCTI), a broad-based
market index and the Lipper Intermediate-Term Investment Grade Debt Funds
Average (LIIGDFA), an average of funds with similar investment objectives. Total
returns for the index and average shown do not reflect sales charges, expenses
or other fees that the SEC requires to be reflected in the Fund's performance.
Indexes are unmanaged, and it is not possible to invest directly in an index.

Institutional LBGCTI LIIGDFA
Calendar Period Service Shares
1 Year 7.56% 6.92% 7.27%
5 Years 7.08% 7.30% 6.37%
Start of Performance1 7.07% 8.42% 6.37%

1 The Fund's Institutional Service Shares' start of performance date was
December 20, 1993.
Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
rewards.

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED INTERMEDIATE INCOME FUND

<S> <C>

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
the Fund's Institutional Service Shares.

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

Annual Fund Operating Expenses (Before Waivers)1
Expenses That are Deducted From Fund Assets ( as a percentage of average net assets)
Management Fee 2 0.50%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 4 0.25%
Other Expenses 0.23%
Total Annual Fund Operating Expenses 1.23%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

1 Although not contractually obligated to do so, the Adviser, distributor, and
shareholder services provider waived certain amounts. These are shown below
along with the net expenses the Fund's Institutional Service Shares actually
paid for the fiscal year ended April 30, 1999. Total Waiver of Fund's
Institutional Service Shares Expenses 0.43% Total Annual Institutional Service
Shares Operating Expenses (after waiver) 0.80% 2 The Adviser voluntarily waived
a portion of the management fee. The Adviser can terminate this voluntary waiver
at any time. The management fee paid by the Fund's Institutional Service Shares
(after the voluntary waiver) was 0.32% for the year ended April 30, 1999. 3 The
distribution fee has been voluntarily reduced. This voluntary reduction can be
terminated at any time. The distribution fee paid by the Fund's Institutional
Service Shares (after the voluntary reduction) was 0.16% for the year ended
April 30, 1999. 4 The shareholder services fee has been voluntarily reduced.
This voluntary reduction can be terminated at any time. The shareholder services
fee paid by the Fund's Institutional Service Shares (after the voluntary
reduction) was 0.09% for the year ended April 30, 1999.

<PAGE>

EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund's
Institutional Service Shares with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Institutional Service
Shares for the time periods indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Fund's Institutional Service Shares' operating
expenses are before waivers as shown in the Table and remain the same. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:

1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
Institutional Service Shares
- -----------------------------------------------------------------------
$125 $390 $676 $1,489
- --------------------------------------------------------------------------------

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

The Fund invests in a diversified portfolio of fixed income securities
consisting primarily of corporate debt securities; U.S. government and privately
issued mortgage backed securities; and U.S. treasury and agency securities.
Securities in the Fund's portfolio must be rated investment grade (BBB or
higher) by a nationally recognized statistical rating organization (NRSRO), or
if unrated, of comparable quality as determined by the Adviser. A description of
the various types of securities in which the Fund invests, and their risks,
immediately follows this strategy section. The Adviser seeks to enhance the
Fund's performance by allocating relatively more of its portfolio to the
security type that the Adviser expects to offer the best balance between current
income and risk and thus offer the greatest potential for return. The allocation
process is based on the Adviser's continuing analysis of a variety of economic
and market indicators in order to arrive at the projected yield "spread" of each
security type. (The spread is the difference between the yield of a security
versus the yield of a U.S. treasury security with a comparable average life.)
The security's projected spread is weighed against the spread the security can
currently be purchased for, as well as the security's credit risk (in the case
of corporate securities and privately issued mortgage backed securities) and its
risk of prepayment (in the case of mortgage backed securities) in order to
complete the analysis. Corporate debt securities, which tend to pay off on a
predetermined schedule, generally offer higher yields than treasury and agency
securities to compensate for credit risk. Similarly, mortgaged backed securities
tend to amortize principal on a somewhat irregular schedule over time, since the
borrower can usually prepay all or part of the loan without penalty. These
securities generally offer higher yields versus U.S. treasury securities and
non-mortgage backed agency securities to compensate for this prepayment risk as
well as any credit risk which might also be present in the security. The Adviser
actively manages the Fund's portfolio, seeking the higher relative returns of
corporate debt securities and mortgage backed securities while attempting to
limit the associated credit or prepayment risk. The Adviser attempts to manage
the Fund's credit risk by selecting corporate debt securities that make default
in the payment of principal and interest less likely. The Adviser analyzes a
variety of factors, including macroeconomic analysis and corporate earnings
analysis, among others, to determine which business sectors and credit ratings
are most advantageous for investment by the Fund. In selecting individual
corporate fixed income securities, the Adviser analyzes the issuer's business,
competitive position, and general financial condition to assess whether the
security's credit risk is commensurate with its potential return. The Adviser
attempts to manage the Fund's prepayment risk by selecting mortgage backed
securities with characteristics that make prepayment fluctuations less likely.
Characteristics that the Adviser may consider in selecting securities include
the average interest rates of the underlying mortgages and the federal agencies
(if any) that support the mortgages. The Adviser attempts to assess the relative
returns and risks for mortgage backed securities by analyzing how the timing,
amount and division of cash flows might change in response to changing economic
and market conditions. In addition to managing the Fund's portfolio to seek
enhanced current income while minimizing credit and prepayment risk, the Adviser
also seeks to limit the magnitude of fluctuation of the value of the Fund's
shares. The Adviser attempts to manage price fluctuation by limiting the Fund's
dollar weighted average maturity to between three and ten years, and the dollar
weighted average duration to between three and seven years. The Adviser may
lengthen or shorten duration from time-to-time based on its interest rate
outlook. If the Adviser expects interest rates to decline, it will generally
lengthen the Fund's duration, and if the Adviser expects interest rates to
increase, it will generally shorten the Fund's duration. The Adviser formulates
its interest rate outlook and otherwise attempts to anticipate changes in
economic and market conditions by analyzing a variety of factors, such as: o
current and expected U.S. growth; o current and expected interest rates and
inflation; o the U.S. Federal Reserve Board's monetary policy; and o changes in
the supply of or demand for U.S. government securities There is no assurance
that the Adviser's efforts to forecast market interest rates and assess the
impact of market interest rates on particular securities will be successful.
Temporary Defensive Investments The Fund may temporarily depart from its
principal investment strategies by investing its assets in cash, cash items, and
shorter-term, higher quality debt securities and similar obligations. It may do
this to minimize potential losses and maintain liquidity to meet shareholder
redemptions during adverse market conditions. This may cause the Fund to give up
greater investment returns to maintain the safety of principal, that is, the
original amount invested by shareholders.

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

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

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

<PAGE>

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

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

WHAT DO SHARES COST?

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

HOW IS THE FUND SOLD?

The Fund offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Service Shares. Each share class
has different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.

The Fund's Distributor markets the Shares described in this prospectus to retail
and private banking customers of financial institutions or individuals, directly
or through investment professionals.

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

RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Institutional Service Shares. Because these
Shares pay marketing fees on an ongoing basis, your investment cost may be
higher over time than other shares with different sales charges and marketing
fees.

HOW TO PURCHASE SHARES

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL
o Establish an account with the investment professional; and

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

o Send your payment to the Fund by Federal Reserve wire or check.

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

By Wire Send your wire to:

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

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

HOW TO REDEEM SHARES

You should redeem Shares:

o through an investment professional if you purchased Shares through an
investment professional; or

o directly from the Fund if you purchased Shares directly from the Fund.

DIRECTLY FROM THE FUND

By Telephone
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.

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

By Mail
You may redeem Shares by mailing a written request to the Fund.

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317 All requests must include:

o Fund Name and Share Class, account number and account registration;

o amount to be redeemed; and

o signatures of all shareholders exactly as registered. Call your investment
professional or the Fund if you need special instructions.

Signature Guarantees Signatures must be guaranteed if:

o your redemption will be sent to an address other than the address of
record;

o your redemption will be sent to an address of record that was changed
within the last 30 days; or

o a redemption is payable to someone other than the shareholder(s) of record.

o an electronic transfer to your account at a financial institution that is
an ACH member; or

o wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

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

o to allow your purchase to clear;

o during periods of market volatility; or

o when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

ADDITIONAL CONDITIONS

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS
You will receive confirmation of purchases and redemptions. In addition, you
will receive periodic statements reporting all account activity, including
dividends and capital gains paid.

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

WHO MANAGES THE FUND?

The Fund's portfolio managers are:

Joseph M. Balestrino

John T. Gentry

Susan M. Nason

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
funds dealing with foreign service providers or investing in foreign securities
will have difficulty determining the Year 2000 readiness of those entities. This
is especially true of entities or issuers in emerging markets. The financial
impact of these issues for the Fund is still being determined. There can be no
assurance that potential Year 2000 problems would not have a material adverse
effect on the Fund.

FINANCIAL INFORMATION

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

(Financial Statements to be filed by Amendment)

<PAGE>

FEDERATED INTERMEDIATE INCOME FUND

A Portfolio of Federated Income Securities Trust

Institutional service shares

Investment Company Act File No. .811-4577

Cusip 31420C506

3090804A-SS (8/99)

Statement of Additional Information

FEDERATED INTERMEDIATE INCOME FUND

A Portfolio of Federated Income Securities Trust

Institutional shares

Institutional Service shares

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated Intermediate Income Fund
(Fund), dated August 31, 1999. This SAI incorporates by reference the Fund's
Annual Report. Obtain the prospectuses or the Annual Report without charge by
calling 1-800-341-7400.

august 31, 1999

Contents
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Exchanging Securities for Shares
Subaccounting Services
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings
Addresses
Cusip 31420C407
Cusip 31420C506

3090804B (8/99)

<PAGE>

HOW IS THE FUND ORGANIZED?

The Fund is a diversified portfolio of Federated Income Securities Trust
(Trust). The Trust is an open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on January 24,
1986. The Trust may offer separate series of shares representing interests in
separate portfolios of securities. The Fund changed its name from Intermediate
Income Fund to Federated Intermediate Income Fund on February 26, 1996.

The Board of Trustees (the Board) has established two of shares of the Fund,
known as Institutional Shares and Institutional Service Shares (Shares). This
SAI relates to all classes of the above-mentioned Shares. The Fund's investment
adviser is Federated Investment Management Company (Adviser). Effective March
31, 1999, Federated Management, Adviser to the Fund, merged into Federated
Investment Management Company (formerly, Federated Advisers).

SECURITIES IN WHICH THE FUND INVESTS

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

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

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

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

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

<PAGE>

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

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

Surplus Notes
Surplus notes are subordinated debt instruments issued by mutual and
stock insurance companies. Mutual insurance companies generally issue
surplus notes to raise capital. Stock insurance companies primarily
issue surplus notes in transactions with affiliates. Surplus notes are
treated by insurers as equity capital, or "surplus" for regulatory
reporting purposes. Surplus notes typically are subordinated to any
other debt.

Capital Securities
Capital securities are subordinated securities, generally with a 30-50
year maturity and a 5-10 year call protection. Dividend payments
generally can be deferred by the issuer for up to 5 years. These
securities generally are unsecured and subordinated to all senior debt
securities of the issuer, therefore, principal and interest payments on
capital securities are subject to a greater risk of default than senior
debt securities.

Step Up Perpetual Subordinated Securities
Step up perpetual subordinated securities ("step ups") generally are
structured as perpetual preferred securities (with no stated maturity)
with a 10-year call option. If the issue is not called, however, the
coupon increases or "steps up," generally 150 to 250 basis points
depending on the issue and its country of jurisdiction. The step up
interest rate acts as a punitive rate which would typically compel the
issuer to call the security. Thus, these securities generally are
priced as 10-year securities.

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

<PAGE>

Z Classes and Residual Classes
CMOs must allocate all payments received from the underlying
mortgages to some class. To capture any unallocated payments, CMOs
generally have an accrual (Z) class. Z classes do not receive any
payments from the underlying mortgages until all other CMO classes
have been paid off. Once this happens, holders of Z class CMOs
receive all payments and prepayments. Similarly, REMICs have
residual interests that receive any mortgage payments not
allocated to another REMIC class. The degree of increased or
decreased prepayment risks depends upon the structure of the CMOs.
However, the actual returns on any type of mortgage backed
security depend upon the performance of the underlying pool of
mortgages, which no one can predict and will vary among pools.
Asset Backed Securities
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial
debts with maturities of less than ten years. However, almost any type of
fixed income assets (including other fixed income securities) may be used
to create an asset backed security. Asset backed securities may take the
form of commercial paper, notes, or pass through certificates. Asset backed
securities have prepayment risks. Like CMOs, asset backed securities may be
structured like Floaters, Inverse Floaters, IOs and POs. Zero Coupon
Securities Zero coupon securities do not pay interest or principal until
final maturity unlike debt securities that provide periodic payments of
interest (referred to as a coupon payment). Investors buy zero coupon
securities at a price below the amount payable at maturity. The difference
between the purchase price and the amount paid at maturity represents
interest on the zero coupon security. Investors must wait until maturity to
receive interest and principal, which increases the market and credit risks
of a zero coupon security. A zero coupon step-up security converts to a
coupon security before final maturity. There are many forms of zero coupon
securities. Some are issued at a discount and are referred to as zero
coupon or capital appreciation bonds. Others are created from interest
bearing bonds by separating the right to receive the bond's coupon payments
from the right to receive the bond's principal due at maturity, a process
known as coupon stripping. Treasury STRIPs, IOs and POs are the most common
forms of stripped zero coupon securities. In addition, some securities give
the issuer the option to deliver additional securities in place of cash
interest payments, thereby increasing the amount payable at maturity. These
are referred to as pay-in-kind or PIK securities. Bank Instruments Bank
instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit
and banker's acceptances. Yankee instruments are denominated in U.S.
dollars and issued by U.S. branches of foreign banks. Eurodollar
instruments are denominated in U.S. dollars and issued by non-U.S. branches
of U.S. or foreign banks.

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

Convertible preferred stock and convertible bonds pay or accrue interest or
dividends at a specified rate. The rate may be a fixed percentage of the
principal or adjusted periodically. In addition, the issuer of a convertible
bond must repay the principal amount of the bond, normally within a specified
time. Convertible preferred stock and convertible bonds provide more income than
equity securities.

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

Foreign Securities
Foreign securities are securities of issuers based outside the United States.
The Fund considers an issuer to be based outside the United States if: o it is
organized under the laws of, or has a principal office located in, another
country; o the principal trading market for its securities is in another
country; or o it (or its subsidiaries) derived in its most current fiscal year
at least 50% of its total assets, capitalization, gross
revenue or profit from goods produced, services performed, or sales made in
another country.
Foreign securities are primarily denominated in foreign currencies. Along with
the risks normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign investing.
Foreign Exchange Contracts
In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a
foreign security into U.S. dollars, the Fund may enter into spot currency
trades. In a spot trade, the Fund agrees to exchange one currency for
another at the current exchange rate. The Fund may also enter into
derivative contracts in which a foreign currency is an underlying asset.
The exchange rate for currency derivative contracts may be higher or lower
than the spot exchange rate. Use of these derivative contracts may increase
or decrease the Fund's exposure to currency risks.
Derivative Contracts
Derivative contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty. Many
derivative contracts are traded on securities or commodities exchanges. In this
case, the exchange sets all the terms of the contract except for the price.
Investors make payments due under their contracts through the exchange. Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange. Parties to the contract make
(or collect) daily payments to the margin accounts to reflect losses (or gains)
in the value of their contracts. This protects investors against potential
defaults by the counterparty. Trading contracts on an exchange also allows
investors to close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.

The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.
Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to market and
currency risks, and may also expose the Fund to liquidity and leverage risks.
OTC contracts also expose the Fund to credit risks in the event that a
counterparty defaults on the contract. The Fund may trade in the following types
of derivative contracts.
Futures Contracts
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified
price, date, and time. Entering into a contract to buy an underlying asset
is commonly referred to as buying a contract or holding a long position in
the asset. Entering into a contract to sell an underlying asset is commonly
referred to as selling a contract or holding a short position in the asset.
Futures contracts are considered to be commodity contracts. Futures
contracts traded OTC are frequently referred to as forward contracts. The
Fund may buy and sell foreign currency forward contracts and foreign
currency futures contracts. Options Options are rights to buy or sell an
underlying asset for a specified price (the exercise price) during, or at
the end of, a specified period. A call option gives the holder (buyer) the
right to buy the underlying asset from the seller (writer) of the option. A
put option gives the holder the right to sell the underlying asset to the
writer of the option. The writer of the option receives a payment, or
premium, from the buyer, which the writer keeps regardless of whether the
buyer uses (or exercises) the option. The Fund may:
o Buy call options on foreign currency futures contracts and on foreign
currencies in anticipation of an increase in the value of the
underlying asset;
o Buy put options on foreign currency futures contracts and on foreign
currencies in anticipation of a decrease in the value of the underlying
asset; and
o Buy or write options to close out existing options positions.
The Fund may also write call options on foreign currencies to generate
income from premiums, and in anticipation of a decrease or only limited
increase in the value of the underlying asset. If a call written by the
Fund is exercised, the Fund foregoes any possible profit from an increase
in the market price of the underlying asset over the exercise price plus
the premium received. Swaps Swaps are contracts in which two parties agree
to pay each other (swap) the returns derived from underlying assets with
differing characteristics. Most swaps do not involve the delivery of the
underlying assets by either party, and the parties might not own the assets
underlying the swap. The payments are usually made on a net basis so that,
on any given day, the Fund would receive (or pay) only the amount by which
its payment under the contract is less than (or exceeds) the amount of the
other party's payment. Swap agreements are sophisticated instruments that
can take many different forms, and are known by a variety of names
including caps, floors, and collars. Common swap agreements that the Fund
may use include:
Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make
regular payments equal to a fixed or floating interest rate times a
stated principal amount of fixed income securities, in return for
payments equal to a different fixed or floating rate times the same
principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate of interest (which fluctuates) on $10 million
principal amount in exchange for the right to receive the equivalent of
a stated fixed rate of interest on $10 million principal amount. Caps
and Floors Caps and Floors are contracts in which one party agrees to
make payments only if an interest rate or index goes above (Cap) or
below (Floor) a certain level in return for a fee from the other party.
Special Transactions
Repurchase Agreements
Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually
agreed upon time and price. The repurchase price exceeds the sale price,
reflecting the Fund's return on the transaction. This return is unrelated
to the interest rate on the underlying security. The Fund will enter into
repurchase agreements only with banks and other recognized financial
institutions, such as securities dealers, deemed creditworthy by the
Adviser. The Fund's custodian or subcustodian will take possession of the
securities subject to repurchase agreements. The Adviser or subcustodian
will monitor the value of the underlying security each day to ensure that
the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks. Reverse Repurchase
Agreements Reverse repurchase agreements are repurchase agreements in which
the Fund is the seller (rather than the buyer) of the securities, and
agrees to repurchase them at an agreed upon time and price. A reverse
repurchase agreement may be viewed as a type of borrowing by the Fund.
Reverse repurchase agreements are subject to credit risks. In addition,
reverse repurchase agreements create leverage risks because the Fund must
repurchase the underlying security at a higher price, regardless of the
market value of the security at the time of repurchase.

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Delayed Delivery Transactions
Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with
payment and delivery of the securities scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to buy the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions so that the market values of
the securities bought may vary from the purchase prices. Therefore, delayed
delivery transactions create interest rate risks for the Fund. Delayed
delivery transactions also involve credit risks in the event of a
counterparty default.
Dollar Rolls
Dollar rolls are transactions where the Fund sells mortgage backed
securities with a commitment to buy similar, but not identical,
mortgage backed securities on a future date at a lower price. Normally,
one or both securities involved are TBA mortgage backed securities.
Dollar rolls are subject to interest rate risks and credit risks.
Securities Lending
The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from
the borrower as collateral. The borrower must furnish additional collateral
if the market value of the loaned securities increases. Also, the borrower
must pay the Fund the equivalent of any dividends or interest received on
the loaned securities. The Fund will reinvest cash collateral in securities
that qualify as an acceptable investment for the Fund. However, the Fund
must pay interest to the borrower for the use of cash collateral. Loans are
subject to termination at the option of the Fund or the borrower. The Fund
will not have the right to vote on securities while they are on loan, but
it will terminate a loan in anticipation of any important vote. The Fund
may pay administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash collateral to a
securities lending agent or broker. Securities lending activities are
subject to interest rate risks and credit risks. Asset Coverage In order to
secure its obligations in connection with derivatives contracts or special
transactions, the Fund will either own the underlying assets, enter into an
offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has
other readily marketable assets to set aside, it cannot trade assets used
to secure such obligations without entering into an offsetting derivative
contract or terminating a special transaction. This may cause the Fund to
miss favorable trading opportunities or to realize losses on derivative
contracts or special transactions. Credit Enhancement Credit enhancement
consists of an arrangement in which a company agrees to pay amounts due on
a fixed income security if the issuer defaults. In some cases the company
providing credit enhancement makes all payments directly to the security
holders and receives reimbursement from the issuer. Normally, the credit
enhancer has greater financial resources and liquidity than the issuer. For
this reason, the Adviser usually evaluates the credit risk of a fixed
income security based solely upon its credit enhancement. Common types of
credit enhancement include guarantees, letters of credit, bond insurance
and surety bonds. Credit enhancement also includes arrangements where
securities or other liquid assets secure payment of a fixed income
security. If a default occurs, these assets may be sold and the proceeds
paid to security's holders. Either form of credit enhancement reduces
credit risks by providing another source of payment for a fixed income
security.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash. The
Fund may invest in mortgage backed securities primarily by investing in another
investment company (which is not available for general investment by the public)
that owns those securities and that is advised by an affiliate of the Adviser.
This other investment company is managed independently of the Fund and may incur
additional administrative expenses. Therefore, any such investment by the Fund
may be subject to duplicate expenses. However, the Adviser believes that the
benefits and efficiencies of this approach should outweigh the potential
additional expenses. The Fund may also invest in such securities directly.

INVESTMENT RISKS

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

<PAGE>

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

o Mortgage backed securities generally compensate for greater prepayment risk
by paying a higher yield. The difference between the yield of a mortgage
backed security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security is
perceived to have an increased prepayment risk or perceived to have less
market demand. An increase in the spread will cause the price of the
security to decline.
o The Fund may have to reinvest the proceeds of mortgage prepayments in other
fixed income securities with lower interest rates, higher prepayment risks,
or other less favorable characteristics.
Liquidity Risks
o Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell
or buy a security at a favorable price or time. Consequently, the Fund may
have to accept a lower price to sell a security, sell other securities to
raise cash or give up an investment opportunity, any of which could have a
negative effect on the Fund's performance. Infrequent trading of securities
may also lead to an increase in their price volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants to. If
this happens, the Fund will be required to continue to hold the security or
keep the position open, and the Fund could incur losses.
o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts. Risks Associated with Complex CMOs o CMOs with
complex or highly variable prepayment terms, such as companion classes, IOs,
POs, Inverse Floaters and residuals,
generally entail greater market, prepayment and liquidity risks than other
mortgage backed securities. For example, their prices are more volatile and
their trading market may be more limited.
Currency Risks
o Exchange rates for currencies fluctuate daily. The combination of currency
risk and market risks tends to make securities traded in foreign markets
more volatile than securities traded exclusively in the U.S.
o The Adviser attempts to manage currency risk by limiting the amount the
Fund invests in securities denominated in a particular currency. However,
diversification will not protect the Fund against a general increase in the
value of the U.S.
dollar relative to other currencies.
Leverage Risks
o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
o Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

INVESTMENT LIMITATIONS

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

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

Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15% of the value of total assets at the
time of the borrowing. For purposes of this limitation, the following
are not deemed to be pledges: margin deposits for the purchase and sale
of futures contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the purchase
of securities on a when-issued basis.

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

Investing in Commodities
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may
engage in transactions involving futures contracts and related options.

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

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

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

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

The above limitations cannot be changed unless authorized by the "vote of a
majority of its outstanding voting securities," as defined by the Investment
Company Act. The following limitations, however, may be changed by the Board
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.

Investing in Restricted and Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits and certain restricted securities not determined to be liquid
under criteria established by the Trustees.

Writing Covered Call Options
The Fund will not write call options on securities unless the
underlying securities are held in a Fund's portfolio, or unless the
Fund is entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment. The Fund
will not write call options in excess of 25% of the value of its net
assets.

Purchasing Securities to Exercise Control
The Fund will not purchase securities of a company for purposes of
exercising control or management.

Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction. For purposes of its policies
and limitations, the Fund considers certificates of deposit and demand
and time deposits issued by a U.S. branch of a domestic bank or savings
and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."

The Fund has not borrowed money or invested in reverse repurchase
agreements during the last fiscal year and has no present intent to do
so in the coming fiscal year.

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

forbonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;

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

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

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

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

WHAT DO SHARES COST?

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

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

HOW IS THE FUND SOLD?

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

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

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

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

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

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

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

SUBACCOUNTING SERVICES

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

REDEMPTION IN KIND

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

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

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

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

MASSACHUSETTS PARTNERSHIP LAW

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

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

ACCOUNT AND SHARE INFORMATION

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

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

As of June 07, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Shares: Charles Schwab & Co.
Inc., San Francisco, CA. owned 2,073,930 shares (9.59%); Stockyards Bank &
Trust, Louisville, KY. owned 2,058,970 shares (9.52%); and Milards & Co. c/o SEI
Trust Company, Oaks, PA. owned 1,563,,918 shares (7.23%).

As of June 07, 1999, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Service Shares: Merchants
National Bank, Aurora, IL. owned 140,914 shares (9.86%); Comerica Bank, Detroit,
MI. owned 116,903 shares (8.18%); FNB Nominee Co., Indiana, PA. owned 97,254
shares (6.81%); and National Bank of Commerce, Birmingham, AL. owned 73,181
shares (5.12%).

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

TAX INFORMATION

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

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

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

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

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

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

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

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

As of June 07, 1999, the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Shares.

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

<PAGE>

<PAGE>

Name Aggregate Total
Birth Date Compensation Compensation From
Address Principal Occupations From Trust
Position With Trust for Past Five Years Trust and Fund Complex

Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
Birth Date: February 3, 1934 Director, Member of Executive Committee, Children's Trust and
15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, Ernst 54 other investment
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, Inc.; Director, companies
TRUSTEE Member of Executive Committee, University of Pittsburgh. in the Fund Complex

John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; $1414.81 $125,264.48 for the
Birth Date: June 23, 1937 President, Investment Properties Corporation; Senior Trust and
Wood/IPC Commercial Dept. Vice President, John R. Wood and Associates, Inc., 54 other investment
John R. Wood Associates, Inc. Realtors; Partner or Trustee in private real estate companies
Realtors ventures in Southwest Florida; formerly: President, in the Fund Complex
3255 Tamiami Trial North Naples Property Management, Inc. and Northgate Village

Naples, FL Development Corporation.
TRUSTEE

Nicholas Constantakis Director or Trustee of the Federated Fund Complex; $329.67 $47,958.02for the
Birth Date: September 3, 1939 formerly: Partner, Andersen Worldwide SC. Trust and
175 Woodshire Drive 39 other investment
Pittsburgh, PA companies
TRUSTEE in the Fund Complex
John F. Cunningham++ Director or Trustee of some of the Federated Fund $0 $0 for the
Birth Date: March 5, 1943 Complex; Chairman, President and Chief Executive Trust and
353 El Brillo Way Officer, Cunningham & Co., Inc. ; Trustee Associate, 43 other investment
Palm Beach, FL Boston College; Director, EMC Corporation; formerly: companies
TRUSTEE Director, Redgate Communications. in the Fund Complex

Previous Positions: Chairman of the Board and Chief
Executive Officer, Computer Consoles, Inc.; President
and Chief Operating Officer, Wang Laboratories;
Director, First National Bank of Boston; Director,
Apollo Computer, Inc.

Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
Birth Date: October 11, 1932 Professor of Medicine, University of Pittsburgh; Trust and
3471 Fifth Avenue Medical Director, University of Pittsburgh Medical 54 other investment
Suite 1111 Center - Downtown; Hematologist, Oncologist, and companies
Pittsburgh, PA Internist, University of Pittsburgh Medical Center; in the Fund Complex
TRUSTEE Member, National Board of Trustees, Leukemia Society of

America.

Peter E. Madden Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
Birth Date: March 16, 1942 formerly: Representative, Commonwealth of Massachusetts Trust and
One Royal Palm Way General Court; President, State Street Bank and Trust 54 other investment
100 Royal Palm Way Company and State Street Corporation. companies
Palm Beach, FL in the Fund Complex
TRUSTEE Previous Positions: Director, VISA USA and VISA

International; Chairman and Director, Massachusetts
Bankers Association; Director, Depository Trust
Corporation.

John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; 1286.01 $113,860.22 for the
S.J.D. President, Law Professor, Duquesne University; Trust and
Birth Date: December 20, 1932 Consulting Partner, Mollica & Murray. 54 other investment
President, Duquesne University companies
Pittsburgh, PA Previous Positions: Dean and Professor of Law, in the Fund Complex
TRUSTEE University of Pittsburgh School of Law; Dean and

Professor of Law, Villanova University School of Law.

Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; 1286.01 $113,860.22 for the
Birth Date: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and
4905 Bayard Street 54 other investment
Pittsburgh, PA Previous Positions: National Spokesperson, Aluminum companies
TRUSTEE Company of America; business owner. in the Fund Complex
Glen R. Johnson Trustee, Federated Investors, Inc.; staff member, $0 $0 for the
Birth Date: May 2, 1929 Federated Securities Corp. Trust and
Federated Investors Tower 8 other investment
1001 Liberty Avenue companies
Pittsburgh, PA in the Fund Complex

PRESIDENT
J. Christopher Donahue+ President or Executive Vice President of the Federated $0 $0 for the
Birth Date: April 11, 1949 Fund Complex; Director or Trustee of some of the Funds Trust and
Federated Investors Tower in the Federated Fund Complex; President and Director, 22 other investment
1001 Liberty Avenue Federated Investors, Inc.; President and Trustee, companies
Pittsburgh, PA Federated Investment Management Company; President and in the Fund Complex
EXECUTIVE VICE PRESIDENT Director, Federated Investment Counseling and Federated
Global Investment Management Corp.; President,
Passport Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.

<PAGE>

Edward C. Gonzales Trustee or Director of some of the Funds in the $0 $0 for the
Birth Date: October 22, 1930 Federated Fund Complex; President, Executive Vice Trust and
Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment
1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated company
Pittsburgh, PA Investors, Inc.; Vice President, Federated Investment in the Fund Complex
EXECUTIVE VICE PRESIDENT Management Company and Federated Investment
Counseling, Federated Global Investment Management
Corp. and Passport Research, Ltd.; Executive Vice
President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company.

John W. McGonigle Executive Vice President and Secretary of the Federated $0 $0 for the
Birth Date: October 26, 1938 Fund Complex; Executive Vice President, Secretary, and Trust and
Federated Investors Tower Director, Federated Investors, Inc.; Trustee, Federated 54 other investment
1001 Liberty Avenue Investment Management Company; Director, Federated companies
Pittsburgh, PA Investment Counseling and Federated Global Investment in the Fund Complex
EXECUTIVE VICE PRESIDENT Management Corp.; Director, Federated Services Company;
AND SECRETARY Director, Federated Securities Corp.

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

Richard B. Fisher President or Vice President of some of the Funds in the $0 $0 for the
Birth Date: May 17, 1923 Federated Fund Complex; Director or Trustee of some of Trust and
Federated Investors Tower the Funds in the Federated Fund Complex; Executive Vice 6 other investment
1001 Liberty Avenue President, Federated Investors, Inc.; Chairman and companies
Pittsburgh, PA Director, Federated Securities Corp. in the Fund Complex
VICE PRESIDENT
William D. Dawson, III Chief Investment Officer of this Fund and various other $0 $0 for the
Birth Date: March 3, 1949 Funds in the Federated Fund Complex; Executive Vice Trust and
Federated Investors Tower President, Federated Investment Counseling, Federated 41 other investment
1001 Liberty Avenue Global Investment Management Corp., Federated companies
Pittsburgh, PA Investment Management Company and Passport Research, in the Fund Complex
CHIEF INVESTMENT OFFICER Ltd.; Registered Representative, Federated Securities
Corp.; Portfolio Manager, Federated
Administrative Services; Vice President,
Federated Investors, Inc.; formerly: Executive
Vice President and Senior Vice President,
Federated Investment Counseling Institutional
Portfolio Management Services Division; Senior
Vice President, Federated Investment Management
Company and Passport Research, Ltd.
Joseph M. Balestrino Joseph M. Balestrino has been the Fund's portfolio $0 $0 for the
Birth Date: November 3, 1954 manager since January 1994. He is Vice President of the Trust and
Federated Investors Tower Trust. Mr. Balestrino joined Federated in 1986 and has 3 other investment
1001 Liberty Avenue been a Senior Portfolio Manager and Senior Vice companies
Pittsburgh, PA President of the Fund's Adviser since 1998. He was a in the Fund Complex
VICE PRESIDENT Portfolio Manager and a Vice President of the Fund's
Adviser from 1995 to 1998. Mr. Balestrino served as a
Portfolio Manager and an Assistant Vice President of
the Adviser from 1993 to 1995. Mr. Balestrino is a
Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the
University of Pittsburgh.
Randall S. Bauer Randall S. Bauer has been the Fund's portfolio manager $0 $0 for the
Birth Date: November 16, 1957 since October 1995. He is Vice President of the Trust. Trust and
Federated Investors Tower Mr. Bauer joined Federated in 1989 and has been a one other investment
1001 Liberty Avenue Portfolio Manager and a Vice President of the Fund's company
Pittsburgh, PA Adviser since 1994. Mr. Bauer is a Chartered Financial in the Fund Complex
VICE PRESIDENT Analyst and received his M.B.A. in Finance from
Pennsylvania State University.
</TABLE>

+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President
of the Trust.
++ Mr. Cunningham became a member of the Board of Trustees on January 1, 1999.
He did not earn any fees for serving the Fund Complex since these fees are
reported as of the end of the last calendar year. He did not receive any fees as
of the fiscal year end of the Trust.

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

The Adviser is a wholly owned subsidiary of Federated.

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

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

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

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

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

Maximum Administrative Fee Average Aggregate Daily Net Assets of the
Federated Funds
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.

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

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

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

INDEPENDENT PUBLIC ACCOUNTANTs
Ernst & Young LLP is the independent public accountant for the Fund.

FEES PAID BY THE FUND FOR SERVICES
For the Year ended April 30, 1999 1998 1997

Advisory Fee Earned $ $736,045 $539,952
Advisory Fee Reduction $ $319,611 $344,689
Brokerage Commissions $0 $0 $0
Administrative Fee $155,001 $155,001

12b-1 Fee
Institutional Service Shares $ ---- ----
Shareholder Services Fee
Institutional Shares $ ---- ----
Institutional Service Shares $ ---- ----

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

HOW DOES THE FUND MEASURE PERFORMANCE?

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

The performance of Shares depends upon such variables as: portfolio quality;
average portfolio maturity; type and value of portfolio securities; changes in
interest rates; changes or differences in the Fund's or any class of Shares'
expenses; and various other factors.

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

Average Annual Total Returns and Yield

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

Yield given for the 30-Day period ended April 30, 1999.

30-Day Period 1 Year 5 Years Start of Performance on
December 20, 1993

Institutional Shares
Total Return
Yield
- --------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years Start of Performance on
December 20, 1993

Institutional Service
Shares
Total Return
Yield
- --------------------------------------------------------------------------------

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

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

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

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

PERFORMANCE COMPARISONS
Advertising and sales literature may include:

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

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

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

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

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

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

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

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

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.

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

WHO IS FEDERATED INVESTORS, INC.?

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

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

Federated Funds overview

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

Equity Funds
In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

Corporate Bond Funds

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

Government Funds

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

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

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

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

Federated Clients Overview

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

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

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

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

FINANCIAL INFORMATION

(Financial Statements to be file by Amendment)

<PAGE>

INVESTMENT RATINGS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Moody's Investors Service, Inc. Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:

o Leading market positions in well-established industries;

o High rates of return on funds employed;

o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;

o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and

o Well-established access to a range of financial markets and assured sources of
alternate liquidity.

Prime-2--Issuers rated Prime-1 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

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

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

Fitch IBCA, Inc. Commercial Paper Rating Definitions
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.

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

<PAGE>

ADDRESSES

federated intermediate income fund

Institutional Shares

Institutional Service Shares

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

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

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

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

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

Independent Public Accountants
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

<PAGE>

Prospectus

FEDERATED SHORT-TERM INCOME FUND

(A Portfolio of Federated Income Securities Trust)

Institutional shares

A mutual fund seeking to provide current income by investing primarily in a
diversified portfolio of short and medium-term high grade debt securities.

August 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to provide current income. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the strategies and policies described in this
prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified portfolio of investment grade fixed income
securities consisting primarily of U.S. government and privately issued mortgage
backed and asset backed securities; corporate debt securities; and U.S. treasury
and agency securities. The Adviser seeks to enhance the Fund's performance by
allocating relatively more of its portfolio to the security type that the
Adviser expects to offer the best balance between current income and risk.
Although the value of the Fund's shares will fluctuate, the Adviser
will seek to manage the magnitude of fluctuation by limiting the Fund's dollar
weighted average maturity and duration to approximately 1.5 years (and, in any
event, to not more than three years). Maturity reflects the time until a fixed
income security becomes payable. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the Fund. The primary factors that may reduce the Fund's returns
include:
o Interest Rate Risk. Prices of fixed income securities generally fall when
interest rates rise.

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

<PAGE>

Risk/Return Bar Chart and Table

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Shares as of the calendar
year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with "-2.00%" and
increasing in increments of 2.00% up to 14.00%.

The `x' axis represents calculation periods for the last ten calendar years of
the Fund, beginning with the earliest year. The light gray shaded chart features
ten distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentage for the Fund's
Institutional Shares for each calendar year is stated directly at the top of
each respective bar, for the calendar years 1989 through 1998, The percentages
noted are: 9.40%, 1.98%, 13.86%, 6.13%, 5.48%, -0.53%, 10.89%, 5.41%, 6.37% and
5.73%.respectively.

The bar chart shows the variability of the Fund's Institutional Shares total
returns on a calendar year-end basis.

The Fund's shares are not sold subject to a sales charge (load). The total
returns displayed above are based upon net asset value.

The Fund's total return from January 1, 1999 to June 30, 1999 was 1.08%.

Within the period shown in the Chart, the Fund's highest quarterly return was
6.04% (quarter ended March 31, 1991). Its lowest quarterly return was -1.27%
(quarter ended December 31, 1998).

Average Annual Total Return
The following table represents the Fund's Institutional Shares Average Annual
Total Returns for the calendar periods ending December 31, 1998. The table shows
the Fund's total returns averaged over a period of years relative to Merrill
Lynch Total Return Investment Grade Corporate Index (MLTRIGCI), a broad-based
market index and the Lipper Short Investment Grade Debt Funds Average (LSIGDFA),
an average of funds with similar investment objectives. Total returns for the
index and average shown do not reflect sales charges, expenses or other fees
that the SEC requires to be reflected in the Fund's performance. Indexes are
unmanaged, and it is not possible to invest directly in an index.

Institutional
Calendar Period Shares MLTRIGCI LSIGDFA
1 Year 5.73% 7.20% 5.77%
5 Years 5.52% 6.54% 5.39%
10 Years 6.40% 8.10% 7.03%

Past performance does not necessarily predict future performance. This
information provides you with historical performance so that you can analyze
whether the Fund's investment risks are balanced by its potential rewards.

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED SHORT-TERM INCOME FUND

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
the Fund's Institutional Shares.

<S> <C>

Annual Fund Operating Expenses (Before Waivers)1
Expenses That are Deducted From Fund Assets ( as a percentage of average net assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee None
Shareholder Services Fee 3 0.25%
Other Expenses 0.19%
Total Annual Fund Operating Expenses 0.84%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

1 Although not contractually obligated to do so, the Adviser and shareholder
services provider waived certain amounts. These are shown below along with the
net expenses the Fund's Institutional Shares actually paid for the fiscal year
ended April 30, 1999. Total Waiver of Fund's Institutional Shares Expenses 0.28%
Total Annual Institutional Shares Operating Expenses (after waiver) 0.56% 2 The
Adviser voluntarily waived a portion of the management fee. The Adviser can
terminate this voluntary waiver at any time. The management fee paid by the
Fund's Institutional Shares (after the voluntary waiver) was 0.37% for the year
ended April 30, 1999. 3 The shareholder services fee has been voluntarily
reduced. This voluntary reduction can be terminated at any time. The shareholder
services fee paid by the Fund's Institutional Shares (after the voluntary
reduction) was 0.00% for the year ended April 30, 1999.

<PAGE>

EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund's Institutional Shares with the cost of investing in other mutual
funds.

The Example assumes that you invest $10,000 in the Fund's Institutional Shares
for the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes that your investment has a 5% return
each year and that the Fund's Institutional Shares' operating expenses are
before waivers as shown in the Table and remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
Institutional Shares
- -------------------------------------------------------------------------------
$86 $268 $466 $1,037
- -----------------------------------------------------------------------------

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

The Fund invests in a diversified portfolio of investment grade fixed
income securities consisting primarily of U.S. government and privately issued
mortgage backed and asset backed securities; corporate debt securities; and U.S.
treasury and agency securities. Investment grade securities are those rated BBB
or higher by a nationally recognized statistical rating organization (NRSRO). In
addition, at least 65% of the Fund's securities must be rated A or higher (or,
for short-term instruments, in one of the two highest rating categories) by a
NRSRO. A description of the various types of securities in which the Fund
invests, and their risks, immediately follows this strategy section.
The Adviser seeks to enhance the Fund's performance by allocating
relatively more of its portfolio to the security type that the Adviser expects
to offer the best balance between current income and risk and thus offer the
greatest potential for return. The allocation process is based on the Adviser's
continuing analysis of a variety of economic and market indicators in order to
arrive at the projected yield "spread" of each security type. (The spread is the
difference between the yield of a security versus the yield of a U.S. treasury
security with a comparable average life.) The security's projected spread is
weighed against the spread the security can currently be purchased for, as well
as the security's risk of prepayment (in the case of asset backed and mortgage
backed securities) and its credit risk (in the case of corporate securities and
privately issued asset backed and mortgage backed securities) in order to
complete the analysis.
Asset and mortgaged backed securities tend to amortize principal on a
somewhat irregular schedule over time, since the borrower can usually prepay all
or part of the loan without penalty. These securities generally offer higher
yields versus U.S. treasury securities and non-mortgage backed agency securities
to compensate for this prepayment risk as well as any credit risk which might
also be present in the security. Similarly, corporate debt securities, which
tend to pay off on a predetermined schedule, generally offer higher yields than
treasury and agency securities to compensate for credit risk. The Adviser
actively manages the Fund's portfolio, seeking the higher relative returns of
asset and mortgage backed securities and corporate debt securities while
attempting to limit the associated prepayment or credit risk.
The Adviser attempts to manage the Fund's prepayment risk by selecting
asset and mortgage backed securities with characteristics that make prepayment
fluctuations less likely. Characteristics that the Adviser may consider in
selecting securities include the average interest rates of the underlying
mortgages and the federal agencies (if any) that support the mortgages. The
Adviser attempts to assess the relative returns and risks for mortgage backed
securities by analyzing how the timing, amount and division of cash flows might
change in response to changing economic and market conditions.
The Adviser attempts to manage the Fund's credit risk by selecting
corporate debt securities that make default in the payment of principal and
interest less likely. The Adviser analyzes a variety of factors, including
macroeconomic analysis and corporate earnings analysis, among others, to
determine which business sectors and credit ratings are most advantageous for
investment by the Fund. In selecting individual corporate fixed income
securities, the Adviser analyzes the issuer's business, competitive position,
and general financial condition to assess whether the security's credit risk is
commensurate with its potential return.
In addition to managing the Fund's portfolio to seek enhanced current
income while minimizing prepayment and credit risk, the Adviser also seeks to
limit the magnitude of fluctuation of the value of the Fund's shares. The
Adviser attempts to manage price fluctuation by limiting the Fund's dollar
weighted average maturity and duration to approximately 1.5 years and, in any
event, to no greater than three years.
The Adviser may lengthen or shorten duration from time-to-time based on
its interest rate outlook. If the Adviser expects interest rates to decline, it
will generally lengthen the Fund's duration, and if the Adviser expects interest
rates to increase, it will generally shorten the Fund's duration. The Adviser
formulates its interest rate outlook and otherwise attempts to anticipate
changes in economic and market conditions in analyzing a variety of factors,
such as: o current and expected U.S. growth; o current and expected interest
rates and inflation; o the U.S. Federal Reserve Board's monetary policy; and o
changes in the supply of or demand for U.S. government securities There is no
assurance that the Adviser's efforts to forecast market interest rates and
assess the impact of market interest rates on particular securities will be
successful.

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

<PAGE>

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

<PAGE>

In addition, the credit risk of an issuer's debt security may vary
based on its priority for repayment. For example, higher ranking
(senior) debt securities have a higher priority than lower ranking
(subordinated) securities. This means that the issuer might not make
payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders
of senior securities may receive amounts otherwise payable to the
holders of subordinated securities. Some subordinated securities, such
as trust preferred and capital securities notes, also permit the issuer
to defer payments under certain circumstances. For example, insurance
companies issue securities known as surplus notes that permit the
insurance company to defer any payment that would reduce its capital
below regulatory requirements. Mortgage Backed Securities Mortgage
backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable
interest rates. Interests in pools of adjustable rate mortgages are
known as ARMs. Mortgage backed securities come in a variety of forms.
Many have extremely complicated terms. The simplest form of mortgage
backed securities are pass-through certificates. As issuer of
pass-through certificates gathers monthly payments from an underlying
pool of mortgages. Then, the issuer deducts its fees and expenses and
passes the balance of the payments onto the certificate holders once a
month. Holders of pass-through certificates receive a pro rata share of
all payments and pre-payments from the underlying mortgages. As a
result, the holders assume all the prepayment risks of the underlying
mortgages.
Collateralized Mortgage Obligations (CMOs)
CMOs, including interests in real estate mortgage investment
conduits (REMICs), allocate payments and prepayments from an
underlying pass-through certificate among holders of different
classes of mortgage backed securities. This creates different
prepayment and interest rate risks for each CMO class. The
degree of increased or decreased prepayment risk depends upon
the structure of the CMOs. However, the actual returns of any
type of mortgage backed security depend upon the performance
of the underlying pool of mortgages, which no one can predict
and will vary among pools.
Sequential CMOs
In a sequential pay CMO, one class of CMOs receives
all principal payments and prepayments. The next
class of CMOs receives all principal payments after
the first class is paid off. This process repeats for
each sequential class of CMO. As a result, each class
of sequential pay CMOs reduces the prepayment risks
of subsequent classes.
Asset Backed Securities
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed income
assets (including other fixed income securities) may be used to create an asset
backed security. Asset backed securities may take the form of commercial paper,
notes, or pass through certificates. Asset backed securities have prepayment
risks. As with CMOs, the cash flows of asset backed securities may be highly
structured.

<PAGE>

Bank Instruments
Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks. Credit
Enhancement Credit enhancement consists of an arrangement in which a company
agrees to pay amounts due on a fixed income security if the issuer defaults. In
some cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer. Normally,
the credit enhancer has greater financial resources and liquidity than the
issuer. For this reason, the Adviser usually evaluates the credit risk of a
fixed income security based solely upon its credit enhancement. Common types of
credit enhancement include guarantees, letters of credit, bond insurance and
surety bonds. Credit enhancement also includes arrangements where securities or
other liquid assets secure payment of a fixed income security. If a default
occurs, these assets may be sold and the proceeds paid to security's holders.
Either form of credit enhancement reduces credit risks by providing another
source of payment for a fixed income security. Investment Ratings for Investment
Grade Securities The Adviser will determine whether a security is investment
grade based upon the credit ratings given by one or more nationally recognized
rating services. For example, Standard and Poor's, a rating service, assigns
ratings to investment grade securities (AAA, AA, A, and BBB) based on their
assessment of the likelihood of the issuer's inability to pay interest or
principal (default) when due on each security. Lower credit ratings correspond
to higher credit risk. If a security has not received a rating, the Fund must
rely entirely upon the Adviser's credit assessment that the security is
comparable to investment grade.

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

Interest Rate Risks
o Prices of fixed income securities rise and fall in response to changes in
the interest rate paid on newly-issued similar securities. Generally, when
interest rates rise, prices of fixed income securities fall. However,
market factors, such as the demand for particular fixed income securities,
may cause the price of certain fixed income securities to fall while the
prices of other securities rise or remain unchanged.
o Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.
Credit Risks
o Credit risk is the possibility that an issuer will default on a security by
failing to pay interest or principal when due. If an issuer defaults, the
Fund will lose money.
o

<PAGE>

Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely entirely upon the Adviser's credit
assessment.
o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the premium received for accepting this
risk. Spreads may increase generally in response to adverse economic or
market conditions. A security's spread may also increase if the security's
rating is lowered, or the security is perceived to have an increased credit
risk. An increase in the spread will cause the price of the security to
decline.
o Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
Prepayment Risks

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

WHAT DO SHARES COST?

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

HOW IS THE FUND SOLD?

The Fund's Distributor markets the Shares described in this prospectus to
accounts for which financial institutions act in a fiduciary capacity. Shares
are also made available to public and private organizations or individuals,
directly or through investment professionals.

HOW TO PURCHASE SHARES

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL
o Establish an account with the investment professional; and

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

o Send your payment to the Fund by Federal Reserve wire or check.

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

By Wire Send your wire to:

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

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

HOW TO REDEEM SHARES

You should redeem Shares:

o through an investment professional if you purchased Shares through an
investment professional; or

o directly from the Fund if you purchased Shares directly from the Fund.

DIRECTLY FROM THE FUND

By Telephone
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.

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

By Mail
You may redeem Shares by mailing a written request to the Fund.

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317 All requests must include:

o Fund Name and Share Class, account number and account registration;

o amount to be redeemed; and

o signatures of all shareholders exactly as registered.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees Signatures must be guaranteed if:

o your redemption will be sent to an address other than the address of
record;

o your redemption will be sent to an address of record that was changed
within the last 30 days; or

o a redemption is payable to someone other than the shareholder(s) of record.

o an electronic transfer to your account at a financial institution that is
an ACH member; or

o wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

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

o to allow your purchase to clear;

o during periods of market volatility; or

o when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

ADDITIONAL CONDITIONS

ACCOUNT AND SHARE INFORMATION

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

WHO MANAGES THE FUND?

THE FUND'S PORTFOLIO MANAGERS ARE:

Randall S. Bauer

Randall S. Bauer has been the Fund's portfolio manager since October 1995. He is
Vice President of the Trust. Mr. Bauer joined Federated in 1989 and has been a
Portfolio Manager and a Vice President of the Fund's Adviser since 1994. Mr.
Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance from
Pennsylvania State University.

Robert E. Cauley

Robert E. Cauley has been the Fund's portfolio manager since March 1999. Mr.
Cauley joined Federated in 1996 as a Senior Investment Analyst and an Assistant
Vice President of the Fund's Adviser and has been a Portfolio Manager since
1997. Mr. Cauley has been a Vice President of the Adviser since 1999. Mr. Cauley
was a member of the Asset-Backed Structuring Group at Lehman Brothers Holding,
Inc. from 1994 to 1996. Mr. Cauley earned his M.S.I.A., concentrating in Finance
and Economics, from Carnegie Mellon University.

Advisory Fees

The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
funds dealing with foreign service providers or investing in foreign securities
will have difficulty determining the Year 2000 readiness of those entities. This
is especially true of entities or issuers in emerging markets. The financial
impact of these issues for the Fund is still being determined. There can be no
assurance that potential Year 2000 problems would not have a material adverse
effect on the Fund.

FINANCIAL INFORMATION

(Financial Statements to be filed by Amendment)

<PAGE>

FEDERATED SHORT-TERM INCOME FUND

(A Portfolio of Federated Income Securities Trust)

Institutional shares

A Statement of Additional Information (SAI) dated August 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and Semi-Annual Reports to
shareholders as they become available. The Annual Report discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year. To obtain the SAI, the Annual Report,
Semi-Annual Report and other information without charge, and make inquiries,
call your investment professional or the Fund at 1-800-341-7400.

Investment Company Act File No. 811-4577
Cusip 31420C209

1111903A-IS (8/99)

<PAGE>

Prospectus

FEDERATED SHORT-TERM INCOME FUND

(A Portfolio of Federated Income Securities Trust)

Institutional SERVICE shares

A mutual fund seeking to provide current income by investing primarily in a
diversified portfolio of short and medium-term high grade debt securities.

Contents
Risk/Return Summary
What are the Fund's Fees and Expenses?
What are the Fund's Investment Strategies?
What are the Principal Securities in Which the Fund Invests?
What are the Specific Risks of Investing in the Fund?
What do Shares Cost?
How is the Fund Sold?
How to Purchase Shares
How to Redeem and Exchange Shares
Account and Share Information
Who Manages the Fund?
Financial Information

August 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

o Interest Rate Risk. Prices of fixed income securities generally fall when
interest rates rise.

o Credit Risks. There is a possibility that issuers of securities in which
the Fund may invest may default in the payment of interest or principal on
the securities when due, which would cause the Fund to lose money.
The Shares offered by this prospectus are not deposits or obligations of any
bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.

<PAGE>

Risk/Return Bar Chart and Table

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Service Shares as of the
calendar year-end for each of six years.

The `y' axis reflects the "% Total Return" beginning with "-2.00%" and
increasing in increments of 2.00% up to 12.00%.

The `x' axis represents calculation periods from the earliest calendar year end
of the Fund's start of business through the calendar year ended 1998. The light
gray shaded chart features six distinct vertical bars, each shaded in charcoal,
and each visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentage for the Fund's Institutional Service Shares for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1993
through 1998, The percentages noted are: 5.22%, -0.78%, 10.61%, 5.15%, 6.13% and
5.47% respectively.

The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a calendar year-end basis.

The Fund's shares are not sold subject to a sales charge (load). The total
returns displayed above are based upon net asset value.

The Fund's total return from January 1, 1999 to June 30, 1999 was 1.02%.

Within the period shown in the Chart, the Fund's highest quarterly return was
3.77% (quarter ended June 30, 1995). Its lowest quarterly return was -0.70%
(quarter ended June 30, 1994).

Average Annual Total Return
The following table represents the Fund's Institutional Service Shares Average
Annual Total Returns for the calendar periods ending December 31, 1998. The
table shows the Fund's total returns averaged over a period of years relative to
the Merrill Lynch Total Return Investment Grade Corporate Index (MLTRIGCI), a
broad-based market index and the Lipper Short Investment Grade Debt Funds
Average (LSIGDFA), an average of funds with similar investment objectives. Total
returns for the index and average shown do not reflect sales charges, expenses
or other fees that the SEC requires to be reflected in the Fund's performance.
Indexes are unmanaged, and it is not possible to invest directly in an index.

Institutional
Calendar Period Service Shares MLTRIGCI LSIGDFA
1 Year 5.47% 7.20% 5.77%
5 Years 5.26% 6.54% 5.39%
Start of Performance1 5.40% 8.10% 7.03%

1 The Fund's Institutional Service Shares start of performance date was January
24, 1992. Past performance does not necessarily predict future performance. This
information provides you with historical performance so that you can analyze
whether the Fund's investment risks are balanced by its potential rewards.

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED SHORT-TERM INCOME FUND

FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
the Fund's Institutional Service Shares.

<S> <C>

Annual Fund Operating Expenses (Before Waivers)1
Expenses That are Deducted From Fund Assets ( as a percentage of average net assets)
Management Fee 2 0.40%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 4 0.25%
Other Expenses 0.19%
Total Annual Fund Operating Expenses 1.09%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

1 Although not contractually obligated to do so, the Adviser, distributor, and
shareholder services provider waived certain amounts. These are shown below
along with the net expenses the Fund's Institutional Service Shares actually
paid for the fiscal year ended April 30, 1999. Total Waiver of Fund's
Institutional Service Shares Expenses 0.28% Total Annual Institutional Service
Shares Operating Expenses (after waiver) 0.81% 2 The Adviser voluntarily waived
a portion of the management fee. The Adviser can terminate this voluntary waiver
at any time. The management fee paid by the Fund's Institutional Service Shares
(after the voluntary waiver) was 0.37% for the year ended April 30, 1999. 3 The
distribution fee has been voluntarily reduced. This voluntary reduction can be
terminated at any time. The distribution fee paid by the Fund's Institutional
Service Shares (after the voluntary reduction) was 0.01% for the year ended
April 30, 1999. 4 The shareholder services fee has been voluntarily reduced.
This voluntary reduction can be terminated at any time. The shareholder services
fee paid by the Fund's Institutional Service Shares (after the voluntary
reduction) was 0.24% for the year ended April 30, 1999.

<PAGE>

EXAMPLE
The following Example is intended to help you compare the cost of investing in
the Fund's Institutional Service Shares with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in the Fund's
Institutional Service Shares for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's Institutional Service
Shares' operating expenses are before waivers as shown in the Table and remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------------------------------------
Institutional Service Shares
- -----------------------------------------------------------------------
$111 $347 $601 $1,329
- --------------------------------------------------------------------------------

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

<PAGE>

The Adviser attempts to manage the Fund's prepayment risk by selecting
asset and mortgage backed securities with characteristics that make prepayment
fluctuations less likely. Characteristics that the Adviser may consider in
selecting securities include the average interest rates of the underlying
mortgages and the federal agencies (if any) that support the mortgages. The
Adviser attempts to assess the relative returns and risks for mortgage backed
securities by analyzing how the timing, amount and division of cash flows might
change in response to changing economic and market conditions.
The Adviser attempts to manage the Fund's credit risk by selecting
corporate debt securities that make default in the payment of principal and
interest less likely. The Adviser analyzes a variety of factors, including
macroeconomic analysis and corporate earnings analysis, among others, to
determine which business sectors and credit ratings are most advantageous for
investment by the Fund. In selecting individual corporate fixed income
securities, the Adviser analyzes the issuer's business, competitive position,
and general financial condition to assess whether the security's credit risk is
commensurate with its potential return.
In addition to managing the Fund's portfolio to seek enhanced current
income while minimizing prepayment and credit risk, the Adviser also seeks to
limit the magnitude of fluctuation of the value of the Fund's shares. The
Adviser attempts to manage price fluctuation by limiting the Fund's dollar
weighted average maturity and duration to approximately 1.5 years and, in any
event, to no greater than three years.
The Adviser may lengthen or shorten duration from time-to-time based on
its interest rate outlook. If the Adviser expects interest rates to decline, it
will generally lengthen the Fund's duration, and if the Adviser expects interest
rates to increase, it will generally shorten the Fund's duration. The Adviser
formulates its interest rate outlook and otherwise attempts to anticipate
changes in economic and market conditions in analyzing a variety of factors,
such as: o current and expected U.S. growth; o current and expected interest
rates and inflation; o the U.S. Federal Reserve Board's monetary policy; and o
changes in the supply of or demand for U.S. government securities

There is no assurance that the Adviser's efforts to forecast market interest
rates and assess the impact of market interest rates on particular securities
will be successful.

<PAGE>

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

<PAGE>

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

<PAGE>

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

WHAT DO SHARES COST?

The required minimum initial investment for Fund Shares is $25,000. There is no
required minimum subsequent investment amount.

HOW IS THE FUND SOLD?

The Fund offers two share classes: Institutional Shares and Institutional
Service Shares, each representing interests in a single portfolio of securities.
This prospectus relates only to Institutional Service Shares. Each share class
has different expenses, which affect their performance. Contact your investment
professional or call 1-800-341-7400 for more information concerning the other
class.

The Fund's Distributor markets the Shares described in this prospectus to retail
and private banking customers of financial institutions or individuals, directly
or through investment professionals.

HOW TO PURCHASE SHARES

You may purchase Shares through an investment professional or directly from the
Fund. The Fund reserves the right to reject any request to purchase Shares.

THROUGH AN INVESTMENT PROFESSIONAL
o Establish an account with the investment professional; and

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

o Send your payment to the Fund by Federal Reserve wire or check.

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

By Wire Send your wire to:

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

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

HOW TO REDEEM SHARES

You should redeem Shares:

o through an investment professional if you purchased Shares through an
investment professional; or

o directly from the Fund if you purchased Shares directly from the Fund.

DIRECTLY FROM THE FUND

By Telephone
You may redeem Shares by calling the Fund once you have completed the
appropriate authorization form for telephone transactions.

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

By Mail
You may redeem Shares by mailing a written request to the Fund.

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317 All requests must include:

o Fund Name and Share Class, account number and account registration;

o amount to be redeemed; and

o signatures of all shareholders exactly as registered.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees Signatures must be guaranteed if:

o your redemption will be sent to an address other than the address of
record;

o your redemption will be sent to an address of record that was changed
within the last 30 days; or

o a redemption is payable to someone other than the shareholder(s) of record.

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

o an electronic transfer to your account at a financial institution that is
an ACH member; or

o wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

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

o to allow your purchase to clear;

o during periods of market volatility; or

o when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

ADDITIONAL CONDITIONS

ACCOUNT AND SHARE INFORMATION

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

WHO MANAGES THE FUND?

THE FUND'S PORTFOLIO MANAGERS ARE:

Randall S. Bauer

<PAGE>

Robert E. Cauley

Advisory Fees
The Adviser receives an annual investment advisory fee of 0.40% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
funds dealing with foreign service providers or investing in foreign securities
will have difficulty determining the Year 2000 readiness of those entities. This
is especially true of entities or issuers in emerging markets. The financial
impact of these issues for the Fund is still being determined. There can be no
assurance that potential Year 2000 problems would not have a material adverse
effect on the Fund.

FINANCIAL INFORMATION

(Financial Statements to be filed by Amendment)

<PAGE>

FEDERATED SHORT-TERM INCOME FUND

(A Portfolio of Federated Income Securities Trust)

Institutional Service shares

A Statement of Additional Information (SAI) dated August 31, 1999, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is contained in the Fund's Annual and Semi-Annual Reports to
shareholders as they become available.The Annual Report discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year. To obtain the SAI, the Annual Report,
Semi-Annual Report and other information without charge, and make inquiries,
call your investment professional or the Fund at 1-800-341-7400.

Investment Company Act File No. 811-4577
Cusip 31420C209

1111903A-IS (8/99)

<PAGE>

Statement of Additional Information

FEDERATED SHORT-TERM INCOME FUND

(A Portfolio of Federated Income Securities Trust)

institutional shares

institutional service shares

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated Short-Term Income Fund
(Fund), dated August 31, 1999. This SAI incorporates by reference the Fund's
Annual Report. Obtain the prospectuses or the Annual Report without charge by
calling 1-800-341-7400.

august 31, 1999

Contents
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Subaccounting Services
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings
Addresses

Cusip 31420C209

Cusip 31420C308

1111903B (8/99)

<PAGE>

HOW IS THE FUND ORGANIZED?

The Board of Trustees (the Board) has established two classes of shares of the
Fund, known as Institutional Shares and Institutional Service Shares (Shares).
This SAI relates to all classes of the above-mentioned Shares. The Fund's
investment adviser is Federated Investment Management Company (Adviser).
Effective March 31, 1999, Federated Management, Adviser to the Fund, merged into
Federated Investment Management Company (formerly Federated Advisers).

SECURITIES IN WHICH THE FUND INVESTS

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

Fixed Income Securities
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities. A security's yield measures the
annual income earned on a security as a percentage of its price. A security's
yield will increase or decrease depending upon whether it costs less (a
discount) or more (a premium) than the principal amount. If the issuer may
redeem the security before its scheduled maturity, the price and yield on a
discount or premium security may change based upon the probability of an early
redemption. Securities with higher risks generally have higher yields. The
following describes the types of fixed income securities in which the Fund
invests.
Treasury Securities
Treasury securities are direct obligations of the federal government of
the United States. Treasury securities are generally regarded as having
the lowest credit risks. Agency Securities Agency securities are issued
or guaranteed by a federal agency or other government sponsored entity
acting under federal authority (a GSE). The United States supports some
GSEs with its full faith and credit. Other GSEs receive support through
federal subsidies, loans or other benefits. A few GSEs have no explicit
financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risks, but not as low as
treasury securities. The Fund treats mortgage backed securities
guaranteed by GSEs as agency securities. Although a GSE guarantee
protects against credit risks, it does not reduce the market and
prepayment risks of these mortgage backed securities.
Corporate Debt Securities
Corporate debt securities are fixed income securities issued by businesses.
Notes, Bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities. The Fund may also purchase interests in bank loans to
companies. The credit risks of corporate debt securities vary widely among
issuers. In addition, the credit risk of an issuer's debt security may vary
based on its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated) securities.
This means that the issuer might not make payments on subordinated securities
while continuing to make payments on senior securities. In addition, in the
event of bankruptcy, holders of senior securities may receive amounts otherwise
payable to the holders of subordinated securities. Some subordinated securities,
such as trust preferred and capital securities notes, also permit the issuer to
defer payments under certain circumstances. For example, insurance companies
issue securities known as surplus notes that permit the insurance company to
defer any payment that would reduce its capital below regulatory requirements.
Commercial Paper
Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for
current expenditures. Most issuers constantly reissue their commercial
paper and use the proceeds (or bank loans) to repay maturing paper. If
the issuer cannot continue to obtain liquidity in this fashion, its
commercial paper may default. The short maturity of commercial paper
reduces both the market and credit risks as compared to other debt
securities of the same issuer. Demand Instruments Demand instruments
are corporate debt securities that the issuer must repay upon demand.
Other demand instruments require a third party, such as a dealer or
bank, to repurchase the security for its face value upon demand. The
Fund treats demand instruments as short-term securities, even though
their stated maturity may extend beyond one year.
Mortgage Backed Securities
Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.
Interests in pools of adjustable rate mortgages are known as ARMs. Mortgage
backed securities come in a variety of forms. Many have extremely complicated
terms. The simplest form of mortgage backed securities are pass-through
certificates. An issuer of pass-through certificates gathers monthly payments
from an underlying pool of mortgages. Then, the issuer deducts its fees and
expenses and passes the balance of the payments onto the certificate holders
once a month. Holders of pass-through certificates receive a pro rata share of
all payments and pre-payments from the underlying mortgages. As a result, the
holders assume all the prepayment risks of the underlying mortgages.
Collateralized Mortgage Obligations (CMOs)
CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying
pass-through certificate among holders of different classes of mortgage
backed securities. This creates different prepayment and interest rate
risks for each CMO class. The degree of increased or decreased
prepayment risks depends upon the structure of the CMOs. However, the
actual returns on any type of mortgage backed security depend upon the
performance of the underlying pool of mortgages, which no one can
predict and will vary among pools.

Sequential CMOs
In a sequential pay CMO, one class of CMOs receives all
principal payments and prepayments. The next class of CMOs
receives all principal payments after the first class is paid
off. This process repeats for each sequential class of CMO. As
a result, each class of sequential pay CMOs reduces the
prepayment risks of subsequent classes. PACs, TACs and
Companion Classes More sophisticated CMOs include planned
amortization classes (PACs) and targeted amortization classes
(TACs). PACs and TACs are issued with companion classes. PACs
and TACs receive principal payments and prepayments at a
specified rate. The companion classes receive principal
payments and prepayments in excess of the specified rate. In
addition, PACs will receive the companion classes' share of
principal payments, if necessary, to cover a shortfall in the
prepayment rate. This helps PACs and TACs to control
prepayment risks by increasing the risks to their companion
classes. IOs and POs CMOs may allocate interest payments to
one class (Interest Only or IOs) and principal payments to
another class (Principal Only or POs). POs increase in value
when prepayment rates increase. In contrast, IOs decrease in
value when prepayments increase, because the underlying
mortgages generate less interest payments. However, IOs tend
to increase in value when interest rates rise (and prepayments
decrease), making IOs a useful hedge against interest rate
risks. Floaters and Inverse Floaters Another variant allocates
interest payments between two classes of CMOs. One class
(Floaters) receives a share of interest payments based upon a
market index such as LIBOR. The other class (Inverse Floaters)
receives any remaining interest payments from the underlying
mortgages. Floater classes receive more interest (and Inverse
Floater classes receive correspondingly less interest) as
interest rates rise. This shifts prepayment and interest rate
risks from the Floater to the Inverse Floater class, reducing
the price volatility of the Floater class and increasing the
price volatility of the Inverse Floater class. Z Classes and
Residual Classes CMOs must allocate all payments received from
the underlying mortgages to some class. To capture any
unallocated payments, CMOs generally have an accrual (Z)
class. Z classes do not receive any payments from the
underlying mortgages until all other CMO classes have been
paid off. Once this happens, holders of Z class CMOs receive
all payments and prepayments. Similarly, REMICs have residual
interests that receive any mortgage payments not allocated to
another REMIC class.
Asset Backed Securities
Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed income
assets (including other fixed income securities) may be used to create an asset
backed security. Asset backed securities may take the form of commercial paper,
notes, or pass through certificates. Asset backed securities have prepayment
risks. Like CMOs, asset backed securities may be structured like Floaters,
Inverse Floaters, IOs and POs. Zero Coupon Securities Zero coupon securities do
not pay interest or principal until final maturity unlike debt securities that
provide periodic payments of interest (referred to as a coupon payment).
Investors buy zero coupon securities at a price below the amount payable at
maturity. The difference between the purchase price and the amount paid at
maturity represents interest on the zero coupon security. Investors must wait
until maturity to receive interest and principal, which increases the market and
credit risks of a zero coupon security. A zero coupon step-up security converts
to a coupon security before final maturity. There are many forms of zero coupon
securities. Some are issued at a discount and are referred to as zero coupon or
capital appreciation bonds. Others are created from interest bearing bonds by
separating the right to receive the bond's coupon payments from the right to
receive the bond's principal due at maturity, a process known as coupon
stripping. Treasury STRIPs, IOs, and POs are the most common forms of stripped
zero coupon securities. In addition, some securities give the issuer the option
to deliver additional securities in place of cash interest payments, thereby
increasing the amount payable at maturity. These are referred to as pay-in-kind
or PIK securities. Bank Instruments Bank instruments are unsecured interest
bearing deposits with banks. Bank instruments include bank accounts, time
deposits, certificates of deposit and Banker's acceptances. Yankee instruments
are denominated in U.S. dollars and issued by U.S. branches of foreign banks.
Eurodollar instruments are denominated in U.S. dollars and issued by non-U.S.
branches of U.S. or foreign banks. Credit Enhancement Credit enhancement
consists of an arrangement in which a company agrees to pay amounts due on a
fixed income security if the issuer defaults. In some cases the company
providing credit enhancement makes all payments directly to the security holders
and receives reimbursement from the issuer. Normally, the credit enhancer has
greater financial resources and liquidity than the issuer. For this reason, the
Adviser usually evaluates the credit risk of a fixed income security based
solely upon its credit enhancement. Common types of credit enhancement include
guarantees, letters of credit, bond insurance and surety bonds. Credit
enhancement also includes arrangements where securities or other liquid assets
secure payment of a fixed income security. If a default occurs, these assets may
be sold and the proceeds paid to security's holders. Either form of credit
enhancement reduces credit risks by providing another source of payment for a
fixed income security. Derivative Contracts Derivative contracts are financial
instruments that require payments based upon changes in the values of designated
(or underlying) securities, currencies, commodities, financial indices or other
assets. Some derivative contracts (such as futures, forwards and options)
require payments relating to a future trade involving the underlying asset.
Other derivative contracts (such as swaps) require payments relating to the
income or returns from the underlying asset. The other party to a derivative
contract is referred to as a counterparty. Many derivative contracts are traded
on securities or commodities exchanges. In this case, the exchange sets all the
terms of the contract except for the price. Investors make payments due under
their contracts through the exchange. Most exchanges require investors to
maintain margin accounts through their brokers to cover their potential
obligations to the exchange. Parties to the contract make (or collect) daily
payments to the margin accounts to reflect losses (or gains) in the value of
their contracts. This protects investors against potential defaults by the
counterparty. Trading contracts on an exchange also allows investors to close
out their contracts by entering into offsetting contracts. For example, the Fund
could close out an open contract to buy an asset at a future date by entering
into an offsetting contract to sell the same asset on the same date. If the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. Exchanges may limit
the amount of open contracts permitted at any one time. Such limits may prevent
the Fund from closing out a position. If this happens, the Fund will be required
to keep the contract open (even if it is losing money on the contract), and to
make any payments required under the contract (even if it has to sell portfolio
securities at unfavorable prices to do so). Inability to close out a contract
could also harm the Fund by preventing it from disposing of or trading any
assets it has been using to secure its obligations under the contract. Depending
upon how the Fund uses derivative contracts and the relationships between the
market value of a derivative contract and the underlying asset, derivative
contracts may increase or decrease the Fund's exposure to market and currency
risks, and may also expose the Fund to liquidity and leverage risks. OTC
contracts also expose the Fund to credit risks in the event that a counterparty
defaults on the contract. The Fund may trade in the following types of
derivative contracts. Swaps Swaps are contracts in which two parties agree to
pay each other (swap) the returns derived from underlying assets with differing
characteristics. Most swaps do not involve the delivery of the underlying assets
by either party, and the parties might not own the assets underlying the swap.
The payments are usually made on a net bases so that, on any given day, the Fund
would receive (or pay) only the amount by which its payment under the contract
is less than (or exceeds) the amount of the other party's payment. Swap
agreements are sophisticated instruments that can take many different forms, and
are known by a variety of names including caps, floors, and collars. Common swap
agreements that the Fund may use include:
Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make
regular payments equal to a fixed or floating interest rate times a
stated principal amount of fixed income securities, in return for
payments equal to a different fixed or floating rate times the same
principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate of interest (which fluctuates) on $10 million
principal amount in exchange for the right to receive the equivalent of
a stated fixed rate of interest on $10 million principal amount. Caps
and Floors Caps and Floors are contracts in which one party agrees to
make payments only if an interest rate or index goes above (Cap) or
below (Floor) a certain level in return for a fee from the other party.
Total Return Swaps Total return swaps are contracts in which one party
agrees to make payments of the total return from the underlying asset
during the specified period, in return for payments equal to a fixed or
floating rate of interest or the total return from another underlying
asset.
Special Transactions
Repurchase Agreements
Repurchase agreements are transactions in which the Fund buys a
security from a dealer or bank and agrees to sell the security back at
a mutually agreed upon time and price. The repurchase price exceeds the
sale price, reflecting the Fund's return on the transaction. This
return is unrelated to the interest rate on the underlying security.
The Fund will enter into repurchase agreements only with banks and
other recognized financial institutions, such as securities dealers,
deemed creditworthy by the Adviser. The Fund's custodian or
subcustodian will take possession of the securities subject to
repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of
the security always equals or exceeds the repurchase price. Repurchase
agreements are subject to credit risks. Reverse Repurchase Agreements
Reverse repurchase agreements are repurchase agreements in which the
Fund is the seller (rather than the buyer) of the securities, and
agrees to repurchase them at an agreed upon time and price. A reverse
repurchase agreement may be viewed as a type of borrowing y the Fund.
Reverse repurchase agreements are subject to credit risks. In addition,
reverse repurchase agreements create leverage risks because the Fund
must repurchase the underlying security at a higher price, regardless
of the market value of the security at the time of repurchase. Delayed
Delivery Transactions Delayed delivery transactions, including when
issued transactions, are arrangements in which the Fund buys securities
for a set price, with payment and delivery of the securities scheduled
for a future time. During the period between purchase and settlement,
no payment is made by the Fund to the issuer and no interest accrues to
the Fund. The Fund records the transaction when it agrees to buy the
securities and reflects their value in determining the price of its
shares. Settlement dates may be a month or more after entering into
these transactions so that the market values of the securities bought
may vary from the purchase prices. Therefore, delayed delivery
transactions create interest rate risks for the Fund. Delayed delivery
transactions also involve credit risks in the event of a counterparty
default. Securities Lending The Fund may lend portfolio securities to
borrowers that the Adviser deems creditworthy. In return, the Fund
receives cash or liquid securities from the borrower as collateral. The
borrower must furnish additional collateral if the market value of the
loaned securities increases. Also, the borrower must pay the Fund the
equivalent of any dividends or interest received on the loaned
securities. The Fund will reinvest cash collateral in securities that
qualify as an acceptable investment for the Fund. However, the Fund
must pay interest to the borrower for the use of cash collateral. Loans
are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are
on loan, but it will terminate a loan in anticipation of any important
vote. The Fund may pay administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash collateral to a securities lending agent or broker. Securities
lending activities are subject to interest rate risks and credit risks.
Asset Coverage In order to secure its obligations in connection with
derivatives contracts or special transactions, the Fund will either own
the underlying assets, enter into an offsetting transaction or set
aside readily marketable securities with a value that equals or exceeds
the Fund's obligations. Unless the Fund has other readily marketable
assets to set aside, it cannot trade assets used to secure such
obligations without entering into an offsetting derivative contract or
terminating a special transaction. This may cause the Fund to miss
favorable trading opportunities or to realize losses on derivative
contracts or special transactions.
Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash. The
Fund may invest in mortgage backed securities primarily by investing in another
investment company (which is not available for general investment by the public)
that owns those securities and that is advised by an affiliate of the Adviser.
This other investment company is managed independently of the Fund and may incur
additional administrative expenses. Therefore, any such investment by the Fund
may be subject to duplicate expenses. However, the Adviser believes that the
benefits and efficiencies of this approach should outweigh the potential
additional expenses. The Fund may also invest in such securities directly.

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

o Mortgage backed securities generally compensate for greater prepayment risk
by paying a higher yield. The difference between the yield of a mortgage
backed security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security is
perceived to have an increased prepayment risk or perceived to have less
market demand. An increase in the spread will cause the price of the
security to decline.
o The Fund may have to reinvest the proceeds of mortgage prepayments in other
fixed income securities with lower interest rates, higher prepayment risks,
or other less favorable characteristics.
Liquidity Risks
o Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell
or buy a security at a favorable price or time. Consequently, the Fund may
have to accept a lower price to sell a security, sell other securities to
raise cash or give up an investment opportunity, any of which could have a
negative effect on the Fund's performance. Infrequent trading of securities
may also lead to an increase in their price volatility.
o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants to. If
this happens, the Fund will be required to continue to hold the security or
keep the position open, and the Fund could incur losses.
Risks Associated with Complex CMOs
o CMOs with complex or highly variable prepayment terms, such as companion
classes, IOs, POs, Inverse Floaters and residuals, generally entail greater
market, prepayment and liquidity risks than other mortgage backed
securities. For example, their prices are more volatile and their trading
market may be more limited.
Risks of Foreign Investing
o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United States.
Securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S.
investors.
o Foreign companies may not provide information (including financial
statements) as frequently or to as great an extent as companies in the
United States. Foreign companies may also receive less coverage than United
States companies by market analysts and the financial press. In addition,
foreign countries may lack uniform accounting, auditing and financial
reporting standards or regulatory requirements comparable to those
applicable to U.S. companies. These factors may prevent the Fund and its
Adviser from obtaining information concerning foreign companies that is as
frequent, extensive and reliable as the information available concerning
companies in the United States.
o Foreign countries may have restrictions on foreign ownership of securities
or may impose exchange controls, capital flow restrictions or repatriation
restrictions which could adversely affect the liquidity of the Fund's
investments.

Leverage Risks
o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.
o Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

FUNDAMENTAL INVESTMENT POLICIES
The Fund will invest primarily in a diversified portfolio of short and
medium-term high grade debt securities.

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.

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: during 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 not
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.

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 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.

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 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.

Investing in Restricted and Illiquid Securities

The Fund will not invest more than 15% of the value of its net assets
in illiquid securities including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable time
deposits and certain restricted securities not determined to be liquid
under criteria established by the Trustees.

During the fiscal year ended April 30, 1999, 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.

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."

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

for bonds and other fixed income securities, at the last sale price on
a national securities exchange, if available, otherwise, as determined by an
independent pricing service;

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

WHAT DO SHARES COST?

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

HOW IS THE FUND SOLD?

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

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

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

SUBACCOUNTING SERVICES

REDEMPTION IN KIND

MASSACHUSETTS PARTNERSHIP LAW

ACCOUNT AND SHARE INFORMATION

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

As of June 7, 1999, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Institutional Shares: Charles Schwab & Co. Inc.,
San Francisco, CA. owned 2,714,117 shares (11.77%); Community Savings FA,
Riviera Beach, FL. owned 1,734,785 shares (7.53%); and Milards & Co., c/o SEI
Trust Company, Oaks, PA. owned 1,237,012 shares (5.37%).

As of June 7, 1999, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Institutional Service Shares: Planmember
Services Corp. a/o City National Bank, Beverly Hills, CA. owned 1,077,314 shares
(38.25%); TRUCOJO Trust Company of St. Joseph, St. Joseph, MO. owned 611,314
shares (21.70%); and Planmember Services Corp. a/o Dai-Ichi Kangyo Bank, Los
Angeles, CA. owned 206,306 shares (7.32%).

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

TAX INFORMATION

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

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

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

<PAGE>

Name Aggregate Total
Birth Date Principal Occupations Compensation Compensation From
Address for Past Five Years From Trust
Position With Trust Trust and Fund Complex

John F. Donahue*+ Chief Executive Officer and Director or Trustee of the $0 $0 for the
Birth Date: July 28, 1924 Federated Fund Complex; Chairman and Director, Trust and
Federated Investors Tower Federated Investors, Inc.; Chairman and Trustee, 54 other investment
1001 Liberty Avenue Federated Investment Management Company; Chairman and companies
Pittsburgh, PA Director, Federated Investment Counseling, and in the Fund Complex
CHARMAN AND TRUSTEE Federated Global Investment Management Corp.; Chairman,
Passport Research, Ltd.
Thomas G. Bigley Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
Birth Date: February 3, 1934 Director, Member of Executive Committee, Children's Trust and
15 Old Timber Trail Hospital of Pittsburgh; formerly: Senior Partner, Ernst 54 other investment
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, Inc.; Director, companies
TRUSTEE Member of Executive Committee, University of Pittsburgh. in the Fund Complex

Nicholas Constantakis Director or Trustee of the Federated Fund Complex; $329.67 $47,958.02 for the
Birth Date: September 3, 1939 formerly: Partner, Andersen Worldwide SC. Trust and
175 Woodshire Drive 39 other investment
Pittsburgh, PA companies
TRUSTEE in the Fund Complex
John F. Cunningham++ Director or Trustee of some of the Federated Fund $0 $0 for the
Birth Date: March 5, 1943 Complex; Chairman, President and Chief Executive Trust and
353 El Brillo Way Officer, Cunningham & Co., Inc. ; Trustee Associate, 43 other investment
Palm Beach, FL Boston College; Director, EMC Corporation; formerly: companies
TRUSTEE Director, Redgate Communications. in the Fund Complex

John E. Murray, Jr., J.D., Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
S.J.D. President, Law Professor, Duquesne University; Trust and
Birth Date: December 20, 1932 Consulting Partner, Mollica & Murray. 54 other investment
President, Duquesne University companies
Pittsburgh, PA Previous Positions: Dean and Professor of Law, in the Fund Complex
TRUSTEE University of Pittsburgh School of Law; Dean and
Professor of Law, Villanova University School of Law.

Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; $1286.01 $113,860.22 for the
Birth Date: June 21, 1935 Public Relations/Marketing/Conference Planning. Trust and
4905 Bayard Street 54 other investment
Pittsburgh, PA Previous Positions: National Spokesperson, Aluminum companies
TRUSTEE Company of America; business owner. in the Fund Complex
Glen R. Johnson Trustee, Federated Investors, Inc.; staff member, $0 $0 for the
Birth Date: May 2, 1929 Federated Securities Corp. Trust and
Federated Investors Tower 8 other investment
1001 Liberty Avenue companies
Pittsburgh, PA in the Fund Complex
PRESIDENT
J. Christopher Donahue+ President or Executive Vice President of the Federated $0 $0 for the
Birth Date: April 11, 1949 Fund Complex; Director or Trustee of some of the Funds Trust and
Federated Investors Tower in the Federated Fund Complex; President and Director, 22 other investment
1001 Liberty Avenue Federated Investors, Inc.; President and Trustee, companies
Pittsburgh, PA Federated Investment Management Company; President and in the Fund Complex
EXECUTIVE VICE-PRESIDENT Director, Federated Investment Counseling and Federated

Global Investment Management Corp.; President,
Passport Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.

<PAGE>

Edward C. Gonzales Trustee or Director of some of the Funds in the $0 $0 for the
Birth Date: October 22, 1930 Federated Fund Complex; President, Executive Vice Trust and
Federated Investors Tower President and Treasurer of some of the Funds in the 1 other investment
1001 Liberty Avenue Federated Fund Complex; Vice Chairman, Federated company
Pittsburgh, PA Investors, Inc.; Vice President, Federated Investment in the Fund Complex
EXECUTIVE VICE-PRESIDENT Management Company and Federated Investment
Counseling, Federated Global Investment Management
Corp. and Passport Research, Ltd.; Executive Vice
President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company.

John W. McGonigle Executive Vice President and Secretary of the Federated $0 $0 for the
Birth Date: October 26, 1938 Fund Complex; Executive Vice President, Secretary, and Trust and
Federated Investors Tower Director, Federated Investors, Inc.; Trustee, Federated 54 other investment
1001 Liberty Avenue Investment Management Company; Director, Federated companies
Pittsburgh, PA Investment Counseling and Federated Global Investment in the Fund Complex
EXECUTIVE VICE-PRESIDENT AND Management Corp.; Director, Federated Services Company;
SECRETARY Director, Federated Securities Corp.

Joseph M. Balestrino Joseph M. Balestrino has been the Fund's portfolio $0 $0 for the
Birth Date: November 3, 1954 manager since January 1994. He is Vice President of the [Fund/Corporation/
Federated Investors Tower Trust. Mr. Balestrino joined Federated in 1986 and has Trust] and
1001 Liberty Avenue been a Senior Portfolio Manager and Senior Vice 3 other investment
Pittsburgh, PA President of the Fund's Adviser since 1998. He was a companies
VICE PRESIDENT Portfolio Manager and a Vice President of the Fund's in the Fund Complex
Adviser from 1995 to 1998. Mr. Balestrino served as a
Portfolio Manager and an Assistant Vice President of
the Adviser from 1993 to 1995. Mr. Balestrino is a
Chartered Financial Analyst and received his Master's
Degree in Urban and Regional Planning from the
University of Pittsburgh.
Randall S. Bauer Randall S. Bauer has been the Fund's portfolio manager $0 $0 for the
Birth Date: November 16, 1957 since October 1995. He is Vice President of the Trust. Trust and
Federated Investors Tower Mr. Bauer joined Federated in 1989 and has been a 1 other investment
1001 Liberty Avenue Portfolio Manager and a Vice President of the Fund's company
Pittsburgh, PA Adviser since 1994. Mr. Bauer is a Chartered Financial in the Fund Complex
VICE PRESIDENT Analyst and received his M.B.A. in Finance from

Pennsylvania State University.
</TABLE>

+ Mr. Donahue is the father of J. Christopher Donahue, Executive Vice-President
of the Trust.
++ Mr. Cunningham became a member of the Board of Trustees on January 1, 1999.
He did not earn any fees for serving the Fund Complex since these fees are
reported as of the end of the last calendar year. He did not receive any fees as
of the fiscal year end of the Trust.

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

The Adviser is a wholly owned subsidiary of Federated.

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

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

INDEPENDENT PUBLIC ACCOUNTANTs
Ernst & Young LLP is the independent public accountant for the Fund.

FEES PAID BY THE FUND FOR SERVICES
For the Year ended April 30
1999 1998 1997
Advisory Fee Earned $ $871,326 $957,140
Advisory Fee Reduction $ $73,876 $72,703

Brokerage Commissions $ 0 0

Administrative Fee $ $164,374 $180,791
12b-1 Fee
Institutional Service Shares $ ---- ----
Shareholder Services Fee
Institutional Shares $ ---- ----
Institutional Service Shares $ ---- ----
Fees are allocated among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder services fees, which are
borne only by the applicable class of Shares.

HOW DOES THE FUND MEASURE PERFORMANCE?

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

Total returns given for the one-year, five-year, ten-year and Start of
Performance periods ended April 30, 1999.

Yield given for the 30-Day period ended April 30, 1999.

30-Day Period 1 Year 5 Years 10 Years

Institutional Shares
Total Return
Yield
- --------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years Start of Performance on
January 24, 1992

Institutional Service
Shares
Total Return
Yield
- --------------------------------------------------------------------------------

<PAGE>

PERFORMANCE COMPARISONS
Advertising and sales literature may include:

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

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

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

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

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 NAV 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.

WHO IS FEDERATED INVESTORS, INC.?

Federated Funds overview

Corporate Bond Funds

Government Funds

Federated Clients Overview

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

Institutional Clients

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

Fisher, President, Institutional Sales Division, Federated Securities Corp.