FIXED INCOME SECURITIES INC, 485BPOS, 1995-07-11

FIXED INCOME SECURITIES INC
485BPOS, 1995-07-11

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1933 Act File No. 33-43472
1940 Act File No. 811-6447

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

Pre-Effective Amendment No.

Post-Effective Amendment No. 16 X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 17 X

FIXED INCOME SECURITIES, INC.

(Exact Name of Registrant as Specified in Charter)

Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)

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

John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
X on July 26, 1995 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

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

Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:

X filed the Notice required by that Rule on January 13, 1995; or
intends to file the Notice required by that Rule on or about January
13, 1995; or
during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.

CROSS-REFERENCE SHEET

This Amendment to the Registration Statement of FIXED INCOME
SECURITIES, INC.(the "Corporation"), which is comprised of three
portfolios: (1) Limited Term Fund, offering two separate classes of
shares, (a) Class A Shares and (b) Fortress Shares, (2) Limited Term
Municipal Fun, offering two separate classes of shares, (a) Class A
Shares and (b) Fortress Shares and (3) Strategic Income Fund, offering
four separate classes of shares, (a) Class A Shares, (b) Class B Shares,
(c) Class C Shares and (d) Fortress Shares, relates only to Strategic
Income Fund, and is comprised of the following:

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. Cover Page (1-3) Cover Page.
Item 2. Synopsis (1-3) Summary of Fund Expenses; (3)
Synopsis.
Item 3. Condensed Financial
Information (1-3) Financial Highlights; (1-3)
Performance Information.
Item 4. General Description of
Registrant (1-3) General Information;
[1(a),2(a) and 3] Liberty Family of
Funds; [1(b) and 3] Fortress
Investment Program; [1,2,3(d)]
Investment Information; (1-3)
Investment Objective; (1-3)
Investment Policies; (1-3)
Investment Limitations (3)
Investment Risks.

Item 5. Management of the Fund (1,2) Fixed Income Securities, Inc.
Information; (3) Fund Information;
(1,2) Management of the
Corporation; (3[a-c]) Management of
the Fund; [3(d)] Management of the
Corporation; [1(a),2(a)]
Distribution of Class A Shares;[3(a-
c)] Distribution of Shares;
[1(b),2(b) and 3(d)] Distribution
of Fortress Shares; [1,2,3(d)]
Distribution and Shareholder
Services Plans; [3(a-c)]
Distribution Plan and Shareholder
Services Agreement; (1-3)
Administration of the Fund; (1,2)
Expenses of the Fund.

Item 6. Capital Stock and Other
Securities (1-3) Dividends and Distributions;
(1-3) Shareholder Information; (1-
3) Voting Rights; (1-3) Tax
Information; (1-3) Federal Income
Tax; (1-3) Pennsylvania Corporate
and Personal Property Taxes; (2)
Other State and Local Taxes.

Item 7. Purchase of Securities Being
Offered (1-3) Net Asset Value; [1(b), 2(b)
and 3(d)] Investing in Fortress
Shares; [1(a), 2(a),3(a-c)]
Investing in Class A Shares; [3(a-
c] Investing in Class B Shares;
[3(a-c)] Investing in Class C
Shares; (1,2) Share Purchases; [3(a-
c)] How to Purchase Shares; (1,2)
Minimum Investment Required; (1,2)
What Shares Cost; [1, 3]
Eliminating the Sales Load;
Elimination of Contingent Deferred
Sales Charge;[5(a-c)]; (1-3)
Systematic Investment Program; (1-
3) Exchange Privilege; [1(b), 2(b)]
Exchanges for Shares of other
Funds; (1-3) Certificates and
Confirmations; (1) Retirement
Plans;[5(a-c)] Requirements for
Exchange, [5(a-c)] Tax
Consequences, and [5(a) and 5(a-c)]
Making an Exchange.

Item 8. Redemption or Repurchase [1(b), 2(b) and 5(d)] Redeeming
Fortress Shares; [1(a), 2(a) and
3(a-c)] Redeeming Class A Shares;
[5(a-c)] Redeeming Class B Shares;
[5(a-c)];[5{a-c)] Redeeming Class C
Shares; (1-3) Through a Financial
Institution; (1,2) Directly By
Mail; [5(a-c)] Purchasing Shares by
Wire; [5(a-c)] Purchasing Shares by
Check; (1,-3) Signatures; (1,2)
Receiving Payment; (1-3) Systematic
Withdrawal Program; [1(a) , 2(a),
5(a-c)] Purchases With Proceeds
from Redemptions of Unaffiliated
Investment Companies; (1-3)
Accounts With Low Balances; [1(b),
3(b), 5(a-c)] Contingent Deferred
Sales Charge.
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.

Item 10. Cover Page (1-3) Cover Page.
Item 11. Table of Contents (1-3) Table of Contents.
Item 12. General Information and
History (1-3) General Information About the
Fund.
Item 13. Investment Objectives and
Policies (1-3) Investment Objective and
Policies.
Item 14. Management of the Fund (1-3) Fixed Income Securities, Inc.
Management.
Item 15. Control Persons and Principal
Holders of Securities (1-3) Fund Ownership.
Item 16. Investment Advisory and Other
Services (1-3) Investment Advisory Services;
(1-3) Administrative Services;
(1,2) Distribution and Shareholder
Services Plans; [5(a-d)]
Distribution Plan and Shareholder
Services Agreement;
Item 17. Brokerage Allocation (1-3) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered (1-3) Purchasing Shares; (1-3)
Determining Net Asset Value; (1-3)
Redeeming Shares; (1-3) Exchange
Privilege.
Item 20. Tax Status (1-3) Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data (1-3) Total Return; (1-3) Yield;
(1-3) Performance Comparisons;
(2) Tax-Equivalent Yield.
Item 23. Financial Statements [1,2,3(d)] Filed in Part A.[3(a-c)]
Filed in Part B.

STRATEGIC INCOME FUND

(A PORTFOLIO OF FIXED INCOME SECURITIES, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS

The shares of Strategic Income Fund (the "Fund") offered by this prospectus
represent interests in the Fund, which is a diversified investment portfolio in
Fixed Income Securities, Inc. (the "Corporation"), an open-end, management
investment company (mutual fund).

The investment objective of the Fund is to seek a high level of current income.
The Fund invests in domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt obligations.

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

This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares and Class C Shares of the Fund. Keep
this prospectus for future reference.

SPECIAL RISKS

THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN LOWER-RATED CORPORATE DEBT
OBLIGATIONS, WHICH ARE COMMONLY REFERRED TO AS "JUNK BONDS." THESE LOWER-RATED
BONDS MAY BE MORE SUSCEPTIBLE TO REAL OR PERCEIVED ADVERSE ECONOMIC CONDITIONS
THAN INVESTMENT GRADE BONDS. THESE LOWER-RATED BONDS ARE REGARDED AS
PREDOMINANTLY SPECULATIVE WITH REGARD TO EACH ISSUER'S CONTINUING ABILITY TO
MAKE PRINCIPAL AND INTEREST PAYMENTS (I.E., THE BONDS ARE SUBJECT TO THE RISK OF
DEFAULT). IN ADDITION, THE SECONDARY TRADING MARKET FOR LOWER-RATED BONDS MAY BE
LESS LIQUID THAN THE MARKET FOR INVESTMENT GRADE BONDS. PURCHASERS SHOULD
CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE SHARES. SEE
THE SECTION OF THIS PROSPECTUS ENTITLED "SPECIAL RISKS."

The Fund has also filed a Combined Statement of Additional Information for Class
A Shares, Class B Shares, Class C Shares and Fortress Shares, dated July 26,
1995, with the Securities and Exchange Commission. The information contained in
the Combined Statement of Additional Information is incorporated by reference
into this prospectus. You may request a copy of the Combined Statement of
Additional Information, which is in paper form only, or a paper copy of this
prospectus, if you have received it electronically, free of charge by calling
1-800-235-4669. To obtain other information or make inquiries about the Fund,
contact your financial institution.

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

Prospectus dated July 26, 1995

- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------

TABLE OF CONTENTS

Summary of Fund Expenses...................................................... 1

Financial Highlights.......................................................... 4

Synopsis...................................................................... 6

Liberty Family of Funds....................................................... 7
Federated LifeTrackTM Program
(Class A Shares and Class C Shares)...................................... 8

Investment Information........................................................ 9
Investment Objective........................................................ 9
Investment Policies......................................................... 9
Investment Limitations......................................................21

Net Asset Value...............................................................22

Investing in the Fund.........................................................22

How to Purchase Shares........................................................23
Special Purchase Features...................................................27

How to Redeem Shares..........................................................30
Special Redemption Features.................................................31
Account and Share Information...............................................33

Fund Information..............................................................34
Administration of the Fund..................................................37

Shareholder Information.......................................................38

Tax Information...............................................................39
Federal Income Tax..........................................................39

Performance Information.......................................................40

Other Classes of Shares.......................................................40

Appendix......................................................................41

Addresses.....................................................................44

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- - -------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES

STRATEGIC INCOME FUND

<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................ 4.50%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)..... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)......................... None
Exchange Fee............................................................................... None

ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)........................................................... 0.00%
12b-1 Fee.................................................................................. None
Total Other Expenses (after expense reimbursement)......................................... 1.35%
Shareholder Services Fee...................................................... 0.25%
Total Class A Shares Operating Expenses(3)........................................ 1.35%
</TABLE>

(1) Class A Shares purchased under a periodic special offering with the proceeds
of a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase.

(2) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.85%.

(3) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Class A Shares operating expenses were 0.25% for the fiscal year ended November
30, 1994 and would have been 9.12% absent the voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN CLASS A SHARES" AND "FUND
INFORMATION." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- - -------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period................. $ 63 $86
</TABLE>

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

- - ------------------------------------------------------
- - ------------------------------------------------------

SUMMARY OF FUND EXPENSES

STRATEGIC INCOME FUND

<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)..................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(2)............................................................... 0.00%
12b-1 Fee...................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)............................................. 1.35%
Shareholder Services Fee.......................................................... 0.25%
Total Class B Shares Operating Expenses(3)(4)......................................... 2.10%
</TABLE>

(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred Sales
Charge").

(2) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver of the management fee. The adviser can terminate this
anticipated voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.85%.

(3)Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.

(4) The total Class B Shares operating expenses are estimated to be 9.87% absent
the anticipated voluntary waiver of the management fee and the anticipated
voluntary reimbursement of certain other operating expenses.

* Total Class B Shares operating expenses are estimated based on average
expenses expected to be incurred during the period ending November 30, 1995.
During the course of this period, expenses may be more or less than the average
amount shown.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS B SHARES" AND "FUND INFORMATION."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

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

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- - ------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period............................. $ 78 $ 109
You would pay the following expenses on the same investment, assuming no
redemption......................................................................... $ 21 $ 66
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE CLASS B SHARES' FISCAL YEAR ENDING
NOVEMBER 30, 1995.

- - ------------------------------------------------------
- - ------------------------------------------------------

SUMMARY OF FUND EXPENSES

STRATEGIC INCOME FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................................................... None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)(1)..................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................. None
Exchange Fee................................................................................... None

ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2)............................................................... 0.00%
12b-1 Fee...................................................................................... 0.75%
Total Other Expenses (after expense reimbursement)............................................. 1.35%
Shareholder Services Fee.......................................................... 0.25%
Total Class C Shares Operating Expenses(3)............................................ 2.10%
</TABLE>

(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of Shares redeemed within one year of
their purchase date. For a more complete description, see "Contingent Deferred
Sales Charge."

(3) The total Class C Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending November 30, 1995. The total
Class C Shares operating expenses were 1.00% for the fiscal year ended November
30, 1994, and would have been 9.87% absent the voluntary waiver of the
management fee and the voluntary reimbursement of certain other operating
expenses.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN CLASS C SHARES" AND "FUND INFORMATION."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

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

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- - ------------------------------------------------------------------------------------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period............................. $ 32 $66
You would pay the following expenses on the same investment, assuming no
redemption......................................................................... $ 21 $66
</TABLE>

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

- - ------------------------------------------------------
- - ------------------------------------------------------

FINANCIAL HIGHLIGHTS--CLASS A SHARES

STRATEGIC INCOME FUND
- - --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated January 13, 1995, on the Fund's
financial statements and financial highlights for the year ended November 30,
1994, is included in the Statement of Additional Information.

<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- - -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- - -------------------------------------------------------------------------------------
Net investment income 0.45
- - -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign currency (0.45)
- - ------------------------------------------------------------------------------------- --------
Total from investment operations 0.00
- - -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- - -------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)
- - ------------------------------------------------------------------------------------- --------
Distributions in excess of net investment income (a) (0.01)
- - ------------------------------------------------------------------------------------- --------
Total distributions (0.46)
- - ------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.54
- - ------------------------------------------------------------------------------------- --------
TOTAL RETURN** 0.05%
- - -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- - -------------------------------------------------------------------------------------
Expenses 0.25%(c)
- - -------------------------------------------------------------------------------------
Net investment income 8.38%(c)
- - -------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- - -------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- - -------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,366
- - -------------------------------------------------------------------------------------
Portfolio turnover rate 34%
- - -------------------------------------------------------------------------------------
</TABLE>

* For the period from May 3, 1994 (date of initial public investment) to
November 30, 1994.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

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

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended November 30, 1994, which can be obtained
free of charge.

- - ------------------------------------------------------
- - ------------------------------------------------------

FINANCIAL HIGHLIGHTS--CLASS C SHARES

STRATEGIC INCOME FUND
- - --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1994*
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- - -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- - -------------------------------------------------------------------------------------
Net investment income 0.40
- - -------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign currency (0.44)
- - ------------------------------------------------------------------------------------- --------
Total from investment operations (0.04)
- - -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- - -------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.40)
- - -------------------------------------------------------------------------------------
Distributions in excess of net investment income (a) (0.02)
- - ------------------------------------------------------------------------------------- --------
Total distributions (0.42)
- - ------------------------------------------------------------------------------------- --------
NET ASSET VALUE, END OF PERIOD $ 9.54
- - ------------------------------------------------------------------------------------- --------
TOTAL RETURN** (0.41%)
- - -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- - -------------------------------------------------------------------------------------
Expenses 1.00%(c)
- - -------------------------------------------------------------------------------------
Net investment income 7.99%(c)
- - -------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 8.87%(c)
- - -------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- - -------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,190
- - -------------------------------------------------------------------------------------
Portfolio turnover rate 34%
- - -------------------------------------------------------------------------------------
</TABLE>

* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.

** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.

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

Further information about the Fund's performance is contained in the Fund's
annual report for the fiscal year ended November 30, 1994, which can be obtained
free of charge.

- - ------------------------------------------------------

SYNOPSIS

The Corporation was established under the laws of the State of Maryland on
October 15, 1991. The Corporation's address is Liberty Center, Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779. The Articles of
Incorporation permit the Corporation to offer separate series of shares
representing interests in separate portfolios of securities. As of the date of
this prospectus, the Board of Directors ("Directors") has established three
separate portfolios: Strategic Income Fund, Limited Term Fund and Limited Term
Municipal Fund. With respect to the Fund, the Directors have established four
classes of shares, known as Class A Shares, Class B Shares, Class C Shares and
Fortress Shares. This prospectus relates only to the Class A Shares, Class B
Shares and Class C Shares of the Fund (individually and collectively as the
context requires, "Shares").

Shares of the Fund are designed for investors seeking high current income
through a professionally managed, diversified portfolio investing primarily in
domestic and corporate debt obligations, U.S. government securities and foreign
government and corporate debt obligations.

For information on how to purchase the Shares offered by this prospectus, please
refer to "How to Purchase Shares." The minimum initial investment for Class A
Shares is $500. The minimum initial investment for Class B Shares and Class C
Shares is $1500. However, the minimum initial investment for a retirement
account in any class is $50. Subsequent investments in any class must be in
amounts of at least $100, except for retirement plans which must be in amounts
of at least $50.

Class A Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see "How
to Redeem Shares."

Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How to Redeem Shares."

Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first full 12 months
following purchase. See "How to Redeem Shares."

In addition, the Fund also pays a shareholder services fee at an annual rate not
to exceed 0.25% of the average daily net assets.

Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as principal underwriter ("Federated Funds") can be found under "Exchange
Privilege."

Federated Advisers is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.

Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including investing in lower-rated corporate debt obligations, which are
commonly referred to as "junk bonds." These risks are described under
"Investment Policies."

- - ------------------------------------------------------

LIBERTY FAMILY OF FUNDS

This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:

- - - American Leaders Fund, providing growth of capital and income through high
quality stocks;

- - - Capital Growth Fund, providing appreciation of capital primarily through
equity securities;

- - - Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;

- - - Federated Bond Fund, providing current income through high-quality corporate
debt;

- - - Federated Growth Strategies Fund, providing appreciation of capital primarily
through equity securities of companies with above-average growth in earnings
and dividends, or of companies where significant fundamental changes are
taking place;

- - - Federated Small Cap Strategies Fund, providing capital appreciation primarily
through common stocks of small and medium-sized companies;

- - - International Equity Fund, providing long-term capital growth and income
through international securities;

- - - International Income Fund, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;

- - - Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;

- - - Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated corporate bonds;

- - - Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;

- - - Liberty U.S. Government Money Market Trust, providing current income
consistent with stability of principal through high-quality U.S. government
securities;

- - - Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;

- - - Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value through investment grade securities;

- - - Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;

- - - Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the state
of Michigan and Michigan municipalities, primarily through Michigan municipal
securities;

- - - Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;

- - - Tax-Free Instruments Trust, providing current income consistent with stability
of principal and exempt from federal income tax, through

high-quality, short-term municipal securities; and

- - - World Utility Fund, providing total return through securities issued by
domestic and foreign companies in the utilities industries.

Prospectuses for these funds are available by writing to Federated Securities
Corp.

Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.

The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to meet the
challenges of changing market conditions by offering convenient exchange
privileges which give access to various investment vehicles and by providing the
investment services of proven, professional investment advisers.

Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in and exchanges between the
Class A Shares of any funds in the Liberty Family of Funds, as long as they
maintain a $500 balance in one of the Liberty Funds.

FEDERATED LIFETRACK(TM) PROGRAM (CLASS A SHARES AND CLASS C SHARES)

The Fund is also a member of the Federated LifeTrack(TM) Program sold through
financial representatives. Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and administrative services. Additional
fees are charged to participating plans for these services. As part of the
Federated LifeTrack(TM) Program, exchanges may readily be made between
investment options selected by the employer or a plan trustee.

Other funds participating in the Federated LifeTrack(TM) Program are: American
Leaders Fund, Inc., Capital Growth Fund, Capital Preservation Fund, Federated
Growth Strategies Fund, Federated Small Cap Strategies Fund, Fund for U.S.
Government Securities, Inc., International Equity Fund, International Income
Fund, Liberty Equity Income Fund, Inc., Liberty High Income Bond Fund, Inc.,
Liberty Utility Fund, Inc., Prime Cash Series, Stock and Bond Fund, Inc. and
World Utility Fund.

With respect to Class A Shares, no sales load is imposed on purchases made by
qualified retirement plans with over $1 million invested in funds participating
in the Federated LifeTrack(TM) Program.

- - ------------------------------------------------------

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to seek a high level of current income.

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

INVESTMENT POLICIES

The Fund pursues it investment objective by investing in a diversified portfolio
primarily consisting of domestic corporate debt obligations, U.S. government
securities, and foreign government and corporate debt obligations. Under normal
circumstances, the Fund's assets will be invested in each of these three
sectors. However, the Fund may from time to time invest up to 100% of its total
assets in any one sector, if, in the judgment of the investment adviser, the
Fund has the opportunity of seeking a high level of current income without undue
risk to principal. Accordingly, the Fund's investments should be considered
speculative. Distributable income will fluctuate as the Fund shifts assets among
the three sectors.

There will be no limit to the weighted average maturity of the portfolio. It
will generally be of longer duration. Duration is a commonly used measure of the
potential volatility of the price of a debt security, or the aggregate market
value of a portfolio of debt securities, prior to maturity. Securities with
longer durations generally have more volatile prices than securities of
comparable quality with shorter durations.

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

ACCEPTABLE INVESTMENTS

The Fund invests primarily in a professionally managed, diversified portfolio
consisting of domestic corporate debt obligations, U.S. government securities,
and foreign government and corporate debt obligations. The Fund may also invest
in debt securities issued by domestic and foreign utilities, as well as money
market instruments and other temporary investments.

The securities in which the Fund invests principally are:

- - - securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities;

- - - domestic corporate debt obligations, some of which may include equity
features; and

- - - debt obligations issued by foreign governments and corporations.

The allocation of investments across these three principal types of securities
at any given time is based upon the adviser's estimate of expected performance
and risk of each type of investment. In order to benefit from the typical low
correlation of these three types of securities, the Fund will typically invest a
portion of its assets in each category. However, from time to time, the adviser
may change the allocation based upon its evaluation of the marketplace.

The Fund may invest in debt securities of any maturity. The prices of fixed
income securities fluctuate inversely to the direction of interest rates.

U.S. GOVERNMENT SECURITIES

The U.S. government securities in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The U.S.
government securities in which the Fund invests principally are:

- - - direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes
and bonds; and

- - - obligations of U.S. government agencies or instrumentalities, such as Federal
Home Loan Banks; Federal National Mortgage Association; Government National
Mortgage Association; Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Tennessee Valley
Authority; Export-Import Bank of the United States; Commodity Credit
Corporation; Federal Financing Bank; Student Loan Marketing Association; or
Federal Home Loan Mortgage Corporation.

The government securities in which the Fund may invest are backed in a variety
of ways by the U.S. government or its agencies or instrumentalities. Some of
these securities, such as Government National Mortgage Association ("GNMA")
mortgage-backed securities, are backed by the full faith and credit of the U.S.
government. Other securities, such as obligations of the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"), are backed by the credit of the agency or instrumentality issuing the
obligations but not the full faith and credit of the U.S. government. No
assurances can be given that the U.S. government will provide financial support
to these other agencies or instrumentalities, because it is not obligated to do
so.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans on real
property. The mortgage-backed securities in which the Fund may invest may be
issued by an agency of the U.S. government, typically, GNMA, FNMA or FHLMC.

COLLATERALIZED MORTGAGE
OBLIGATIONS AND MULTICLASS
PASS-THROUGH SECURITIES

Collateralized mortgage obligations ("CMOs") are debt obligations collateralized
by mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC certificates, but also may be
collateralized by whole loans or private pass-through securities (such
collateral being called "Mortgage Assets"). Multiclass pass-through securities
are equity interests in a trust composed of Mortgage Assets. Payments of
principal of and interest on the Mortgage Assets, and any reinvestment income,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to be treated as a real
estate mortgage investment conduit, which has special tax attributes.

In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating rate of interest and has a stated maturity or final distribution
date. Principal prepayment on the Mortgage Assets may cause the CMOs to be
retired substantially ear-

lier than their stated maturities or final distribution dates. Interest is paid
or accrued on all classes of the CMOs on a monthly, quarterly or semi-annual
basis. The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a series of a CMO in innumerable ways. In one
structure, payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes of a CMO in the order of the
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.

CMOs that include a class bearing a floating rate of interest also may include a
class whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
classes of a CMO and the yield thereon, as well as the value thereof, will
fluctuate in inverse proportion to changes in the index on which a interest rate
adjustments are based. As a result, the yield on an inverse floater class of a
CMO will generally increase when market yields (as reflected by the index)
decrease and decrease when market yields increase. The extent of the volatility
of inverse floaters depends on the extent of anticipated changes in market rates
of interest. Generally, inverse floaters provide for interest rate adjustments
based upon a multiple of the specified interest index, which further increases
their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.

The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or distribution date but
may be retired earlier. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after interest
has been paid to all classes.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")

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

CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES

Mortgage-backed securities have yield and maturity characteristics corresponding
to the underlying mortgages. Distributions to holders of mortgage-backed
securities include both interest and principal of the underlying mortgages and
any prepayments of principal due to prepayment, refinancing, or foreclosure of
the underlying mortgages. Although maturities of the underlying mortgage loans
may range up to

30 years, amortization and prepayments substantially shorten the effective
maturities of mortgage-backed securities. Due to these features, mortgage-backed
securities are less effective as a means of "locking in" attractive long-term
interest rates than fixed-income securities which pay only a stated amount of
interest until maturity, when the entire principal amount is returned. This is
caused by the need to reinvest at lower interest rates both distributions of
principal generally and significant prepayments which become more likely as
mortgage interest rates decline. Since comparatively high interest rates cannot
be effectively "locked in," mortgage-backed securities may have less potential
for capital appreciation during periods of declining interest rates than other
non-callable fixed-income government securities of comparable stated maturities.
However, mortgage-backed securities may experience less pronounced declines in
value during periods of rising interest rates.

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

Some of the CMOs purchased by the Fund may represent an interest solely in the
principal repayments or solely in the interest payments on mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
these securities may be more interest-rate sensitive than other securities
purchased by the Fund. If prevailing interest rates fall below the level at
which the securities were issued, there may be substantial prepayments on the
underlying mortgages, leading to the relatively early prepayments of
principal-only securities and a reduction in the amount of payment made to
holders of interest-only securities. It is possible that the Fund might not
recover its original investment in interest-only securities if there are
substantial prepayments on the underlying mortgages. Therefore, interest-only
securities generally increase in value as interest rates rise and decrease in
value as interest rates fall, counter to changes in value experienced by most
fixed-income securities. The Fund's adviser intends to use this characteristic
of interest-only securities to reduce the effects of interest rate changes on
the value of the Fund's portfolio, while continuing to pursue current income.

CORPORATE BONDS AND OTHER FIXED INCOME OBLIGATIONS

The Fund may invest in both investment grade and non-investment grade
(lower-rated) bonds (which may be denominated in U.S. dollars or in non-U.S.
currencies) and other fixed-income obligations issued by domestic and foreign
corporations and other private issuers. There are no minimum rating requirements
for these investments by the Fund. The Fund's investments may include U.S.
dollar-denominated debt obligations known as "Brady Bonds," which are issued for
the exchange of existing commercial bank loans to foreign entities for new
obligations that are generally collateralized by zero coupon Treasury securities
having the same maturity. From time to time, the Fund's portfolio may consist
primarily of lower-rated (i.e., rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's"), or BB or lower by Standard & Poor's Ratings Group ("Standard &
Poor's") or Fitch Investors Service, Inc. ("Fitch")) corporate debt obligations,
which are commonly referred to as "junk bonds." A description of the rating
categories is contained in the Appendix to this Prospectus. Certain fixed-income
obligations in which the Fund invests may, for example, invest in unit

offerings that combine fixed-income securities and common stock equivalents such
as warrants, rights and options. It is anticipated that the majority of the
value attributable to the unit will relate to its fixed-income component.

FLOATING RATE CORPORATE DEBT OBLIGATIONS

The Fund expects to invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate securities are generally
offered at an initial interest rate which is at or above prevailing market
rates. The interest rate paid on these securities is then reset periodically
(commonly, every 90 days) to an increment over some predetermined interest rate
index. Commonly utilized indices include the three-month Treasury bill rate, the
180-day Treasury bill rate, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a bank, the commercial paper rates, or
the longer-term rates on U.S. Treasury securities.

FIXED RATE CORPORATE DEBT OBLIGATIONS

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

PARTICIPATION INTERESTS

The Fund may acquire participation interests in senior, fully secured floating
rate loans that are made primarily to U.S. companies. The Fund's investments in
participation interests are subject to its limitation on investments in illiquid
securities. The Fund may purchase only those participation interests that mature
in one year or less, or, if maturing in more than one year, have a floating rate
that is automatically adjusted at least once each year according to a specified
rate for such investments, such as a published interest rate or interest rate
index. Participation interests are primarily dependent upon the creditworthiness
of the borrower for payment of interest and principal. Such borrowers may have
difficulty making payments and may have senior securities rated as low as C by
Moody's, or D by Standard & Poor's or Fitch. A description of the rating
categories is contained in the Appendix to this Prospectus.

PREFERRED STOCKS

Preferred stock, unlike common stock, offers a stated dividend rate payable from
the issuer's earnings. Preferred stock dividends may be cumulative or
non-cumulative, participating, or auction rate. If interest rates rise, the
fixed dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as call/redemption provisions prior to maturity, a negative
feature when interest rates decline.

CONVERTIBLE SECURITIES

A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible

security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics, such as (a) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (b) a lesser
degree of fluctuation in value than the underlying stock since they have fixed
income characteristics, and (c) the potential for capital appreciation if the
market price of the underlying common stock increases.

The Fund has no current intention of converting any convertible securities it
may own into equity securities or holding them as an equity investment upon
conversion. A convertible security might be subject to redemption at the option
of the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for redemption,
the Fund may be required to permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party.

NON-GOVERNMENT MORTGAGE-BACKED SECURITIES

Non-government mortgage-backed securities in which the Fund may invest include:

- - - privately issued securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by
an agency or instrumentality of the U.S. government;

- - - privately issued securities which are collateralized by pools of mortgages in
which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or

- - - other privately issued securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and
interest is supported by the credit of an agency or instrumentality of the
U.S. government.

ASSET-BACKED SECURITIES

The Fund may invest in asset-backed securities including, but not limited to,
interests in pools of receivables, such as credit card and accounts receivable
and motor vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government guarantee, are structurally
similar to CMOs and mortgage pass-through securities, which are described above.
However, non-mortgage related asset-backed securities present certain risks that
are not presented by mortgage securities, primarily because these securities do
not have the benefit of the same security interest in the related collateral.
Credit card receivables, for example, are generally unsecured, while the trustee
of asset-backed securities backed by automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.

ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES

The Fund may invest in zero coupon, pay-in-kind and delayed interest securities
issued by corporations. Corporate zero coupon securities are: (i) notes or
debentures which do not pay current interest and are issued at substantial
discounts from par value, or (ii) notes or debentures that pay no current
interest until a stated date one or more years into the future, after which the
issuer is obligated to pay interest until maturity, usually at a higher rate
than if interest

were payable from the date of issuance. Pay-in-kind securities pay interest
through the issuance to holders of additional securities and delayed interest
securities do not pay interest for a specified period. Because values of
securities of this type are subject to greater fluctuations than are the values
of securities that distribute income regularly, they may be more speculative
than such securities.

SPECIAL RISKS

From time to time, the Fund's portfolio may consist primarily of lower-rated
(i.e., rated Ba or lower by Moody's or BB or lower by Standard & Poor's or
Fitch) corporate debt obligations, which are commonly referred to as "junk
bonds." A description of the rating categories is contained in the Appendix to
this Prospectus. Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk associated with these
investments. (For example, securities rated in the lowest category have been
unable to satisfy their obligations under the bond indenture.) These lower-rated
bonds may be more susceptible to real or perceived adverse economic conditions
than investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing ability to
make principal and interest payments. In addition, the secondary trading market
for lower-rated bonds may be less liquid than the market for investment grade
bonds. As a result of these factors, lower-rated securities tend to have more
price volatility and carry more risk to principal than higher-rated securities.
The Fund's investment adviser will endeavor to limit these risks through
diversifying the portfolio and through careful credit analysis of individual
issuers. Purchasers should carefully assess the risks associated with an
investment in the Fund.

Many corporate debt obligations, including many lower-rated bonds, permit the
issuers to call the security and thereby redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond which is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at lower interest rates, thus
reducing income to the Fund.

<TABLE>
<CAPTION>
AS A PERCENTAGE
OF TOTAL MARKET
VALUE OF
SECURITY
HOLDINGS AS OF
NOVEMBER 30,
CREDIT RATING 1994
- - --------------------------- ---------------
<S> <C>
BB.................... 5.0%
B..................... 26.2%
CCC................... 2.7%
-----
33.9%
===============
</TABLE>

CORPORATE EQUITY SECURITIES

The Fund may also invest in equity securities, including common stocks, warrants
and rights issued by corporations in any industry (industrial, financial or
utility) which may be denominated in U.S. dollars or foreign currencies.

WARRANTS AND RIGHTS

The Fund may invest up to 5% of its total assets in warrants and rights,
including but not limited to warrants or rights (i) acquired as part of a unit
or attached to other securities purchased by the Fund, or (ii) acquired as part
of a distribution from the issuer.

FOREIGN SECURITIES

The Fund may invest in foreign securities, including foreign securities not
publicly traded in the United States. No more than 25% of the Fund's total
assets, at the time of purchase, will be invested in government securities of
any one foreign country. The Fund has no other restriction on the amount of its
assets that may be

invested in foreign securities and may purchase securities issued in any
country, developed or undeveloped. There are no minimum rating requirements for
the foreign securities in which the Fund invests.

The percentage of the Fund's assets that will be allocated to foreign securities
will vary depending on the relative yields of foreign and U.S. securities, the
economies of foreign countries, the condition of such countries' financial
markets, the interest rate climate of such countries and the relationship of
such countries' currency to the U.S. dollar. These factors are judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data.

RISKS

Investments in foreign securities involve special risks that differ from those
associated with investments in domestic securities. The risks associated with
investments in foreign securities apply to securities issued by foreign
corporations and sovereign governments. These risks relate to political and
economic developments abroad, as well as those that result from the differences
between the regulation of domestic securities and issuers and foreign securities
and issuers. These risks may include, but are not limited to, expropriation,
confiscatory taxation, currency fluctuations, withholding taxes on interest,
limitations on the use or transfer of assets, political or social instability
and adverse diplomatic developments. It may also be more difficult to enforce
contractual obligations or obtain court judgments abroad than would be the case
in the United States because of differences in the legal systems. If the issuer
of the debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt, the Fund may have limited legal recourse
in the event of default. Moreover, individual foreign economies may differ
favorably or unfavorably from the domestic economy in such respect as growth of
gross national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.

Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issuers;
the likelihood that securities of foreign issuers may be less liquid or more
volatile; generally high foreign brokerage commissions; and unreliable mail
service between countries.

To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment income
and capital gain, if any, to be distributed to shareholders by the Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of the
Fund's assets denominated in that currency will increase; correspondingly, if
the value of a foreign currency declines against the U.S. dollar, the value of
the Fund's assets denominated in that currency will decrease.

The risks noted above often are heightened for investments in emerging or
developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small

number of securities. Prices on these exchanges tend to be volatile and, in the
past, securities in these countries have offered greater potential for gain (as
well as loss) than securities of companies located in developed countries.
Further, investments by foreign investors are subject to a variety of
restrictions in many emerging or developing countries. These restrictions may
take the form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the type of companies in which
foreigners may invest. Additional restrictions may be imposed at any time by
these and other countries in which a fund invests. In addition, the repatriation
of both investment income and capital from several foreign countries is
restricted and controlled under certain regulations, including in some cases,
the need for certain government consents. Although these restrictions may in the
future make it undesirable to invest in emerging or developing countries, the
Fund's adviser does not believe that any current repatriation restrictions would
affect its decision to invest in such countries.

FOREIGN CURRENCY TRANSACTIONS

The Fund will enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.

The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency transactions may be used by the Fund to protect against a
decline in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.

FORWARD FOREIGN CURRENCY
EXCHANGE CONTRACTS.

A forward foreign currency exchange contract (a "forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.

Generally, no commission charges or deposits are involved. At the time the Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's records and
are maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than six months. The Fund will generally
enter into a forward contract to provide the proper currency to settle a
securities transaction at the time the transaction occurs (the "trade date").
The period between the trade date and settlement date will vary between 24 hours
and 30 days, depending upon local custom.

The Fund may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts and
the constantly changing value of the securities involved. Although the adviser
will consider the likelihood of changes in currency values when making
investment decisions, the adviser believes that it is important to be able to
enter into forward

contracts when it believes the interests of the Fund will be served.

TEMPORARY INVESTMENTS

The Fund may invest temporarily in debt obligations maturing in one year or less
during times of unusual market conditions for defensive purposes and to maintain
liquidity in anticipation of favorable investment opportunities.

The Fund's temporary investments may include:

- - - obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities;

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

- - - domestic and foreign issues of commercial paper or other corporate debt
obligations;

- - - obligations of the types listed above, but not satisfying the standards set
forth above, if they are (a) subject to repurchase agreements or (b)
guaranteed as to principal and interest by a domestic or foreign bank having
total assets in excess of $1 billion, by a corporation whose commercial paper
may be purchased by the Fund, or by a foreign government having an existing
debt security rated at least Baa by Moody's or BBB by Standard & Poor's or
Fitch; and

- - - other short-term investments of a type which the Adviser determines presents
minimal credit risks and which are of "high quality" as determined by a
nationally recognized statistical rating organization, or, in the case of an
instrument that is not rated, of comparable quality in the judgment of the
Adviser.

REPURCHASE AGREEMENTS

Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.

OPTIONS

The Fund may deal in options on foreign currencies, foreign currency futures,
securities, and securities indices, which options may be listed for trading on a
national securities exchange or traded over-the-counter. The Fund will use
options only to manage interest rate and currency risks. The Fund may write
covered call options to generate income. The Fund may write covered call options
and secured put options on up to 25% of its net assets and may purchase put and
call options provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.

A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow and the
writer of a secured option invests an amount not less than the exer-

cise price in eligible assets to the extent that it is obligated as a writer. 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. In writing puts, there is a risk that the Fund
may be required to take delivery of the underlying asset at a disadvantageous
price.

Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the Fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer, OTC options, which may not be continuously liquid, are
available for a greater variety of assets, and a wider range of expiration dates
and exercise prices, than are exchange traded options.

FINANCIAL FUTURES AND OPTIONS ON FINANCIAL FUTURES

The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.

The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchasers of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged.

RISKS

When the Fund uses financial futures and options on financial futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contracts and any related
options to react differently than the portfolio securities to market changes. In
addition, the Adviser could be incorrect in its expectations about the direction
or extent of market factors such as interest rate movements. In these events,
the Fund may lose money on the futures contracts or options. It is not certain
that a secondary market for positions in futures contracts or for options will
exist at all times. Although the Adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary market
on an exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to estab-

lish and close out futures and options positions depends on this secondary
market.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of other investment companies, but it will
not own more than 3% of the total outstanding voting securities of any such
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in investment
companies in general. To the extent that the Fund invests in securities issued
by other investment companies, the Fund will indirectly bear its proportionate
share of any fees and expenses paid by such companies in addition to the fees
and expenses payable directly by the Fund. The Fund will purchase securities of
closed-end investment companies only in open market transactions involving only
customary brokers' commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization or
acquisition of Fund assets.

RESTRICTED AND ILLIQUID
SECURITIES

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

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

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

LENDING OF PORTFOLIO SECURITIES

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

There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may,

therefore, lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for bankruptcy
or become insolvent, disposition of the securities may be delayed pending court
action.

PORTFOLIO TURNOVER

The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. During periods of falling interest rates, the
values of outstanding fixed-income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities. Because the Fund will actively use trading to
benefit from short-term yield disparities among different issues of fixed-income
securities or otherwise to increase its income, the Fund may be subject to a
greater degree of portfolio turnover than might be expected from investment
companies which invest substantially all of their assets on a long-term basis.
The Fund cannot accurately predict its portfolio turnover rate, but it is
anticipated that its annual turnover rate generally will not exceed 200%
(excluding turnover of securities having a maturity of one year or less).

Higher portfolio turnover results in increased Fund expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities, and results in the
acceleration of realization of capital gains or losses for tax purposes. To the
extent that increased portfolio turnover results in sales of securities held
less than three months, the Fund's ability to qualify as a "regulated investment
company" under the Internal Revenue Code may be affected.

INVESTMENT LIMITATIONS

The Fund will not:

- - - borrow money directly or through reverse repurchase agreements or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 15% of the value
of those assets to secure such borrowings;

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

- - - 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.

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

The Fund will not:

- - - invest more than 10% of the value of its total assets in securities subject to
restrictions resale under the Securities Act of 1933 except for certain
restricted securities that meet criteria for liquidity as established by the
Directors; or

- - - invest more than 15% of the value of its net assets in securities that are not
readily marketable or that are otherwise considered illiquid, including
repurchase agreements providing for settlement in more than seven days after
notice.

- - ------------------------------------------------------

NET ASSET VALUE

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

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

- - ------------------------------------------------------

INVESTING IN THE FUND

This prospectus offers investors three classes of Shares that carry sales loads
and contingent deferred sales charges in different forms and amounts and which
bear different levels of expenses.

CLASS A SHARES

An investor who purchases Class A Shares pays a maximum sales load of 4.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales loads. See "Reducing the
Sales Load-- Class A Shares." Class A Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.

CLASS C SHARES

Class C Shares are sold without an initial sales load, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.

- - ------------------------------------------------------

HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)

In connection with any sale, Federated Securities Corp. may from time to time
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales load as follows:

<TABLE>
<CAPTION>
SALES LOAD
SALES LOAD AS AS A DEALER
A PERCENTAGE PERCENTAGE CONCESSION AS
OF OF NET A PERCENTAGE
AMOUNT OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
- - --------------- -------------- ---------- --------------
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than $1
million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "Dealer Concession."

No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser, or
retirement plan may be charged an additional service fee by the institution.
Additionally, no sales load is imposed for Class A Shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee or fees for
services.

No sales load is imposed on purchases made by retirement plans with over $1
million invested in funds available through the Federated LifeTrack(TM) Program.

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.

The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.

REDUCING OR ELIMINATING
THE SALES LOAD

The sales load can be reduced or eliminated on the purchase of Class A Shares
through:

- - - quantity discounts and accumulated purchases;

- - - concurrent purchases;

- - - signing a 13-month letter of intent;

- - - using the reinvestment privilege; or

- - - purchases with proceeds from redemptions of unaffiliated investment company
shares.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.

If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.

To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.

CONCURRENT PURCHASES

For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $70,000 in this Fund, the sales
load would be reduced.

To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.

LETTER OF INTENT

If a shareholder intends to purchase at least $100,000 of shares in the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 4.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is completed.

The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If Class A Shares in the Fund have been redeemed, the shareholder has a right,
within 120 days, to reinvest the redemption proceeds at the next-determined net
asset value without any sales load. Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution of the
reinvestment in order to eliminate a sales load. If the shareholder redeems his
Class A Shares in the Fund, there may be tax consequences.

PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES

Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or redeemed with a sales load or commission and were
not distributed by Federated Securities Corp. The purchase must be made within
60 days of the redemption, and Federated Securities Corp. must be notified by
the investor in writing, or by his financial institution, at the time the
purchase is made. From time to time, the Fund may offer dealers a payment of .50
of 1.00% for Shares purchased under this program. If Shares are purchased in
this manner, Fund purchases will be subject to a contingent deferred sales
charge for one year from the date of purchase.

INVESTING IN CLASS B SHARES

Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge-- Class
B Shares," a contingent deferred sales charge may be applied by the distributor
at the time Class B Shares are redeemed.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a distribution services fee (see
"Distribution of Shares"). Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Liberty Family of Funds will convert into Class A Shares based on
the time of the initial purchase. For purposes of conversion to Class A Shares,
Shares purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be

charged on assets redeemed within the first full 12 months following purchase.
For a complete description of this charge see "Contingent Deferred Sales
Charge--Class C Shares."

PURCHASING SHARES THROUGH A
FINANCIAL INSTITUTION

An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.

The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.

PURCHASING SHARES BY WIRE

Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the telephone, and the order
is considered received immediately. Payment for purchases which are subject to a
sales load must be received within three business days following the order.
Payment for purchases on which no sales load is imposed must be received before
3:00 p.m. (Eastern time) on the next business day following the order. Federal
funds should be wired as follows: State Street Bank and Trust Company, Boston,
MA; Attn; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number);
Account Number; Trade Date and Order Number; Group Number or Dealer Number;
Nominee or Institution Name; and ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted.

PURCHASING SHARES BY CHECK

Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Orders by mail are considered received when payment by check is converted into
federal funds (normally the business day after the check is received).

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the

Fund at the net asset value next determined after an order is received by the
Fund, plus the sales load, if applicable. Shareholders should contact their
financial institution or the Fund to participate in this program.

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE

CLASS A SHARES

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Neither the
Fund nor any of the funds in the Liberty Family of Funds imposes any additional
fees on exchanges. Participants in a retirement plan under the Federated
LifeTrack(TM) Program may exchange all or some of their Shares for Class A
Shares of other funds offered under the plan at net asset value.

CLASS B SHARES

Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds). Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.

CLASS C SHARES

Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other Class C Shares in the Liberty Family of Funds.)
Participants in a retirement plan under the Program may exchange some or all of
their Shares for Class C Shares of other funds offered under their plan at net
asset value without a contingent deferred sales charge. To the extent that a
shareholder exchanges Shares for Class C Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period. For more information, see "Contingent
Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.

This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.

Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family of Funds may be given in
writing or by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to Federated Services Company, 500
Victory Road- 2nd Floor, Quincy, Massachusetts 02171.

Instructions for exchanges for retirement plans participating in the Federated
LifeTrack(TM) Program should be given to the plan administrator.

TELEPHONE INSTRUCTIONS

Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be exchanged the
same day. Shareholders exchanging into a Fund will begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.

- - ------------------------------------------------------

HOW TO REDEEM SHARES

Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below. Redemptions of Shares held through retirement plans
participating in the Federated LifeTrack(TM) Program will be governed by the
requirements of the respective plans.

REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION

Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.

REDEEMING SHARES BY TELEPHONE

Shares may be redeemed in any amount by calling the Fund, provided the Fund has
a properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared.

Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA 02266-8600.

The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. It is recommended
that any share certificates be sent by registered or certified mail with the
written request.

If you are requesting a redemption of any amount to be sent to an address other
than that on record with the Fund, or a redemption payable to a third party,
then all signatures appearing on the written request must be guaranteed by a
bank which is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, or any other "eligible
guarantor institution," as defined by the Securities and Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.

Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales load, it is not advisable for shareholders to continue to purchase Class A
Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B and C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:

CLASS A SHARES

Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp. may
be charged a contingent deferred sales charge of .50 of 1.00% for redemptions
made within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.

CLASS B SHARES

Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the

redeemed Shares at the time of redemption in accordance with the following
schedule:

<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
- - ----------------------- -------------------
<S> <C>
First.................. 5.50%
Second................. 4.75%
Third.................. 4%
Fourth................. 3%
Fifth.................. 2%
Sixth.................. 1%
Seventh and
thereafter........... 0%
</TABLE>

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption. No contingent deferred sales charge
will be charged for redemptions of Class C Shares from the Federated
LifeTrack(TM) Program.

CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares on
a first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for Shares of other funds in the
Liberty Family of Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged for Shares
are redeemed is calculated as if the shareholder had held the Shares from the
date on which he became a shareholder of the exchanged-from Shares. Moreover,
the contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or
Federated LifeTrack(TM) Program funds or redemptions from the Federated
LifeTrack(TM) Program.

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum re-

quired distributions from an Individual Retirement Account or other retirement
plan to a shareholder who has attained the age of 70 1/2; and (3) involuntary
redemptions by the Fund of Shares in shareholder accounts that do not comply
with the minimum balance requirements. No contingent deferred sales charge will
be imposed on redemptions of Shares held by Directors, employees and sales
representatives of the Fund, the distributor, or affiliates of the Fund or
distributor; employees of any financial institution that sells Shares of the
Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of Shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940, as amended, or retirement
plans where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Directors reserve the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any Shares purchased prior to the termination of
such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the Shares. If
a shareholder making a redemption qualifies for an elimination of the contingent
deferred sales charge, the shareholder must notify Federated Securities Corp. or
the transfer agent in writing that he is entitled to such elimination.

ACCOUNT AND SHARE INFORMATION

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.

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

DIVIDENDS

Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Dividends and distributions are automatically reinvested in
additional Shares of the Fund on payment dates at the ex-dividend date net asset
value without a sales load, unless shareholders request cash payments on the new
account form or by contacting the transfer agent. All shareholders on the record
date are entitled to the dividend. If Shares are redeemed or exchanged prior to
the record date or purchased after the record date, those Shares are not
entitled to that month's dividend.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.

- - ------------------------------------------------------

FUND INFORMATION

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Fund's business affairs and for exercising all the Fund's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Directors handles the Board's responsibilities between meetings of the Board.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser, subject to direction by the Directors. The Adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.

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

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to .85 of 1% of the
Fund's average daily net assets, plus 4.5% of the Fund's gross income (excluding
any capital gains or losses). Gross income includes, in general, discounts
earned on U.S. Treasury bills and agency discount notes, interest earned on all
interest-bearing obligations, and dividend income recorded on the ex-dividend
date but does not include capital gains or losses or reduction for expenses. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses. The Adviser can terminate this voluntary
reimbursement of expenses at any time at its sole discretion. The Adviser has
also undertaken to reimburse the Fund for operating expenses in excess of
limitations established by certain states.

ADVISER'S BACKGROUND

Federated Advisers, a Delaware business trust organized on April 11, 1989, is a
registered investment adviser under the Investment Advisers Act of 1940. It is a
subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.

Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.

PORTFOLIO MANAGERS' BACKGROUNDS

Randall S. Bauer, Mark E. Durbiano, and Kathleen M. Foody-Malus are the Fund's
portfolio managers. Mr. Bauer and Mr. Durbiano have performed these duties since
the Fund's inception. Ms. Foody-Malus assumed her duties on March 1, 1995. Mr.
Bauer joined Federated Investors in 1989 and has been a Vice President of the
Fund's investment adviser since January 1994. Prior to this, Mr. Bauer served as
an Assistant Vice President of the Fund's investment adviser. Mr. Bauer was an
Assistant Vice President of the International Banking Division at Pittsburgh
National Bank from 1982 until 1989. Mr. Bauer is a Chartered Financial Analyst
and received his M.B.A. in Finance from Pennsylvania State University. Mr.
Durbiano joined Federated Investors in 1982 and has been a Vice President of the
Fund's investment adviser since 1988. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of Pittsburgh.
Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Foody-Malus served as an
Assistant Vice President of the investment adviser from 1990 until 1992, and
from 1986 until 1989 she acted as an investment analyst. Ms. Foody-Malus
received her M.B.A. in Accounting/Finance from the University of Pittsburgh.

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

The distributor may offer to pay financial institutions an amount up to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase (except for participants in the Federated LifeTrack(TM)
Program). These payments will be made directly by the distributor from its
assets, and will not be made from assets of the Fund. Financial institutions may
elect to waive the initial payment described above; such waiver will result in
the waiver by the Fund of the otherwise applicable contingent deferred sales
charge.

The distributor will pay dealers an amount equal to 5.50% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES AGREEMENT

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a
fee to the distributor in an amount computed at an annual rate of .75% of the
average daily net assets of each class of Shares to finance any activity which
is principally intended to result in the sale of Shares subject to the
Distribution Plan. For Class C Shares, the distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales services or distribution-related
support services as agents for their clients or customers. With respect to Class
B Shares, because distribution fees to be paid by the Fund to the distributor
may not exceed an annual rate of .75% of each class of Shares' average daily net
assets, it will take the distributor a number of years to recoup the expenses it
has incurred for its sales services and distribution-related support services
pursuant to the Plan.

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

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25 of 1% of the average daily net asset value
of Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or

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

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

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under the Federated
LifeTrack(TM) Program or by certain qualified plans as approved by Federated
Securities Corp. (Such payments are subject to a reclaim from the financial
institution should the assets leave the program within 12 months after
purchase.)

Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

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

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
- - --------------------- ------------------------------------
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>

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

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT

Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.

INDEPENDENT AUDITORS

The independent auditors for the Fund are Deloitte & Touche LLP, 2500 One PPG
Place, Pittsburgh, Pennsylvania 15222-5401.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally utilize 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 Federated Securities Corp. The adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Board of Directors.

- - ------------------------------------------------------

SHAREHOLDER INFORMATION

VOTING RIGHTS

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

As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.

Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding Shares of all series entitled to vote.

- - ------------------------------------------------------

TAX INFORMATION

FEDERAL INCOME TAX

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

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.

Distributions from the Fund are based on estimates of book income for the year.
Tax basis income includes gains or losses attributable to currency fluctuation,
whereas book income generally consists solely of the coupon income generated by
the portfolio. 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 can not 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.

PENNSYLVANIA PERSONAL PROPERTY TAXES

Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.

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

- - ------------------------------------------------------

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for each class
of Shares including Fortress Shares as described under "Other Classes of
Shares."

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

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

The performance information reflects the effect of non-recurring charges, such
as the maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.

Total return and yield will be calculated separately for Class A Shares, Class B
Shares, Class C Shares, and Fortress Shares.

From time to time, advertisements for Class A Shares, Class B Shares, Class C
Shares and Fortress Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the performance of
Class A Shares, Class B Shares, Class C Shares and Fortress Shares to certain
indices.

- - ------------------------------------------------------

OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Fortress Shares. Fortress
Shares are sold primarily to customers of financial institutions subject to a
front-end sales load, a contingent deferred sales charge and a minimum initial
investment of $1,500, unless the investment is in a retirement account in which
the minimum investment is $50.

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

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

- - ------------------------------------------------------
- - ------------------------------------------------------

APPENDIX

STRATEGIC INCOME FUND
- - --------------------------------------------------------------------------------

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS

AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

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, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.

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.

D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

NR--Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.

MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS

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.

NR--Not rated by Moody's.

FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS

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

AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA.

- - --------------------------------------------------------------------------------

Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.

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

BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligator'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 indentifiable 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 in imminent default in payment or interest or principal.

DDD, DD, AND D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.

NR--Indicates that Fitch does not rate the specific issue.

- - ------------------------------------------------------
- - ------------------------------------------------------

ADDRESSES

STRATEGIC INCOME FUND
- - --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
Strategic Income Fund
Class A Shares Federated Investors Tower
Class B Shares Pittsburgh, Pennsylvania 15222-3779
Class C Shares
- - ----------------------------------------------------------------------------------------------

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

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

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

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

Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401
- - ----------------------------------------------------------------------------------------------
</TABLE>

STRATEGIC INCOME FUND
(A PORTFOLIO OF FIXED INCOME SECURITIES,
INC.)

COMBINED PROSPECTUS

A Diversified

Management Investment Company

August , 1995

FEDERATED SECURITIES CORP.
(LOGO)
- - ---------------------------------------------

Distributor

A subsidiary of FEDERATED INVESTORS

LIBERTY CENTER

FEDERATED INVESTORS TOWER

PITTSBURGH, PA 15222-3779

G01288-01 (8/95)

Strategic Income Fund

(A Portfolio of Fixed Income Securities, Inc.)
Class A Shares
Class B Shares
Class C Shares
Fortress Shares
Combined Statement of Additional Information

This Combined Statement of Additional Information should be read
with the combined prospectus for Class A Shares, Class B Shares,
and Class C Shares, dated July 26, 1995, and the prospectus for
Fortress Shares, dated January 31, 1995, of Strategic Income Fund
(the "Fund"). This Statement is not a prospectus itself. To
receive a copy of any of the prospectuses, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated July 26, 1995

Federated Securities Corp.
Distributor
A subsidiary of FEDERATED
INVESTORS
General Information About the Issuing Senior Securities and
Fund 1 Borrowing Money 8
Investment Objective and Policies 1 Pledging Assets 8
Types of Investments and Diversification of Investments
Investment Techniques 1 8
Resets of Interest 1 Investing in Real Estate 8
Caps and Floors 1 Investing in Commodities 8
Brady Bonds 1 Underwriting 8
Non-Mortgage Related Asset- Lending Cash or Securities
Backed Securities 2 8
Convertible Securities 2 Concentration of Investments
Equity Securities 2 8
Warrants 2 Investing in Restricted
Futures and Options Securities 9
Transactions 3
Financial Futures Contracts 3
Put Options on Financial
Futures Contracts 3
Call Options on Financial
Futures Contracts 3
"Margin" in Futures
Transactions 4
Purchasing Put Options on
Portfolio Securities 4
Writing Covered Call Options
on Portfolio Securities 4
Purchasing and Writing Over-
the-Counter Options 4
Foreign Currency Transactions 4
Currency Risks 4
Forward Foreign Currency
Exchange Contracts 5
Foreign Currency Options 5
Special Risks Associated with
Foreign Currency Options 5
Foreign Currency Futures
Transactions 6
Special Risks Associated with
Foreign Currency Futures
Contracts and Related
Options 6
Foreign Bank Instruments 6
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid
Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7
Investment Limitations 7
Selling Short and Buying on
Margin 7
Investing in New Issuers 9
Investing in Minerals 9
Investing in Warrants 9
Investing in Securities of
Other Investment Companies 9
Dealing in Puts and Calls 9
Investing in Issuers Whose
Securities are Owned by
Officers and Directors of
the Corporation 9
Fixed Income Securities, Inc.
Management 10
Fund Ownership 13
Officers and Directors
Compensation 15
Director Liability 16
Investment Advisory Services 16
Adviser to the Fund 16
Advisory Fees 16
State Expense Limitations 16
Administrative Services 16
Transfer Agent and Dividend
Disbursing Agent 16
Brokerage Transactions 16
Purchasing Shares 17
Distribution Plan (Class B
Shares, Class C Shares and
Fortress Shares) and
Shareholder Services Agreement 17
Conversion to Federal Funds 18
Purchases by Sales
Representatives, Fund
Directors, and Employees 18
Determining Net Asset Value 18
Determining Market Value of
Securities 18
Exchange Privilege 18
Reduced Sales Load 18
Requirements for Exchange 19
Tax Consequences 19
Making an Exchange 19
Telephone Instructions 19
Redeeming Shares 19
Redemption in Kind 19
Tax Status 20
The Fund's Tax Status 20
Foreign Taxes 20
Shareholders' Tax Status 20
Capital Gains 20
Yield 20
Performance Comparisons 21
About Federated Investors 21
Mutual Fund Market 22
Institutional 22
Trust Organizations 22
Broker/dealers and bank
broker/dealer subsidiaries 22
Financial Statements 23
General Information About the Fund
The Fund is a portfolio of Fixed Income Securities, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the
State of Maryland on October 15, 1991.
Shares of the Fund are offered in four classes known as Class A Shares,
Class B Shares, Class C Shares and Fortress Shares (individually and
collectively referred to as "Shares" as the context may require). This
Combined Statement of Additional Information relates to all classes of
Shares of the Fund.
Investment Objective and Policies
The investment objective of the Fund is to seek a high level of current
income. The investment objective stated above cannot be changed without
approval of shareholders. The investment policies stated below may be
changed by the Board of Directors ("Directors") without shareholder
approval. Shareholders will be notified before any material change in
the investment policies becomes effective.
Types of Investments and Investment Techniques
The Fund pursues its investment objective by investing in a diversified
portfolio primarily consisting of domestic corporate debt obligations,
U.S. government securities, and foreign government and corporate debt
obligations. Under normal circumstances, the Fund's assets will be
invested in each of these three sectors. However, the Fund may from time
to time invest up to 100% of its total assets in any one sector if, in
the judgment of the investment adviser, the Fund has the opportunity of
seeking a high level of current income without undue risk to principal.
Resets of Interest
The interest rates paid on the mortgage-backed securities in which the
Fund invests generally are readjusted at intervals of one year or less
to an increment over some predetermined interest rate index. There are
two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices
include the one-year and five-year constant maturity Treasury note
rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the National Median Cost
of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate
changes than a fixed rate debt security of the same stated maturity.
Hence, Adjustable Rate Mortgages ("ARMs") which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.
Caps and Floors
The underlying mortgages which collateralize the mortgage-backed
securities in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Fund invests may be
affected if market interest rates rise or fall faster and farther than
the allowable caps or floors on the underlying residential mortgage
loans. Additionally, even though the interest rates on the underlying
residential mortgages are adjustable, amortization and prepayments may
occur, thereby causing the effective maturities of the mortgage
securities in which the Fund invests to be shorter than the maturities
stated in the underlying mortgages.
Brady Bonds
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady Bonds." These are debt obligations of foreign
entities that may be fixed-rate par bonds or floating-rate discount
bonds and are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations that have the same
maturity as the Brady Bonds. However, the Fund may also invest in
uncollateralized Brady Bonds. Brady Bonds are generally viewed as having
three or four valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments;
(iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute what is referred to as the "residual
risk" of such bonds). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations
of the issuer are accelerated, the zero coupon U.S. Treasury securities
held as collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to
be outstanding, at which time the face amount of the collateral will
equal the principal payments which would have then been due on the Brady
Bonds in the normal course. In addition, in light of the residual risk
of Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative.
Non-Mortgage Related Asset-Backed Securities
Non-mortgage related asset-backed securities present certain risks that
are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of asset-backed securities backed by motor
vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders
of the related asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and
the obligor move to another state, such re-registration could defeat the
original security interest in the vehicle in certain cases. In addition,
because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee with the
holders of asset-backed securities backed by automobile receivables may
not have a proper security interest in all of the obligations backing
such receivables. Therefore, there is a possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
Convertible Securities
The Fund may invest in convertible securities. Convertible securities
are fixed income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock
at the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible
bonds or debentures, units consisting of "usable" bonds and warrants or
a combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for a variety of
investment strategies.
The Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of the investment adviser,
the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. The Fund may also
elect to hold or trade convertible shares. In selecting convertible
securities, the Fund's investment adviser evaluates the investment
characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
Equity Securities
Generally, less than 10% of the value of the Fund's total assets will be
invested in equity securities, including common stocks, warrants or
rights. The Fund may exceed this limitation for temporary defensive
purposes if unusual market conditions occur.
Warrants
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a
specific period of time. Warrants may have a life ranging from less than
one year to twenty years, or they may be perpetual. However, most
warrants have expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the common stock
does not exceed the warrant's exercise price during the life of the
warrant. Warrants have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock. The Fund will not invest more
than 5% of the value of its total assets in warrants. Warrants acquired
in units or attached to securities may be deemed to be without value for
purposes of this policy.
Futures and Options Transactions
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund currently does not intend to invest more than
5% of its total assets in options transactions.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller
who agrees to make delivery of the specific type of security
called for in the contract ("going short") and the buyer who
agrees to take delivery of the security ("going long") at a
certain time in the future. In the fixed income securities market,
price moves inversely to interest rates. A rise in rates means a
drop in price. Conversely, a drop in rates means a rise in price.
In order to hedge its holdings of fixed income securities against
a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e.,
"go short") to protect itself against the possibility that the
prices of its fixed income securities may decline during the
Fund's anticipated holding period. The Fund would agree to
purchase securities in the future at a predetermined price (i.e.,
"go long") to hedge against a decline in market interest rates.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on financial futures
contracts. Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set date
at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide
on or before a future date whether to assume a short position at
the specified price.
The Fund would purchase put options on futures contracts to
protect portfolio securities against decreases in value resulting
from an anticipated increase in market interest rates. Generally,
if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also
decrease in value and the option will increase in value. In such
an event, the Fund will normally close out its option by selling
an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the
original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option. To do so, it
would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of
the option) and exercise the option. The Fund would then deliver
the futures contract in return for payment of the strike price. If
the Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, the Fund may
write listed call options on futures contracts to hedge its
portfolio against an increase in market interest rates. When the
Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the
life of the option if the option is exercised. As market interest
rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's
call option position to increase.
In other words, as the underlying futures price goes down below
the strike price, the buyer of the option has no reason to
exercise the call, so that the Fund keeps the premium received for
the option. This premium can offset the drop in value of the
Fund's fixed income portfolio which is occurring as interest rates
rise.
Prior to the expiration of a call written by the Fund, or exercise
of it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the
second option will be less than the premium received by the Fund
for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it
has sold or call options it has written on futures contracts if,
in the aggregate, the value of the open positions (marked to
market) exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close
out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay
or receive money upon the purchase or sale of a futures contract.
Rather, the Fund is required to deposit an amount of "initial
margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin in
securities transactions in that futures contract initial margin
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation
margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the broker of the amount
one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market
its open futures positions.
The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio securities to
protect against price movements in particular securities in its
portfolio. A put option gives the Fund, in return for a premium,
the right to sell the underlying security to the writer (seller)
at a specified price during the term of the option.
Writing Covered Call Options on Portfolio Securities
The Fund may also write covered call options to generate income.
As writer of a call option, the Fund has the obligation upon
exercise of the option during the option period to deliver the
underlying security upon payment of the exercise price. The Fund
may only sell call options either on securities held in its
portfolio or on securities which it has the right to obtain
without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
Purchasing and Writing Over-the-Counter Options
The Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities
held by the Fund and not traded on an exchange. Over-the-counter
options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-
the-counter options may not.
Foreign Currency Transactions
The Fund may engage without limitation in foreign currency transactions,
including those described below.
Currency Risks
The exchange rates between the U.S. dollar and foreign currencies
are a function of such factors as supply and demand in the
currency exchange markets, international balances of payments,
governmental intervention, speculation and other economic and
political conditions. Although the Fund values its assets daily in
U.S. dollars, the Fund may not convert its holdings of foreign
currencies to U.S. dollars daily. The Fund may incur conversion
costs when it converts its holdings to another currency. Foreign
exchange dealers may realize a profit on the difference between
the price at which the Fund buys and sells currencies.
The Fund will engage in foreign currency exchange transactions in
connection with its investments in the securities. The Fund will
conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase
or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange
contracts in order to protect itself against a possible loss
resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency involved in an underlying
transaction. However, forward foreign currency exchange contracts
may limit potential gains which could result from a positive
change in such currency relationships. The Fund's investment
adviser believes that it is important to have the flexibility to
enter into forward foreign currency exchange contracts whenever it
determines that it is in the Fund's best interest to do so. The
Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when it
would be obligated to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the Fund's investment
adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund will
not enter into a forward foreign currency exchange contract with a
term longer than one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise
price on a specified date or during the option period. The owner
of a call option has the right, but not the obligation, to buy the
currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the
option is obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time
prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on
foreign currency generally falls in value if the underlying
currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement
in the value of a foreign currency, the option will not limit the
movement in the value of such currency. For example, if the Fund
was holding securities denominated in a foreign currency that was
appreciating and had purchased a foreign currency put to hedge
against a decline in the value of the currency, the Fund would not
have to exercise their put option. Likewise, if the Fund were to
enter into a contract to purchase a security denominated in
foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in
value of the currency, and if the value of the currency instead
depreciated between the date of purchase and the settlement date,
the Fund would not have to exercise its call. Instead, the Fund
could acquire in the spot market the amount of foreign currency
needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the
same risks that apply to options generally. In addition, there are
certain additional risks associated with foreign currency options.
The markets in foreign currency options are relatively new, and
the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary
market. Although the Fund will not purchase or write such options
unless and until, in the opinion of the Fund's investment adviser,
the market for them has developed sufficiently to ensure that the
risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no
assurance that a liquid secondary market will exist for a
particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally.
Foreign currency options that are considered to be illiquid are
subject to the Fund's 15% limitation on illiquid securities.
The value of a foreign currency option depends upon the value of
the underlying currency relative to the U.S. dollar. As a result,
the price of the option position may vary with changes in the
value of either or both currencies and may have no relationship to
the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable
than for round lots.
There is no systematic reporting of last sale information for
foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or
revised on a timely basis. Available quotation information is
generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place
in the underlying markets that cannot be reflected in the options
markets until they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same
objectives as it would through the use of forward foreign currency
exchange contracts. The Fund may be able to achieve these
objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange
contracts.
Special Risks Associated with Foreign Currency Futures Contracts and
Related Options
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures
generally. In addition, there are risks associated with foreign
currency futures contracts and their use as a hedging device
similar to those associated with options on futures currencies, as
described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish and close
out positions on such options is subject to the maintenance of a
liquid secondary market. To reduce this risk, the Fund will not
purchase or write options on foreign currency futures contracts
unless and until, in the opinion of the Fund's investment adviser,
the market for such options has developed sufficiently that the
risks in connection with such options are not greater than the
risks in connection with transactions in the underlying foreign
currency futures contracts. Compared to the purchase or sale of
foreign currency futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for
the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a
futures contract would result in a loss, such as when there is no
movement in the price of the underlying currency or futures
contract.
Foreign Bank Instruments
Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits
("ETDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Europaper
are subject to somewhat different risks than domestic obligations of
domestic issuers. Examples of these risks include international,
economic and political developments, foreign governmental restrictions
that may adversely affect the payment of principal or interest, foreign
withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing bank, and the
possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements,
loan requirements, loan limitations, examinations, accounting, auditing,
and recording keeping and the public availability of information. These
factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Lending of Portfolio Securities
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker.
Restricted and Illiquid Securities
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under the Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for
Rule 144A under the Securities Act of 1933 (the "Rule"). The Rule is a
non-exclusive safe harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors.
The Directors consider the following criteria in determining the
liquidity of certain restricted securities:
- the frequency of trades and quotes for the security;
- the number of dealers willing to purchase or sell the security and
the number of other potential buyers;
- dealer undertakings to make a market in the security; and
- the nature of the security and the nature of the marketplace
trades.
Repurchase Agreements
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a
defaulting seller files for bankruptcy or becomes insolvent, disposition
of securities by the Fund might be delayed pending court action. The
Fund believes that under the regular procedures normally in effect for
custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Fund and allow retention or disposition of such securities. The Fund
will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Directors.
Reverse Repurchase Agreements
The Fund may also enter into reverse repurchase agreements. A reverse
repurchase transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio
instrument to another person, such as a financial institution, broker,
or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future, the Fund
will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not
ensure that the Fund will be able to avoid selling portfolio instruments
at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and are maintained until the transaction is settled.
Portfolio Turnover
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective, without regard to
the length of time a particular security may have been held. The adviser
does not anticipate that portfolio turnover will result in adverse tax
consequences. During the period from April 29, 1994 (date of initial
public investment), through November 30, 1994, the Fund's portfolio
turnover rate was 34%.
Investment Limitations
Selling Short and Buying on Margin
The Fund will not sell securities short or purchase securities on
margin, other than in connection with the purchase and sale of
options, financial futures and options on financial futures, but
may obtain such short-term credits as are necessary for clearance
of transactions.
Issuing Senior Securities and Borrowing Money
The Fund will not issue senior securities except as required by
forward commitments to purchase securities or currencies and
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 or 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
borrowings in excess of 5% of its total assets are outstanding.
During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion
of the reverse repurchase agreements, the Fund will restrict the
purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse
repurchase agreements.
Pledging Assets
The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may
pledge 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. Margin deposits for the purchase and
sale of options, financial futures contracts and related options
are not deemed to be a pledge.
Diversification of Investments
With respect to securities comprising 75% of the value of its
total assets, the Fund will not purchase securities of any one
issuer (other than cash, cash items or securities issued or
guaranteed by the government of the United States or its agencies
or instrumentalities and repurchase agreements collateralized by
U.S. government securities) if as a result more than 5% of the
value of its total assets would be invested in the securities of
that issuer or the Fund would own more than 10% of the outstanding
voting securities of that issuer.
Investing in Real Estate
The Fund will not buy or sell real estate, including limited
partnership interests in real estate, although it may invest in
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, except that the
Fund may purchase and sell financial futures contracts and related
options. Further, the Fund may engage in transactions in foreign
currencies and may purchase and sell options on foreign currencies
and indices for hedging purposes.
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.
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.
Concentration of Investments
The Fund will not invest 25% or more of the value of its total
assets in any one industry or in government securities of any one
foreign country, except it 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.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its total
assets in securities subject to restrictions on resale under the
Securities Act of 1933, except for commercial paper issued under
Section 4(2) of the Securities Act of 1933 and certain other
restricted securities which meet the criteria for liquidity as
established by the Directors.
Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter options, certain foreign currency options and
certain securities not determined by the Directors to be liquid.
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. With
respect to asset-backed securities, the Fund will treat the
originator of the asset pool as the company issuing the security
for purposes of determining compliance with this limitation.
Investing in Minerals
The Fund will not purchase or sell 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 Warrants
The Fund will not invest more than 5% of its net assets in
warrants, including those acquired in units or attached to other
securities. To comply with certain state restrictions, the Fund
will limit its investments in such warrants not listed on the New
York or American Stock Exchanges to 2% of its net assets. (If
state restrictions change, this latter restriction may be revised
without notice to shareholder.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or
market, except that warrants acquired by the Fund in units with or
attached to securities may be deemed to be without value.
Investing in Securities of Other Investment Companies
The Fund will limit its investments in other investment companies
to no more than 3% of the total outstanding voting securities of
any such investment company, will invest no more than 5% of its
total assets in any one investment company, and will invest no
more than 10% of its total assets in investment companies in
general. These limitations are not applicable if the securities
are acquired as part of a merger, consolidation, reorganization,
or other acquisition.
Dealing in Puts and Calls
The Fund may not write or purchase options, except that the Fund
may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options,
provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Corporation
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Corporation 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.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of the investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not
result in a violation of such restriction. 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."
The Fund does not expect to borrow money or pledge securities in excess
of 5% of the value of its total assets during the present fiscal year.
Fixed Income Securities, Inc. Management
Officers and Directors are listed with their addresses, present
positions with Fixed Income Securities, Inc., and principal
occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Company.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.

Richard B. Fisher *
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
President and Director
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.

Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Shareholder, Henny, Kochuba, Meyer and Flaherty;
Director, Eat'N Park Restaurants, Inc., and Statewide Settlement Agency,
Inc.; Director, Trustee, or Managing General Partner of the Funds;
formerly, Counsel, Horizon Financial, F.A., Western Region.

Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation.

Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online
Computer Library Center, Inc., and U.S. Space Foundation; Chairman,
Czecho Management Center; Director, Trustee, or Managing General Partner
of the Funds; President Emeritus, University of Pittsburgh; founding
Chairman, National Advisory Council for Environmental Policy and
Technology and Federal Emergency Management Advisory Board.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/marketing consultant; Conference Coordinator, Non-
profit entities; Director, Trustee, or Managing General Partner of the
Funds.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Vice President
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director
of the Company.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.

* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the
Board of Directors between meetings of the Board.
Fund Ownership
Officers and Directors as a group, own less than 1% of the Fund's
outstanding Shares, as of July 26, 1995.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities
Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Term
Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The
Shawmut Funds; Short-Term Municipal Trust; Star Funds; The Starburst
Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark
Funds; Trust for Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for
U.S. Treasury Obligations; The Virtus Funds; and World Investment
Series, Inc.
As of July 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Shares of the Fund:
As of July __, 1995, no shareholders of record owned 5% or more of the
outstanding Class B Shares of the Fund.
As of July__, 1995, no shareholders of record owned 5% or more of the
outstanding Class C Shares of the Fund.
As of July __, 1995, the following shareholders of record owned 5% or
more of the outstanding Fortress Shares of the Fund:
Officers and Directors Compensation

NAME , AGGREGATE TOTAL COMPENSATION
PAID
POSITION WITH COMPENSATION FROM TO DIRECTORS FROM
CORPORATION *CORPORATION CORPORATION AND FUND
COMPLEX

John F. Donahue,
Chairman and Director $ -0- $ -0- for the
Corporation and
69 investment companies

Thomas G. Bigley,
Director $ 131.00 $ 24,991 for the
Corporation and
50 investment companies

John T. Conroy, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment companies

William J. Copeland,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment companies

James E. Dowd,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment companies

Lawrence D. Ellis, M.D.,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment companies

Richard B. Fisher,
President and Director $ -0- $ -0- for the Corporation
and
9 investment companies

Edward L. Flaherty, Jr.,
Director $ 1,501.75 $ 136,100 for the
Corporation and
65 investment companies

Peter E. Madden,
Director $ 1,153.50 $ 104,880 for the
Corporation and
65 investment companies

Gregor F. Meyer,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment companies

Wesley W. Posvar,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment companies

Marjorie P. Smuts,
Director $ 1,362.50 $ 123,600 for the
Corporation and
65 investment companies

* The aggregate compensation is provided for the Corporation which is
comprised of 3portfolios.
Director Liability
The Corporation's Articles of Incorporation provide that the Directors
will not be liable for errors of judgment or mistakes of fact or law.
However, they are not protected against any liability to which they
would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of their office.
Investment Advisory Services
Adviser to the Fund
The Fund's investment adviser is Federated Advisers (the "Adviser"). It
is a subsidiary of Federated Investors. All of the voting securities of
Federated Investors are owned by a trust, the Trustees of which are John
F. Donahue, his wife, and his son, J. Christopher Donahue.
Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the respective prospectuses. During the
period from April 29, 1994 (date of initial public investment), through
November 30, 1994, the Adviser earned $15,014, all of which was
voluntarily waived.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1-1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
Adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
Administrative Services
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the respective prospectuses. During the period from April
29, 1994 (date of initial public investment), through November 30, 1994,
$61,836 in fees were paid to Federated Administrative Services. Dr.
Henry J. Gailliot, an officer of Federated Advisers, the adviser to the
Fund, holds approximately 20% of the outstanding common stock and serves
as a director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative
Services.
Transfer Agent and Dividend Disbursing Agent
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the Adviser will
generally utilize those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to review by the
Directors.
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
- advice as to the advisability of investing in securities;
- security analysis and reports;
- economic studies;
- industry studies;
- receipt of quotations for portfolio evaluations; and
- similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relationship to the value of
the brokerage and research services provided.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal year ended November 30, 1994, the Fund paid no brokerage
commissions on brokerage transactions.
Purchasing Shares
Except under certain circumstances described in the respective
prospectuses, Shares are sold at their net asset value (plus a sales
load on Class A Shares and Fortress Shares only) on days the New York
Stock Exchange is open for business. The procedure for purchasing Shares
is explained in the respective prospectuses under "How to Purchase
Shares" and "Investing in Fortress Shares."
Distribution Plan (Class B Shares, Class C Shares and Fortress Shares)
and Shareholder Services Agreement
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan, (Class B Shares, Class C Shares and
Fortress Shares) the Directors expect that the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
During the period from May 9, 1994 (date of initial public investment),
through November 30, 1994, payment in the amount of $2902 was made
pursuant to the Distribution Plan for Fortress Shares. In addition, the
fund paid shareholder services fees in the amount of $1,451 for
Fortress Shares.
During the period from April 29, 1994 (date of initial public
investment), through November 30, 1994, payment in the amount of $2606
was made pursuant to the Distribution Plan for Class C Shares. In
addition, the Fund paid shareholder services fees in the amount of $869
for Class C Shares.
During the period from May 3, 1994 (date of initial public investment)
through November 30, 1994, the Fund paid shareholder services fees in
the amount of $2,096 for Class A Shares.
Class B Shares were not being offered prior to July 26, 1995.
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them
to federal funds.
Purchases by Sales Representatives, Fund Directors, and Employees
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., and their spouses and children under 21, may buy Shares at net
asset value without a sales load. Shares may also be sold without a
sales load to trusts or pension or profit-sharing plans for these
persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the respective
prospectuses.
Determining Market Value of Securities
Market values of the Fund's portfolio securities are determined as
follows:
- as provided by an independent pricing service;
- for short-term obligations, according to the mean bid and asked
prices, as furnished by an independent pricing service, or for
short-term obligations with remaining maturities of less than 60
days at the time of purchase, at amortized cost unless the
Directors determine this is not fair value; or
- at fair value as determined in good faith by the Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices. Pricing services may
consider:
- yield;
- quality;
- coupon rate;
- maturity;
- type of issue;
- trading characteristics; and
- other market data.
Exchange Privilege
This section relates only to Fortress Shares of the Fund. For
information regarding the Exchange Privilege for Class A Shares, Class B
Shares, and Class C Shares of the Fund, please see the combined
prospectus for these classes of Shares.
The Securities and Exchange Commission has issued an order exempting the
Fund from certain provisions of the Investment Company Act of 1940. As a
result, Fund shareholders are allowed to exchange all or some of their
Fortress Shares for shares in other Fortress Funds (which are sold with
a sales load different from that of the Fund or with no sales load and
which are advised by subsidiaries or affiliates of Federated Investors)
without the assessment of a contingent deferred sales charge on the
exchanged Shares.
Reduced Sales Load
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales load, the shareholder must notify Federated
Securities Corp.
Requirements for Exchange
Shareholders using this privilege must exchange Shares having a net
asset value of at least $1,500. Before the exchange, the shareholder
must receive a prospectus of the fund for which the exchange is being
made.
This privilege is available to shareholders resident in any state in
which the fund shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and the proceeds invested in shares of the other
fund.
Further information on the exchange privilege and prospectuses for
Fortress Funds or certain Federated Funds are available by calling the
Fund.
Tax Consequences
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a short-term or
long-term capital gain or loss may be realized.
Making an Exchange
Instructions for exchanges for Fortress Funds or certain Federated Funds
may be given in writing or by telephone. Written instructions may
require a signature guarantee.
Telephone Instructions
Telephone instructions made by the investor may be carried out
only if a telephone authorization form completed by the investor
is on file with the Fund or its agents. If the instructions are
given by a broker, a telephone authorization form completed by the
broker must be on file with the Fund or its agents. Shares may be
exchanged between two funds by telephone only if the two funds
have identical shareholder registrations.
Telephoned exchange instructions may be recorded. They must be
received by the transfer agent before 4:00 p.m. (Eastern time) for
shares to be exchanged that day. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
Redeeming Shares
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemption procedures are
explained in the respective prospectuses under "How to Redeem Shares" or
"Redeeming Fortress Shares." Although the transfer agent does not charge
for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Class B Shares redeemed within six years of purchase, Class C Shares
redeemed within one year of purchase, and Fortress Shares redeemed
within four years of purchase may be subject to a contingent deferred
sales charge. The amount of the contingent deferred sales charge is
based upon the amount of the administrative fee paid at the time of
purchase by the distributor to the financial institutions for services
rendered, and the length of time the investor remains a shareholder in
the Fund. Should financial institutions elect to receive an amount less
than the administrative fee that is stated in the prospectus for
servicing a particular shareholder, the contingent deferred sales charge
and/or holding period for that particular shareholder will be reduced
accordingly.
Redemption in Kind
Although the Fund intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole
or in part by a distribution of securities from the Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules,
taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Directors
determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.
Tax Status
The Fund's Tax Status
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special
tax treatment afforded to such companies. To qualify for this treatment,
the Fund must, among other requirements:
- derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
- derive less than 30% of its gross income from the sale of
securities held less than three months;
- invest in securities within certain statutory limits; and
- distribute to its shareholders at least 90% of its net income
earned during the year.
Foreign Taxes
Investment income on certain foreign securities in which the Fund may
invest 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.
Shareholders' Tax Status
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. The Fund's dividends, and
any short-term capital gains, are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held the Fund shares.
Total Return
The Class A Shares' cumulative total return from May 3, 1994 (date of
initial public investment), through
November 30, 1994, was (4.52%). The Class C Shares' cumulative total
return from April 29, 1994 (date of initial public investment), through
November 30, 1994, was (1.51%). The Fortress Shares' cumulative total
return from
May 9, 1994 (date of initial public investment), through November 30,
1994, was (2.34%). Class B Shares were not offered prior to July 26,
1995. Cumulative total return reflects the Shares' total performance
over a specific period of time. This total return assumes and is
reduced by the payment of the maximum sales load and any contingent
deferred sales charge. The Shares' cumulative total return is
representative of approximately seven months of Fund activity since the
Shares' date of initial public investment.
The average annual total return for each class of Shares of the Fund is
the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying
the number of Shares owned at the end of the period by the offering
price 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 load on
Class A Shares or Fortress Shares, adjusted over the period by any
additional Shares, assuming the quarterly reinvestment of all dividends
and distributions. Any applicable contingent deferred sales charge is
deducted from the ending value of the investment based on the lesser of
the original purchase price or the offering price of Shares redeemed.
Occasionally, total return which does not reflect the effect of the
sales load may be quoted in advertising.
Yield
The yield for Class A Shares, Class C Shares and Fortress Shares for the
thirty-day period ended November 30, 1994, was 8.78%, 8.43% and 8.59%,
respectively. Class B Shares were not offered prior to July 26 1995.
The yield for each class of Shares of the Fund is determined by dividing
the net investment income per share (as defined by the SEC) earned by
the class of Shares over a thirty-day period by the maximum offering
price per share of the respective class on the last day of the period.
This value is then annualized using semi-annual compounding. This means
that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends
or other distributions paid to the shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in a class of Shares, the performance will be reduced for those
shareholders paying those fees.
Performance Comparisons
The performance of each class of Shares depends upon such variables as:
- portfolio quality;
- average portfolio maturity;
- type of instruments in which the portfolio is invested;
- changes in interest rates and market value of portfolio
securities;
- changes in the Fund's or a class of Shares' expenses; and
- various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and net asset value per Share fluctuate daily. Both net
earnings and net asset value per Share are factors in the computation of
yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
- Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in offering price over a specific period of time. From time
to time, the Fund will quote its Lipper ranking in the "General
Bond Funds" category in advertising and sales literature.
- Lehman Brothers Government/Corporate Bond Index is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates
total returns for one-month, three-month, twelve-month, and ten-
year periods and year-to-date.
- Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Shares may quote total
returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an
investment in Shares based on monthly reinvestment of dividends over a
specified period of time.
Advertisements may quote performance information which does not reflect
the effect of various sales loads on Class A Shares, Class B Shares,
Class C Shares, and Fortress Shares.
About Federated Investors
Federated is dedicated to meeting investor needs which is
reflected in its investment decision making structured,
straightforward, and consistent. This has resulted in a
history of competitive performance with a range of
competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is
firmly rooted in sound methodologies backed by fundamental
and technical research. Investment decisions are made and
executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors.
In the corporate bond sector, as of December 31, 1994,
Federated managed 8 money market funds, 5 investment grade
and 4 high yield bond funds with assets approximating $7.4
billion, $.9 billion and $.8 billion, respectively.
Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 20
years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds
in the industry. In 17 years ending December 1994,
Federated's high-yield portfolios experienced a default
rate of just 1.86%, versus 3.10% for the market as a whole.
In 1983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market
totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees
Federated's equity and high yield corporate bond management
while William D. Dawson, Executive Vice President, oversees
Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management
of Federated's international portfolios.
Mutual Fund Market
Twenty-seven percent of American households are pursuing
their financial goals through mutual funds. These
investors, as well as businesses and institutions, have
entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes
mutual funds for a variety of investment applications.
Specific markets include:
Institutional
Federated meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate
accounts and mutual funds for a variety of applications,
including defined benefit and defined contribution
programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds,
tax-exempt entities, foundations/endowments, insurance
companies, and investment and financial advisors. The
marketing effort to these institutional clients is headed
by John B. Fisher, President, Institutional Sales Division.
Trust Organizations
Other institutional clients include close relationships
with more than 1,500 banks and trust organizations.
Virtually all of the trust divisions of the top 100 bank
holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is
headed by Mark R. Gensheimer, Executive Vice President,
Bank Marketing & Sales.
Broker/dealers and bank broker/dealer subsidiaries
Federated mutual funds are available to consumers through major
brokerage firms nationwide--including 200 New York Stock Exchange firms-
- - -supported by more wholesalers than any other mutual fund distributor.
The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Division.
*source: Investment Company Institute

Strategic Income Fund Portfolio of Investments November 30, 1994

Principal Value
Amount

U.S. Corporate Bonds 31.8%

Broadcast Radio & TV 1.7%

$100,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 $100,750
Business Equipment & Services 0.8%

50,000 Bell & Howell Co., Sr. Sub. Note, 10.75%, 10/1/2002 47,250
Cable Television 0.8%

50,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 45,000
Chemicals & Plastics 3.5%

50,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 48,250

100,000 G-I Holdings, Inc., Sr. Disc. Note, Series B, 0/11.375% 60,750
Accrual, 10/1/98

50,000 LaRoche Industries, Inc., Sr. Sub. Note, 13.00%, 8/15/2004 46,250
50,000(a) Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 48,750

Total 204,000
Clothing & Textiles 1.5%

100,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 88,375

Consumer Products 1.4%

100,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 85,375
12/15/2003

Containers & Glass Products 0.9%

50,000 Owens Illinois, Inc., Sr. Sub. Note, 10.50%, 6/15/2002 50,250
Ecological Services & Equipment 0.9%

50,000 Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 50,750
2/15/2003
Food & Drug Retailers 1.1%

50,000 Grand Union Co., Sr. Sub. Note, 12.25%, 7/15/2002 19,938

50,000 Pathmark Stores, Inc., Sr. Sub. Note, 9.625%, 5/1/2003 43,375
Total 63,313

Food Products 3.2%

$100,000(a) Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.75%, 2/1/2005
$100,875

50,000 Doskocil Cos., Inc., Sr. Sub. Note, 9.75%, 7/15/2000 43,250
50,000 Specialty Foods Corp., Sr. Sub. Note, 11.25%, 8/15/2003 44,000
Total 188,125

Food Services 1.6%

100,000 Flagstar Corp., Sr. Note, 10.875%, 12/1/2002 91,750
Forest Products 1.6%

100,000 Stone Container Corp., Sr. Note, 9.875%, 2/1/2001 92,000
Healthcare 1.7%

100,000 AmeriSource Corp., Sr. PIK Deb., 11.25%, 7/15/2005 101,500
Home Products & Furnishings 0.5%

50,000 American Standard, Inc., Sr. Sub. Disc. Deb., 0/10.50%, 31,875
6/1/2005

Machinery & Equipment 0.9%

50,000(a) Waters Corp., Sr. Sub. Note, 12.75%, 9/30/2004 50,750
Retailers 2.5%

50,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 49,750
100,000(a) ICON Health & Fitness, Inc., Unit, 13.00%, 7/15/2002 98,250
Total 148,000

Steel 3.3%

100,000 Carbide/Graphite Group, Sr. Note, 11.50%, 9/1/2003 101,500

50,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 50,125
9/1/2004
50,000 Northwestern Steel & Wire Co., Sr. Note, 9.50%, 6/15/2001 45,000
Total 196,625

Surface Transportation 2.5%

$100,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 $100,375
50,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 48,250

Total 148,625
Technology Services 0.7%

50,000 Computervision Corp., Sr. Sub. Note, 11.375%, 8/15/99 42,000

Telecommunications & Cellular 0.7%

100,000 NEXTEL Communications Inc., Sr. Disc. Note, 0/11.50%, 43,250
9/1/2003
Total U.S. Corporate Bonds (identified cost $1,946,098) 1,869,563

U.S. Government Agency 33.5%

348,944 Federal Home Loan Mortgage Corp., Pool C00227, 9.50%, 359,516
12/1/2022
646,386 Federal Home Loan Mortgage Corp., Pool M80326, 7.50%, 630,420
6/1/2001
502,276 Government National Mortgage Association, Pool 351468, 463,028
7.50%, 3/15/2024

524,236 Government National Mortgage Association, Pools 356579, 514,727
371837 and 403933, 8.50%, 6/15/2023 8/15/2024
Total U.S. Government Agency (identified cost $2,007,285) 1,967,691

Foreign U.S.
Currency Dollar
Par Amount Value

International Bonds 32.1%

Australian Dollar 2.8%

Corporate 1.4%

150,000 News America Holdings, Inc., 8.625%, 2/7/2014 $83,577
State/Provincial 1.4%

100,000 State Bank of New South Wales, 12.25%, 2/26/2001 82,080
Total Australian Dollar 165,657

British Pound 5.0%

Corporate 3.2%

50,000 Abbey National Treasury, 8.00%, 4/2/2003 $72,718
70,000 Diamler-Benz U.K., 10.75%, 5/17/96 113,828
Total 186,546

Sovereign 1.8%

70,000 Republic of Iceland, 8.75%, 5/12/2003 105,641
Total British Pound 292,187

Canadian Dollar 2.4%

Agency 1.2%

100,000 Ontario Hydro, 9.00%, 6/24/2002 71,094

Corporate 1.2%

100,000 Sherritt, Inc., 11.00%, 3/31/2004 69,379
Total Canadian Dollar 140,473
Danish Krone 3.3%

Sovereign 3.3%

600,000 Denmark, 8.00%, 5/15/2003 93,837
600,000 Denmark, 9.00%, 11/15/96 100,249

Total Danish Krone 194,086
Deutsche Mark 2.6%

Corporate 1.5%

150,000 Ford Credit Europe, PLC, 6.00%, 3/30/99 90,348

Sovereign 1.1%

100,000 Federal Republic of Germany, 8.00%, 7/22/2002 65,487
Total Deutsche Mark 155,835

French Franc 1.2%

Agency 1.2%

400,000 KFW International Finance, Inc., 7.00%, 5/12/2000 $72,082
Italian Lira 1.6%

Agency 1.6%

150,000,000 KFW International Finance, 11.625%, 11/27/98 93,854
Japanese Yen 1.9%

Corporate 1.9%

10,000,000 Bank of Tokyo Cayman Finance, Perpetual 114,675
Convertible Subordinated Note, 4.25%
Mexican Peso 3.5%

Sovereign 3.5%

7,247,800 Mexican CETES, 0.00%, 3/2/95 203,229

New Zealand Dollar 2.2%

Agency 2.2%

200,000 Electricity Corp. of New Zealand, 10.00%, 129,211
10/15/2001
U.S. Dollar 5.6%

Agency 1.4%

100,000 Banco Nacional de Comercio Exterior, 8.00%, 85,281
8/5/2003
Corporate 1.6%

100,000 Banco de Galicia, Conv. Sub. Note, 7.00%, 8/1/2002 92,500
Sovereign 2.6%

100,000 Argentina Bocon, Pre 4 (2) PIK; 4.875%, 9/1/2002 66,800

98,000 Brazil IDU, Deb., 6.0625%, 1/1/2001 82,688
Total 149,488
Total U.S. Dollar 327,269

Total International Bonds (identified cost $1,921,234) 1,888,558

**Repurchase Agreement 3.9%

$230,000 J.P. Morgan Securities, Inc., 5.77%, dated 11/30/94, due $230,000
12/1/94 (at amortized cost)
Total Investments (identified cost $6,104,617) $5,955,81
2

(a) Denotes restricted securities which are subject to resale under
Federal Securities laws. These securities have been determined
to be liquid under criteria established
by the Board of Directors.

Denotes Variable Rate and Floating Rate Obligations for which
the current rate is shown.

The cost of investments for federal tax purposes amounts to
$6,111,894. The net unrealized depreciation on a federal tax
cost basis amounts to $156,082
and is comprised of $26,814 appreciation and $182,896
depreciation at November 30, 1994.

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

The following abbreviation is used in this portfolio:

PIK Payment in kind

Note: The categories of investments are shown as a percentage of net
assets
($5,881,975) at November 30, 1994.

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

Strategic Income Fund Statement of Assets and Liabilities November 30, 1994

Assets:

Investments in securities at value (identified cost; $6,104,617 and tax cost;
$5,955,81
$6,111,894) 2
Cash denominated in foreign currencies (identified cost; $112,568)
112,476

Cash 4,973
Interest receivable 117,341
Receivable for capital stock sold 47,691

Receivable for foreign currency sold 10,753
Receivable from adviser 3,000

Deferred expenses 7,645
Total assets 6,259,691
Liabilities:

Payable for investments purchased $303,547
Dividends payable 25,230
Payable for foreign currency purchased 10,771

Accrued expenses 38,168

Total liabilities 377,716
Net Assets for 616,440 shares of capital stock
outstanding $5,881,975

Net Assets Consist of:
Paid-in capital $6,066,375

Net unrealized appreciation (depreciation) on investments and translation
of assets and liabilities in foreign currencies (148,970)
Accumulated distributions in excess of net investment income (14,463)
Accumulated net realized gain (loss) on investments and foreign currency
transactions (20,967)

Total Net Assets $5,881,975
Net Asset Value:
Class C Shares ($1,189,566_124,641 shares of capital stock outstanding) $9.54

Class A Shares ($2,366,182_248,034 shares of capital stock outstanding) $9.54
Fortress Shares ($2,326,227_243,765 shares of capital stock
outstanding) $9.54
Offering Price Per Share:

Class C Shares $9.54
Class A Shares (100/95.5 of $9.54)* $9.99
Fortress Shares (100/99 of $9.54)* $9.64
Redemption Proceeds Per Share:
Class C Shares (99/100 of $9.54)** $9.44

Class A Shares $9.54
Fortress Shares (99/100 of $9.54)** $9.44

* See "What Shares Cost" in the prospectus.

** See "Contingent Deferred Sales Charge" in the prospectus.

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

Strategic Income Fund Statement of Operations Year Ended November 30, 1994*

Investment income:
Interest income (net of foreign taxes withheld of $8) $156,336
Expenses:
Investment advisory fee $15,014

Custodian and portfolio accounting fees 51,019

Transfer and dividend disbursing agent fees and expenses 9,367

Printing and postage 6,003

Legal fees 240

Shareholder services fee Class A Shares 2,096

Shareholder services fee Class C Shares 869

Shareholder services fee Fortress Shares 1,451

Distribution services fee Class C Shares 2,606

Distribution services fee Fortress Shares 2,902

Administrative personnel and services fee 61,836

Registration fees 1,858

Taxes 25

Insurance premiums 8,812

Miscellaneous 2,514

Total expenses 166,612

Deduct

Waiver of investment advisory fee $15,014
Reimbursement of other operating expenses by Adviser 141,674 156,688
9,924
Net expenses
146,412
Net investment income
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency:
Net realized gain (loss) on investments and foreign currency transactions
(identified cost basis) (27,206)
Net change in unrealized appreciation (depreciation) on
investments and (148,970)
foreign currency
Net realized and unrealized gain (loss) on investments and foreign (176,176)
currency
$(29,764)
Change in net assets resulting from operations

* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.

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

Strategic Income Fund Statement of Changes in Net Assets

Year Ended
November 30,
1994*
Increase (Decrease) in Net Assets:
Operations
Net investment income
$146,412
Net realized gain (loss) on investment and foreign currency
transactions ($13,691 net loss as computed for federal tax purposes)
(27,206)
Net change in unrealized appreciation (depreciation) on investments
and translation of assets and liabilities in foreign currencies
(148,970)

Change in net assets resulting from operations
(29,764)
Distributions to Shareholders
Dividends to shareholders from net investment income:

Class A Shares (67,293)
Fortress Shares (46,354)

Class C Shares (26,526)
Distributions in excess of net investment income:
Class A Shares (5,083)

Fortress Shares (6,411)
Class C Shares (2,969)
Change in net assets from distributions to shareholders (154,636)

Capital Stock Transactions
Proceeds from sale of shares 7,743,495
Net asset value of shares issued to shareholders in payment of
dividends declared 64,166

Cost of shares redeemed (1,741,286)
Change in net assets resulting from capital
stock transactions 6,066,375

Change in net assets 5,881,975
Net Assets:
Beginning of period

End of period $5,881,975

* For the period April 29, 1994 (date of initial public investment)
to November 30, 1994.

Strategic Income Fund

November 30, 1994

Strategic Income Fund

(1) Organization

Fixed Income Securities Inc. (the "Corporation") is registered
under the Investment
Company Act of 1940, as amended (the "Act"), as an open-end,
management investment company. The Corporation consists of five,
diversified investment portfolios. The
financial statements included herein are only those of Strategic Income
Fund (the "Fund").
The financial statements of the other portfolios are presented separately.
The assets of
each portfolio are segregated and a shareholder's interest is limited to
the portfolio in
which shares are held. The Fund offers three classes of shares; Class A
Shares, Class C
Shares, and Fortress Shares.

As of October 17, 1994, Multi-State Municipal Income Fund no longer accepted
purchases. It
is anticipated that Multi-State Municipal Income Fund's liquidation will
occur in 1995.

During the fiscal year ended November 30, 1994, the Corporation offered
five portfolios
(Limited Term Fund, Limited Term Municipal Fund, Strategic Income
Fund, Limited Maturity
Government Fund, and Multi-State Municipal Income Fund).

The Board of Directors approved the liquidation of Limited Maturity
Government Fund, and as of December 23, 1994 was no longer offered.

(2) Significant Accounting Policies

The following is a summary of significant accounting policies consistently
followed by the
Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.

A. Investment Valuations Listed corporate bonds (and other fixed-
income and asset backed
securities) are valued at the last sale price reported on national
securities
exchanges. Unlisted bonds and securities and short-term obligations are
valued at
the prices provided by an independent pricing service. Short-term
securities with
remaining maturities of sixty days or less may be stated at amortized
cost, which
approximates value.

B. Repurchase Agreements It is the policy of the Fund to require
the custodian bank to take
possession, to have legally segregated in the Federal Reserve
Book Entry System or
to have segregated within the custodian bank's vault, all
securities held as
collateral in support of repurchase agreement investments.
Additionally, procedures
have been established by the Fund to monitor, on a daily basis,
the market value of
each repurchase agreement's underlying collateral to ensure
the value of collateral
at least equals the principal amount of the repurchase agreement,
including accrued
interest.

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

C. Investment Income, Expenses and Distributions Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.
Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These distributions do not represent a return of capital for federal income
tax purposes.

D. Federal Taxes It is the Fund's policy to comply with the provisions
of the Code applicable to regulated investment companies and to distribute
to shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary. However, federal
taxes may be imposed on the Fund upon the disposition of certain
investments in Passive Foreign Investment Companies. Withholding
taxes on foreign dividends have been provided for in accordance with the
Fund's understanding of the applicable country's tax rules and rates. At
November 30, 1994, the Fund, for federal tax purposes, had a capital loss
carryforward of $13,691, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire in 2002 ($13,691).

E. When-Issued and Delayed Delivery Transactions The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

F. Deferred Expenses The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the
initial expense of registering its shares, have been deferred and are
being amortized using the straight-line method not to exceed a period of
five years from the Fund's commencement date.

G. Forward Commitments The Fund may enter into forward commitments for the
delayed delivery of securities or forward foreign currency exchange
contracts which are based upon financial indices at a fixed price or
exchange rate at a future date. Risks may arise upon entering these
contracts from the potential inability of counterparts to
meet the terms of their contracts and from unanticipated movements in
security prices or foreign exchange rates. The forward foreign currency
exchange contracts are adjusted by the daily exchange rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.

At November 30, 1994, the Fund had outstanding forward commitments set out
below.

Contracts to In Unrealized
Deliver/Receive Exchange Appreciation
Settlement Date For (Depreciation)
Sales
Italian Lira 12/01/94 17,437,500 $10,771 ($18)
Purchases

None
Net Unrealized Appreciation (Depreciation)
on Forward Commitments ($18)

H. Foreign Currency Translation The accounting records of the
Fund are maintained in U.S.
dollars. All assets and liabilities denominated in foreign
currencies ("FC") are
translated into U.S. dollars based on the rate of exchange
of such currencies
against U.S. dollars on the date of valuation. Purchases and
sales of securities,
income and expenses are translated at the rate of exchange
quoted on the respective
date that such transactions are recorded. Differences between
income and expense
amounts recorded and collected or paid are adjusted when reported
by the custodian
bank. The Fund does not isolate that portion of the results of
operations resulting
from changes in foreign exchange rates on investments from the
fluctuations arising
from changes in market prices of securities held. Such
fluctuations are included
with the net realized and unrealized gain or loss from investments.

Reported net realized foreign exchange gains or losses arise from sales
and maturities of short-term securities, sales of FCs, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest,
and foreign withholding taxes recorded on the Fund's books, and the U.S.
dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at
fiscal year end, resulting from changes in the exchange rate.

I. Reclassifications During the year ended November 30, 1994, the Fund adopted
Statement of Position 93-2, Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. Accordingly, permanent book and tax
differences have been reclassified to paid-in capital. The Fund reclassified
$6,239 and $6,239 from accumulated net realized gain (loss) and
undistributed net investment income, respectively to paid-in capital in
accordance with SOP 93-2. Net investment income, net realized gains, and
net assets were not affected by this change.

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

J. Restricted Securities Restricted securities are securities that may only
be resold upon registration under Federal securities laws or in
transactions exempt from such registration. In some cases, the issuer
of restricted securities has agreed to register such securities for resale,
at the issuer's expense either upon demand by the Fund or in connection
with another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions exempt
from registration.

Such restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities
are valued at the price provided by dealers in the secondary market or,
if no market prices are available, at the fair value as determined by the
Fund's pricing committee. Additional information on each restricted
security held at November 30, 1994 is as follows:

Acquisition Acquisition
Security Date Cost
Polymer Group, Inc. Sr. Note 8/10/94 $100,000
Curtice-Burns Foods, Inc., Sr. Sub. Note 11/3/94 50,500
Waters Corp., Sr. Sub. Note 8/18/94 50,000

ICON Health & Fitness, Inc. 11/14/94 98,771

K. Other Investment transactions are accounted for on the trade date.

(3) Capital Stock

At November 30, 1994, there were 10,000,000,000 shares of $0.001 par value
capital stock authorized for the Corporation. 4,000,000,000 shares have been
designated for the Fund. Of these shares, 1,000,000,000 have been
designated as Class C Shares, 1,000,000,000 as Class A Shares,
and 1,000,000,000 as Fortress Shares. 1,000,000,000 shares have been
designated for additional classes not currently offered. Transactions
in Capital Stock were as follows:

Class C Shares Shares Dollars
Year Ended
November 30, 1994*
$1,226,29
Shares sold 124,790 6

Shares issued in payment of dividends declared 1,844 17,926

Shares redeemed (1,993) (19,338)
$1,224,88
Net change resulting from Class C share transactions 124,641 4

Class A Shares Shares Dollars
Year Ended
November 30, 1994**
Shares sold 410,346 $4,053,169

Shares issued in payment of dividends declared 3,091 30,074

Shares redeemed (165,403) (1,633,770)
Net change resulting from Class A Share transactions
248,034 $2,449,473

Fortress Shares Shares Dollars
Year Ended
November 30, 1994***

Shares sold 251,274 $2,464,030

Shares issued in payment of dividends declared 1,656 16,166
Shares redeemed (9,165) (88,178)
Net change resulting from Fortress share transactions
243,765 $2,392,018

Net change resulting from Fund share transactions 616,440 $6,066,375

* For the period from April 29, 1994 (date of initial public investment) to
November 30, 1994.

** For the period from May 3, 1994 (date of initial public offering)
to November 30, 1994.

*** For the period from May 9, 1994 (date of initial public offering)
to November 30, 1994.

(4) Investment Advisory Fee and Other Transactions With Affiliates Investment
Advisory Fee Federated Advisers, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory
fee equal to .85 of 1% of the Fund's average daily net assets. The Adviser
may voluntarily choose to waive a portion of its fee and reimburse certain
operating expenses of the Fund. The Adviser can modify or terminate this
voluntary waiver and reimbursement at any time at its sole discretion.

Administrative Fee

Federated Administrative Services ("FAS") provides the Fund administrative
personnel and services. Prior to March 1, 1994, these services were
provided at approximate cost. Effective March 1, 1994, the FAS fee is
based on the level of average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors for the period. The
administrative fee received during the period of the Administrative
Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.

Distribution and Shareholder Services Fee
The Fund has adopted a Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor,
from the net assets of the Fund to finance activities intended to result
in the sale of the Fund's Class C Shares and Fortress Shares. The Plan
provides that the Fund may incur distribution expenses up to .75 and
.50, respectively, of 1% of the average daily net assets of the
Class C Shares and Fortress Shares, respectively, annually, to compensate FSC.

Under the terms of a Shareholder Services Agreement with Federated
Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of 1% of
average net assets for the Fund for the period. This fee is to obtain
certain personal services for shareholders and to maintain
shareholder accounts.

Transfer and Dividend Disbursing Agent Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ
fee is based on the size, type and number of accounts and transactions
made by shareholders.

Organizational Expenses Organizational expenses $103,446 and start-up
administrative services expenses $46,630 were borne initially by the Adviser.
The Fund has agreed to reimburse the Adviser for the organizational
expenses and start-up administrative expenses during the five year period
following April 5, 1994 (date the Fund first became effective). For the
period ended November 30, 1994, the Fund paid $4,621 and $2,083, respectively
pursuant to this agreement.

Certain of the Officers and Directors of the Corporation are Officers and
Directors or Trustees of the above companies.

(5) Investment Transactions

Purchases and sales of investments, excluding short-term securities, for the
period ended November 30, 1994, were as follows:

$6,985,3
Purchases 56
$1,105,3
Sales 48

(6) Subsequent Event

On January 17, 1995, The Grand Union Company announced that it would
default on its January 15, 1995, interest payment. The company is
currently in negotiations with bondholders on a restructuring plan. Fund
management is unable to predict the outcome or timing of these proceedings.

Independent Auditors' Report
To the Board of Directors of FIXED INCOME SECURITIES, INC.
and Shareholders of STRATEGIC INCOME FUND:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Strategic Income Fund (a
portfolio of Fixed Income Securities, Inc.) as of November 30, 1994, and
the related statement of operations, the statement of changes in net
assets, and the financial highlights (see pages 4 and 5 of the
prospectus) for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management.
Our responsibility its to express an opinion on these financial
statements and financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 1994 by
correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Strategic Income Fund as of November 30, 1994, the results of its
operations, the changes in its net assets, and its financial highlights
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Boston, Massachusetts
January 13, 1995
except for Footnote 6,
for which the date is
January 17, 1995

G01288-02 (7/95)

PART C. OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:

(a) Financial Statements: (Filed in Part A for Fortress Shares,
Part B for A, B and C Shares)

(b) Exhibits:
(1) Conformed copy of Articles of Incorporation of the
Registrant(1.);
(i) Conformed copy of Articles Supplementary (dated
April 28, 1993); (12.)
(ii) Conformed copy of Articles Supplementary (dated
August 6, 1993); (15)
(iii) Conformed copy of Articles Supplementary (dated
November 24, 1993); (12.)
(iv) Conformed copy of Articles Supplementary (dated
February 25, 1994); (12.)
(v) Conformed copy of Articles Supplementary (dated
June 1, 1994); (12.)
(2) Copy of By-Laws of the Registrant; (1.)
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Capital
Stock of the Registrant;
(i) Limited Term Fund-Fortress Shares; (6.)
(ii) Limited Term Municipal Fund-Fortress Shares ;
(6.)
(iii) Limited Term Municipal Fund-Class A Shares;
(12.)
(iv) Limited Term Fund-Class A Shares; (12.)
(v) Strategic Income Fund-Class A Shares; (14)
(vi) Strategic Income Fund-Class C Shares; (14)
(vii) Strategic Income Fund-Fortress; (14)

+ All Exhibits filed electronically.
1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed October 23, 1991. (File Nos.
33-43472 and 811-6447)
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed March 24, 1993. (File Nos. 33-43472
and 811-6447)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed July 7, 1993. (File Nos. 33-43472
and 811-6447)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed January 28, 1994. (File Nos. 33-
43472 and 811-6447)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed July 26, 1994. (File Nos. 33-43472
and 811-6447)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 13 on Form N-1A filed September, 21, 1994 (File Nos. 33-
43472 and 811-6447)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed January 27, l995 (File Nos 33-43472
and 811-6447)
(5) Conformed copy of Investment Advisory Contract; (7.)
(i) Conformed Copy of Exhibit A to Investment
Advisory Contract; (7.)
(ii) Conformed copy of Exhibit B to Investment
Advisory Contract; (7.)
(iii) Conformed copy of Exhibit C to Investment
Advisory Contract; (12.)
(iv) Conformed Copy of Exhibit D to Investment
Advisory Contract (9.)
(v) Conformed Copy of Exhibit E to Investment
Advisory Contract; (11.)
(6) Conformed Copy of Distributor's Contract of the
Registrant through and including Exhibits A-J; (14)
(i) Copy of Administrative Agreement; (2.)
(7) Not applicable;
(8) Conformed copy of Custodian Agreement of the
Registrant; (12.)
(9) (i) Conformed copy of Agreement for Fund
Accounting, Shareholder Recordkeeping,
and Custody Services Procurement of the
Registrant; (15)
(ii) Conformed copy of Administrative Services
Agreement; (12.)
(iii) Conformed copy of Shareholder Services
Agreement; (12.)
(iv) Conformed Copy of Shareholder Services
Plan of the Registrant through and
including Exhibits A-J; (14)
(v) Conformed copy of Shareholder Services Sub-
contract; (12.)

(10) Conformed copy of Opinion and Consent of Counsel
as to legality of shares being registered; (15)
(11) Conformed copy of Consent of Independent Public
Accountants;+
(12) Not Applicable;
(13) Conformed copy of Initial Capital Understanding;
(2.)
(14) Not Applicable;
(15) (i) Copy of 12b-1 Agreement; (2.)
(ii) Conformed copy of Distribution Plan; (6.)
(iii) Conformed copies of Exhibits B, C, D, E, F, G,
and H to 12b-1 Plan; (12.)
(iv) Conformed Copy of Exhibit A to 12b-1 Plan; (14)
(v) Conformed copy of Exhibit l to the Distribution
Plan;+
(16) (i) Copy of Schedule for Computation of Fund
Performance Data for Limited Term Municipal
Fund; (9.)
(ii) Copy of Schedule for Computation of Fund
Performance Data for Strategic Income Fund;
(14)
(iii) Copy of Schedule for Computation of Fund
Performance Data for Limited Term Fund; (13.)
(17) Copy of Financial Data Schedules; (+)
(18) Conformed Copy of Power of Attorney; (15)
(i) Amendment No. l to Schedule l to Limited
Power of Attorney;+

+ All Exhibits filed electronically.
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File Nos. 33-
43472 and 811-6447)
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed January 28, 1993. (File Nos. 33-
43472 and 811-6447)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed July 7, 1993. (File Nos. 33-43472
and 811-6447)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 on Form N-1A filed November 30, 1993. (File Nos. 33-
43472 and 811-6447)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed January 28, 1994. (File Nos. 33-
43472 and 811-6447)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed July 26, 1994. (File Nos. 33-43472
and 811-6447)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed June 15, 1992. (File Nos. 33-43472
and 811-6447)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 13 on Form N-1A filed September 21, 1994 (File Nos. 33-
43472 and 811-6447)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed January 27, l995 (File Nos 33-43472
and 811-6447)

Item 25. Persons Controlled by or Under Common Control with Registrant:

None

Item 26. Number of Holders of Securities:

Number of Record Holders
Title of Class as of June 9, 1995

Shares of capital stock
($0.001 per Share par value)

Limited Term Fund - Fortress Shares 421
Limited Term Fund - Class A Shares 8,391
Limited Term Municipal Fund - Fortress Shares 263
Limited Term Municipal Fund - Class A Shares 773
Strategic Income Fund - Class A Shares 214
Strategic Income Fund - Class C Shares 95
Strategic Income Fund - Fortress Shares 109
Strategic Income Fund - Class B Shares 0
Item 27. Indemnification: (2)

Item 28. Business and Other Connections of Investment Adviser:

(a) For a description of the other business of the investment
adviser, see the section entitled "Fixed Income Securities,
Inc. Information - Management of the Corporation" in Part A.
The affiliations with the Registrant of three of the
Trustees and four of the Officers of the investment adviser
are included in Part B of this Registration Statement under
"Fixed Income Securities, Inc. Management - Officers and
Directors." The remaining Trustee of the investment
adviser, his position with the investment adviser, and, in
parentheses, his principal occupation is: Mark D. Olson,
(Partner, Wilson, Halbrook & Bayard), 107 W. Market Street,
Georgetown, Delaware 19947.

The remaining Officers of the investment adviser are:
William D. Dawson, III, Henry A. Frantzen, J. Thomas Madden,
and Mark L. Mallon, Executive Vice Presidents; Henry J.
Gailliot, Senior Vice President-Economist; Peter R.
Anderson, and J. Alan Minteer, Senior Vice Presidents; J.
Scott Albrecht, Randall A. Bauer, David A. Briggs, Jonathan
C. Conley, Deborah A. Cunningham, Michael P. Donnelly; Mark
E. Durbiano, Kathleen M. Foody-Malus, Thomas M. Franks,
Edward C. Gonzales; Jeff A. Kozemchak, Marian R. Marinack,
John W. McGonigle; Susan M. Nason, Mary Jo Ochson, Robert
J. Ostrowski, Frederick L. Plautz, Jr.; Charles A. Ritter,
James D. Roberge; Sandra L. Weber and Christopher H. Wiles,
Vice Presidents; and David M. Taylor, Controller. The
business address of each of the Officers of the investment
adviser is Federated Investors Tower, Pittsburgh, PA 15222-
3779. These individuals are also officers of a majority of
the investment advisers to the Funds listed in Part B of
this Registration Statement under "The Funds."

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File Nos. 33-
43472 and 811-6447)

Item 29. Principal Underwriters:

((a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the
following open-end investment companies: Alexander Hamilton
Funds; American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; California Municipal
Cash Trust; Cash Trust Series, Inc.; Cash Trust Series II;
DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund,
Ltd.; Federated GNMA Trust; Federated Government Trust;
Federated Growth Trust; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust;
Federated Master Trust; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund:
3-5 Years;First Priority Funds; First Union Funds; Fixed
Income Securities, Inc.; Fortress Adjustable Rate U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress Utility Fund, Inc.; Fountain Square Funds; Fund for
U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Independence One
Mutual Funds; Insurance Management Series; Intermediate
Municipal Trust; International Series Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity
Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Managed Series Trust; Marshall Funds,
Inc.; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; The Monitor Funds;
Municipal Securities Income Trust; Newpoint Funds; New York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds;
SouthTrust Vulcan Funds; Star Funds; The Starburst Funds;
The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Tower Mutual Funds; Trademark Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; The Virtus Funds; Vision Fiduciary
Funds, Inc.; Vision Group of Funds, Inc.; and World
Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment
company: Liberty Term Trust, Inc.-
1999.
(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Richard B. Fisher Director, Chairman, Chief President,
Federated Investors Tower Executive Officer, Chief Director
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive Vice Vice President,
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.

John W. McGonigle Director, Executive Vice Vice President and
Federated Investors Tower President, and Assistant Secretary
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph L. Epstein Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Stephen A. LaVersa Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John C. Shelar, Jr. Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

S. Elliott Cohan Secretary, Assistant
Federated Investors Tower Federated Securities Corp. Secretary
Pittsburgh, PA 15222-3779

Item 30. Location of Accounts and Records:

All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:

Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Services Company Federated Investors Tower
"Transfer Agent, Dividend Pittsburgh, PA 15222-3779
Disbursing Agent and Portfolio
Recordkeeper"

Federated Administrative Services Federated Investors Tower
"Administrator" Pittsburgh, PA 15222-3779

Federated Advisers Federated Investors Tower
"Adviser" Pittsburgh, PA 1522-3779

State Street Bank and Trust Company P.O. Box 8604
"Custodian" Boston, Massachusetts 02266-8604

Item 31. Management Services: Not applicable.

Item 32. Undertakings: (2)

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors and the calling of special shareholder meetings by
shareholders.

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual
report to shareholders, upon request and without charge.

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed December 19, 1991. (File No. 33-
43472 and 811-6447)

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FIXED INCOME SECURITIES,
INC., certifies that it meets all of the requirements for effectiveness
of this Amendment to its Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933 and has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 11th day of July, 1995.

FIXED INCOME SECURITIES, INC.

BY: /s/ Charles H. Field
Charles H. Field, Assistant Secretary
Attorney in Fact for John F. Donahue
July 11, 1995

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:

NAME TITLE DATE

By: /s/ Charles H. Field
Charles H. Field Attorney In Fact July 11, 1995
ASSISTANT SECRETARY For the Persons
Listed Below

NAME TITLE

John F. Donahue* Chairman and Director
(Chief Executive Officer)

Richard B. Fisher* President and Director

Edward C. Gonzales* Vice President and Treasurer
(Principal Financial and
Accounting Officer)

Thomas G. Bigley Director

John T. Conroy, Jr.* Director

William J. Copeland* Director

James E. Dowd* Director

Lawrence D. Ellis, M.D.* Director

Edward L. Flaherty, Jr.* Director

Peter E. Madden* Director

Gregor F. Meyer* Director

Wesley W. Posvar* Director

Marjorie P. Smuts* Director

* By Power of Attorney

Exhibit (11) under N-1A
Exhibit 23 under 601/Reg SK

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Post-Effective Amendment No.16 to
Registration Statement No. 33-43472 of the Strategic Income Fund of our
report dated Jnuary 13, 1995 appearing in the Statement of Additional
Information which is a part of such Registration Statement.

/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
July 6, 1995

Exhibit (15(i) on Form N-1A
Exhibit (10) under Item 601/Reg. S-K

EXHIBIT I
to the
Distribution Plan
Fixed Income Securities, Inc.
Strategic Income Fund
Class B

This Distribution Plan is adopted by Fixed Income Securities,
Inc. with respect to the Class of Shares of the portfolio of the
Corporation set forth above.
In compensation for the services provided pursuant to this
Plan, FSC will be paid a monthly fee computed at the annual rate
of .75 of 1% of the average aggregate net asset value of the
Class B Shares of Strategic Income Fund held during the month.
Witness the due execution hereof this 1st day of June, 1995.

Fixed Income Securities, Inc.

By:/s/ Richard B. Fisher
President

Exhibit (18)(i) on Form N-1A
Exhibit (24) under Item 601/Reg. S-K

Amendment No. 1 to
Schedule 1
to Limited Power of Attorney
by Fixed Income Securities, Inc.
(the "Corporation"), acting on
behalf of each of the series portfolios
listed below, and appointing
Federated Advisers
the attorney-in-fact of the
Corporation

List of Series Portfolios

Limited Term Fund
Limited Term Municipal Fund
Strategic Income Fund

<S> <C>

<ARTICLE> 6
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<NUMBER> 7
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Strategic Income Fund
Class A Shares
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<PER-SHARE-NII> 0.450
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<S> <C>

<ARTICLE> 6
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<NAME> Fixed Income Securities, Inc.
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<PERIOD-END> Nov-30-1994
<INVESTMENTS-AT-COST> 6,104,617
<INVESTMENTS-AT-VALUE> 5,955,812
<RECEIVABLES> 178,785
<ASSETS-OTHER> 125,094
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,169
<TOTAL-LIABILITIES> 377,716
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,066,375
<SHARES-COMMON-STOCK> 124,641
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (148,970)
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<NET-INVESTMENT-INCOME> 146,412
<REALIZED-GAINS-CURRENT> (27,206)
<APPREC-INCREASE-CURRENT> (148,970)
<NET-CHANGE-FROM-OPS> (29,764)
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<DISTRIBUTIONS-OF-INCOME> 26,526
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 2,969
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<SHARES-REINVESTED> 1,844
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 166,612
<AVERAGE-NET-ASSETS> 2,741,750
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.400
<PER-SHARE-GAIN-APPREC> (0.440)
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