INVESTMENT SERIES FUNDS INC, 485BPOS, 1997-02-28

INVESTMENT SERIES FUNDS INC
485BPOS, 1997-02-28

Previous: INCOME OPPORTUNITIES FUND 1999 INC, NSAR-B, 1997-02-28

Next: GALAXY VIP FUND, 485APOS, 1997-02-28

1933 Act File No. 33-48847
1940 Act File No. 811-07021

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.12 ............ X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 13 .......................... X

INVESTMENT SERIES FUNDS, 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:

X immediately upon filing pursuant to paragraph (b)
on 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 December 30, 1996; or
intends to file the Notice required by that Rule on or about
; 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.

Copy to:
Matthew Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
CROSS-REFERENCE SHEET

This Amendment to the Registration Statement of Investment Series
Funds, Inc., which consists of one portfolio, Federated Bond Fund,
consisting of four classes of shares (a) Class A Shares, (b) Class B
Shares, (c) Class C Shares, and (d) Class F Shares (formerly, Fortress
Shares), and is comprised of the following:

PART A.INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1.Cover Page ............ Cover Page
Item 2.Synopsis .............. Summary of Fund Expenses.
Item 3.Condensed Financial
Information ........... Financial Highlights; Performance
Information.
Item 4.General Description of
Registrant ............ Synopsis; General Information; Investment
Objective; Investment Policies; Investment
Limitations; Portfolio Turnover;
Item 5.Management of the Fund Investment Series Funds, Inc. Information;
Management of the Corporation;
Administration of the Fund; Brokerage
Transactions; Distribution of Shares.
Item 6.Capital Stock and Other
Securities ............ Dividends; Capital Gains; Dividends and
Distributions; Retirement Plans;
Shareholder Information; Voting Rights;
Tax Information; Federal Income Tax;
Pennsylvania Corporate and Personal
Property Taxes.
Item 7.Purchase of Securities Being
Offered ............... Net Asset Value; Investing in the Fund;
Investing in Class A Shares; Investing in
Class B Shares; Investing in Class C
Shares; Investing in Class F Shares; How
to Purchase Shares; Share Purchases;
Minimum Investment Required; What Shares
Cost; Eliminating the Sales Load; Reducing
or Eliminating the Sales Load; Systematic
Investment Program; Certificates and
Confirmations; Exchange Privilege;
Requirements for Exchange; Tax
Consequences; Making an Exchange.
Item 8.Redemption or Repurchase How to Redeem Shares; Redeeming (Class
A, Class B, Class C,
Class F Shares); Through a Financial
Institution; Redeeming Shares Through Your
Financial Institution; Directly from the
Fund; Redeeming Shares By Mail; Redeeming
Shares By Telephone; Other Classes of
Shares; Directly by Mail; Exchanges for
Shares of Other Funds; Systematic
Withdrawal Program; Accounts with Low
Balances; Contingent Deferred Sales
Charge.
Item 9.Pending Legal Proceedings None.

PART B.INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10.......................Cover Page Cover Page.
Item 11.......................Table of Contents Table of Contents.
Item 12.......................General Information and
History ............... General Information About the Fund.
Item 13.......................Investment Objectives and
Policies .............. Investment Objective and Policies;
Investment Limitations.
Item 14.......................Management of the Fund Investment
Series Funds, Inc. Management.
Item 15.......................Control Persons and Principal
Holders of Securities . Fund Ownership.
Item 16.......................Investment Advisory and Other
Services .............. Investment Advisory Services;
Administrative Services; Transfer Agent
and Dividend Disbursing Agent.
Item 17.......................Brokerage Allocation Brokerage
Transactions.
Item 18.......................Capital Stock and Other
Securities ............ Not Applicable.
Item 19.......................Purchase, Redemption and
Pricing of Securities Being
Offered ............... Purchasing Shares; Determining Net Asset
Value; Redeeming Shares; Exchange
Privilege.
Item 20.......................Tax Status Tax Status.
Item 21.......................Underwriters Not Applicable.
Item 22.......................Calculation of Performance
Data .................. Total Return; Yield; Performance
Comparisons.
Item 23. Financial Statements ......Financial Statements (Financial
Statements for the fiscal year ended
October 31, 1996, are incorporated
herein by reference to the Annual
Report of the Fund dated October 31, 1996;
File Nos. 33-48847 and 811-07021)

FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

PROSPECTUS

The shares of Federated Bond Fund (the "Fund") represent interests in a
diversified portfolio of securities which is an investment portfolio of
Investment Series Funds, Inc. (the "Corporation"), an open-end management
investment company (a mutual fund).

The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in a portfolio of investment grade bonds.

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 RISK,
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, or Class C Shares of the Fund. Keep
this prospectus for future reference.

The Fund has also filed with the Securities and Exchange Commission ("SEC") a
Statement of Additional Information dated February 28, 1997 for Class A Shares,
Class B Shares, Class C Shares, and Class F Shares. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain other
information, or to make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated February 28, 1997

- --------------------------------------------------------------------------------
TABLE OF CONTENTS

Summary of Fund Expenses.......................................................1
Class A Shares...............................................................1
Class B Shares...............................................................2
Class C Shares...............................................................3

Financial Highlights...........................................................4
Class A Shares...............................................................4
Class B Shares...............................................................5
Class C Shares...............................................................6

General Information............................................................7

Investment Information.........................................................8
Investment Objective.........................................................8
Investment Policies..........................................................8
Investment Limitations......................................................17

Net Asset Value...............................................................18

Investing in the Fund.........................................................18

How To Purchase Shares........................................................19
Investing In Class A Shares.................................................19
Reducing or Eliminating the
Sales Charge.............................................................20
Investing In Class B Shares.................................................22
Investing In Class C Shares.................................................22
Special Purchase Features...................................................23

Exchange Privilege............................................................24
Requirements for Exchange...................................................24

How To Redeem Shares..........................................................26
Special Redemption Features.................................................27
Contingent Deferred Sales Charge............................................27
Elimination of Contingent Deferred
Sales Charge.............................................................28

Account and Share Information.................................................29
Fund Information..............................................................30
Management of the Corporation...............................................30
Distribution of Shares......................................................31
Administration of the Fund..................................................33

Shareholder Information.......................................................33
Voting Rights...............................................................33

Tax Information...............................................................34
Federal Income Tax..........................................................34
State and Local Taxes.......................................................34

Performance Information.......................................................34

Other Classes of Shares.......................................................35

Appendix......................................................................36

Addresses.....................................................................38

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

SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND

<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)...................................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.55%
12b-1 Fee (3).................................................................................................... 0.00%
Total Other Expenses............................................................................................. 0.50%
Shareholder Services Fee (after waiver) (4)....................................................... 0.20%
Total Operating Expenses (5)............................................................................ 1.05%

</TABLE>

(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of 0.50% for redemptions made
within one year of purchase.

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.

(3) Class A Shares has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending October 31, 1997. If Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up to
0.25% of its average daily net assets for the 12b-1 fee. See "Fund
Information."

(4) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder
service provider can terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.

(5) The total operating expenses were 1.30% absent the voluntary waivers of
portions of the management fee and shareholder services fee.

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.

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 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return (2) redemption at the end
of each time period and (3) payment of the maximum sales charge.............. $55 $77 $100 $167
</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
FEDERATED BOND FUND

<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)...................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.55%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.55%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (3)(4)......................................................................... 1.85%

</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").

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

(4) The total operating expenses would have been 2.05% absent the voluntary
waiver of a portion of the management fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares of the Fund 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 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period.......................................................... $76 $102 $123 $195
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $19 $58 $100 $195
</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
FEDERATED BOND FUND

<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)...................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.55%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.55%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (3)............................................................................ 1.85%

</TABLE>

(1) The contingent deferred sales charge assessed 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. (See "Contingent Deferred Sales Charge").

(3) The total operating expenses would have been 2.05% absent the voluntary
waiver of a portion of the management fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class C Shares of the Fund 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 CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period.......................................................... $29 $58 $100 $217
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $19 $58 $100 $217
</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
FEDERATED BOND FUND

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
<S> <C> <C>
1996 1995(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.71 0.26
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.67 0.37
- ---------------------------------------------------------------------------------------------------- --------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.71) (0.25)
- ---------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 7.21% 3.92%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.05% 1.02%*
- ----------------------------------------------------------------------------------------------------
Net investment income 7.46% 8.22%*
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.25% 0.35%*
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $37,045 $5,070
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be obtained
free of charge.

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

FINANCIAL HIGHLIGHTS--CLASS B SHARES
FEDERATED BOND FUND

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
<S> <C> <C>
1996 1995(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.64 0.24
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.60 0.35
- ---------------------------------------------------------------------------------------------------- --------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.64) (0.23)
- ---------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 6.40% 3.72%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.85% 1.81%*
- ----------------------------------------------------------------------------------------------------
Net investment income 6.66% 7.36%*
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.20% 0.30%*
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $125,620 $27,768
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be obtained
free of charge.

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

FINANCIAL HIGHLIGHTS--CLASS C SHARES
FEDERATED BOND FUND

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
<S> <C> <C>
1996 1995(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.64 0.24
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04) 0.11
- ---------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.60 0.35
- ---------------------------------------------------------------------------------------------------- --------- -----------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.64) (0.23)
- ---------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76
- ---------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 6.40% 3.72%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.85% 1.81%*
- ----------------------------------------------------------------------------------------------------
Net investment income 6.70% 7.31%*
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.20% 0.30%*
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $22,897 $5,508
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 49% 77%
- ----------------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from June 28, 1995 (date of initial
public offering) to October 31, 1995.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be obtained
free of charge.

- --------------------------------------------------------------------------------
GENERAL INFORMATION

The Corporation was organized under the laws of the State of Maryland on May 20,
1992. Prior to February 5, 1993, the Fund was operated as a portfolio of
Investment Series Trust, a Massachusetts business trust established pursuant to
a Declaration of Trust dated March 17, 1987. The Articles of Incorporation
permit the Fund to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus, the Board of Directors (the "Directors") has
established four classes of shares, known as Class A Shares, Class B Shares,
Class C Shares (individually and collectively referred to herein, as the context
requires, as "Shares"), and Class F Shares. This prospectus relates only to the
Class A Shares, Class B Shares, and Class C Shares of the Fund.

For information on how to purchase the Shares offered by this prospectus, please
refer to "Investing in the Fund." The minimum initial investment for Class A
Shares is $500. The minimum initial investment for Class B Shares and Class C
Shares is $1,500. 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 charge and
are redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see
"Redeeming 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 "Redeeming 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 12 months following
purchase. See "Redeeming Shares."

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 or investment adviser ("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 Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

- --------------------------------------------------------------------------------
INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
investment objective stated above cannot be changed without the approval of
shareholders. Unless stated otherwise, the investment policies of the Fund
described below may be changed without shareholder approval.
INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund invests primarily in a professionally managed, diversified portfolio of
bonds. Under normal circumstances, at least 65% of the Fund's net assets will be
invested in such bonds. Additionally, at least 65% of the Fund's net
assets will be invested in investment grade securities, including repurchase
agreements collateralized by such investment grade securities. Investment
grade securities are generally described as securities that are rated in one
of the top four ratings categories by a nationally recognized statistical
rating organization ("NRSRO"), such as Moody's Investors Service, Inc.
("Moody's), Standard & Poor's Ratings Group ("S&P"), or Fitch Investors
Service, Inc. ("Fitch") or that are unrated but determined by the Fund's
investment adviser to be of comparable quality. Permitted investments include:

domestic or foreign corporate debt obligations;

obligations of the United States;

taxable municipal debt obligations (as a matter of operating policy, the lowest
rated municipal debt obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable quality in the judgment
of the Fund's Adviser);

asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;

bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge
Act subsidiary and guaranteed by the bank, with remaining maturities of nine
months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits

according to the bank's last published statement of condition preceding the
date of acceptance;
preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;

convertible securities, irrespective of their ratings;

equity securities;

other securities which are deemed by the Fund's Adviser, to be consistent with
the Fund's investment objective; and

repurchase agreements collateralized by acceptable investments.

Under normal circumstances, the Fund will not invest more than 10% of its total
assets in equity securities.

CORPORATE DEBT OBLIGATIONS

Although the corporate debt obligations in which the Fund will invest primarily
are rated as investment grade by an NRSRO, or of comparable quality in the
judgment of the Adviser, the Fund may invest not more than 35% of its net assets
in corporate debt obligations that are not investment grade, but are rated in
any category below BBB or Baa or are of comparable quality in the judgment of
the Adviser (i.e., "junk bonds"). Corporate debt obligations that are below
investment grade are high-yield, high-risk securities, typically subject to
greater market fluctuations and greater risk of loss of income and principal due
to an issuer's default. To a greater extent than investment grade securities,
lower rated securities tend to reflect short-term corporate, economic, and
market developments, as well as investor perceptions of the issuer's credit
quality. In addition, lower rated securities may be more difficult to dispose of
or to value than higher rated, lower-yielding securities. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments with respect to these securities than
for higher rated securities.

The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
MARKET VALUE OF BOND
HOLDINGS AS OF
CREDIT RATING OCTOBER 31, 1996
<S> <C>
BB..................... 11.0%
B...................... 14.1
CC & CCC............... 0.4
-----
25.5%
=====
</TABLE>

U.S. GOVERNMENT OBLIGATIONS

The U.S. government obligations in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities. These
securities include, but are not limited to:

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

notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States;

notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and

notes, bonds, and discount notes of other U.S. government instrumentalities
supported only by the credit of the instrumentalities.

Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government are backed by the full faith and credit of the U.S. Treasury. No
assurances can be given that the U.S. government will provide financial support
to other agencies or instrumentalities, since it is

not obligated to do so. These agencies and instrumentalities are supported by:

the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;

discretionary authority of the U.S. government to purchase certain obligations
of an agency or instrumentality; or

the credit of the agency or instrumentality.

MUNICIPAL SECURITIES

Municipal securities are generally issued to finance public works such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.

ASSET-BACKED SECURITIES

Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets
including vehicle installment purchase obligations and credit card receivables
into pools. Interests in these pools are sold as individual securities and are
not backed or guaranteed by the U.S. government and may not be secured. Payments
from the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.

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

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

The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends

primarily upon the credit quality of the assets underlying such securities, how
well the entity issuing the securities is insulated from the credit risk of the
originator or any other affiliated entities, and the amount and quality of any
credit enhancement to such securities.

NON-MORTGAGE RELATED
ASSET-BACKED SECURITIES

The Fund may invest in non-mortgage related 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 collateralized mortgage obligations and mortgage
pass-through securities, which are described below.

MORTGAGE RELATED
ASSET-BACKED SECURITIES

The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by government agencies.

ADJUSTABLE RATE MORTGAGE
SECURITIES ("ARMS")

ARMs are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMs in which the Fund invests
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages which
collateralize ARMs issued by GNMA are fully guaranteed by the Federal Housing
Administration ("FHA") or Veterans Administration ("VA"), while those
collateralizing ARMs issued by FHLMC or FNMA are typically conventional
residential mortgages conforming to strict underwriting size and maturity
constraints.

COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")

CMOs are bonds issued by single-purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies, investment bankers, or
companies related to the construction industry. CMOs purchased by the Fund may
be:

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;

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

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

All CMOs purchased by the Fund are investment grade, as rated by a NRSRO.

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 (the "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, and a
single class of "residual interests." To qualify as a REMIC, substantially all
the assets of the entity must be in assets directly or indirectly secured
principally by real property.

RESETS OF INTEREST

The interest rates paid on the ARMs, CMOs, and REMICs 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. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.

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

CAPS AND FLOORS

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

These payment caps may result in negative amortization. The value of mortgage
securities in which the Fund 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.

BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution having
capital,

surplus and undivided profits over $100 million or insured by BIF or SAIF. Bank
instruments may include Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits ("ETDs").
Due to the fact that institutions issuing such instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as the reserve requirements, loan limitations, examination, accounting,
auditing, recordkeeping, and the public availability of information, these
investments may present additional risks to investors.

CONVERTIBLE SECURITIES

Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock of the issuer or a related financial entity
(for example, a merged or acquired company or partner). Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and warrants; or
securities which cap or otherwise limit returns to the convertible security
held, such as DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable
for Common Stock when issued as a debt security), LYONS--(Liquid Yield Option
Notes, which are corporate bonds that are purchased at prices below par with no
coupons and are convertible into stock), PERCS--(Preferred Equity Redeemable
Stock, an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES--(Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).

Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. The Fund does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This could
result in the Fund purchasing and holding, without limit, convertible securities
rated below investment grade by an NRSRO or in the Fund holding such securities
where they have acquired a rating below investment grade after the Fund has
purchased it.

ZERO COUPON CONVERTIBLE SECURITIES

Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to put the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.

Federal income tax law requires the holder of a zero coupon convertible security
to recognize income with respect to the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company and
avoid liability of federal income taxes, the Fund will be required to distribute
income accrued with respect to zero coupon convertible securities which it owns,
and may have to sell portfolio securities (perhaps at disadvantageous times) in

order to generate cash to satisfy these distribution requirements.

RESTRICTED AND ILLIQUID SECURITIES

The Fund intends to invest in restricted securities and as a matter of
fundamental investment policy, which may not be changed without shareholder
approval, will limit such investments to no more than 10% of its net assets.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objective and policies, but which are subject to
restriction on resale under federal securities law. However, the Fund will limit
investments in illiquid securities, including repurchase agreements providing
for settlement in more than seven days after notice, to 15% of its net assets.

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

The Fund may invest in foreign securities within the parameters of its
investment objective, policies, and limitations. Investments in foreign
securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in domestic
issuers. These considerations include the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It may also be more difficult to enforce
contractual obligations abroad than would be the case in the United States
because of differences in the legal systems. Transaction costs in foreign
securities may be higher. The Adviser will consider these and other factors
before investing in foreign securities and will not make such investments
unless, in its opinion, such investments will meet the Fund's standards and
objectives.

With respect to foreign governmental securities, the Fund reserves the right to
invest up to 25% of its total assets in fixed income securities of foreign
governmental units located within an individual foreign nation and to purchase
or sell various currencies on either a spot or forward basis in connection with
these investments. The Adviser will allocate investments among securities of
particular issuers on the basis of its views as to the best values then
currently available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled with
expectations regarding the economy, movements in the general level and term of
interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.

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 stock of any 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.
The Fund will only invest in other investment companies that are money market
funds having an investment objective and policies similar to its own and
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The Adviser to the Fund will waive its
investment advisory fee on assets invested in securities of open-end investment
companies.

TEMPORARY INVESTMENTS

The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity.

REPURCHASE AGREEMENTS

Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or
certificates of deposit 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 the securities from the Fund, the Fund could receive
less than the repurchase price on any sale of such securities. Repurchase
agreements are included within the definition of investment grade securities.

WHEN-ISSUED OR 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 the transaction 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.

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 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 and 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.

that a borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.

PUT AND CALL OPTIONS

The Fund may purchase put options on financial futures contracts and put options
on portfolio securities. Financial futures may include index futures. These
options will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. For the immediate future, the Fund will enter
into futures contracts directly only when it desires to exercise a financial
futures put option in its portfolio rather than either closing out the option or
allowing it to expire. The Fund will only purchase puts on financial futures
contracts which are traded on a nationally recognized exchange.

The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not traded on
an exchange. The Fund purchases options only from investment dealers and other
financial associations (such as commercial banks or savings associations) deemed
creditworthy by the Adviser.

In general, over-the-counter put options differ from exchange traded put options
in the following respects. Over-the-counter put options are two party contracts
with price and terms negotiated between buyer and seller, and such options are
endorsed and/or guaranteed by third parties (such as a New York Stock Exchange
member). Additionally, over-the-counter strike prices are adjusted to reflect
dividend payments, initial strike prices are generally set at market, and option
premiums (which are all time premiums) are amortized on a straight line basis
over the life of the option. In contrast, exchange traded options are
third-party contracts with standardized strike prices and expiration dates and
are purchased from the Clearing Corporation. Strike prices are not adjusted for
dividends, and options are marked to market, thereby obviating the need to
amortize the time premium. Exchange traded options have a continuous liquid
market while over-the-counter options do not.

The Fund may also write call options on all or any portion of its portfolio in
an effort to generate income for the Fund. The Fund will write call options on
securities either held in its portfolio or which it has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Fund
writes and sells must be listed on a recognized options exchange. Although the
Fund reserves the right to write covered call options on its entire portfolio,
it will not write such options on more than 25% of its total assets unless a
higher limit is authorized by its Directors.

The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.

RISKS. When the Fund writes a call option, the Fund risks not participating in
any rise in the value of the underlying security. In addition, when the Fund
purchases puts on financial futures contracts to protect against declines in
prices of portfolio securities, 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
contract and its corresponding put 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 such an event, the Fund may lose the purchase price of the
put option. Finally, it is not certain that a secondary market for options will
exist at all times. Although the Adviser will consider

liquidity before entering into option transactions, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. The Fund's ability to establish and close out option
positions depends on this secondary market.

DERIVATIVE CONTRACTS
AND SECURITIES

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

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

INVESTMENT LIMITATIONS

The Fund will not:

borrow money directly or through reverse repurchase agreements (arrangements in
which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except,
under certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge up to 10% of the value of 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;

sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions; nor

with respect to 75% of the value of its total assets, invest more than 5% in
securities of any one issuer other than cash, cash items or securities issued
or guaranteed by the government of the United States, its agencies, or
instrumentalities and repurchase agreements collateralized by such securities.

The above investment limitations cannot be changed without shareholder approval.

- --------------------------------------------------------------------------------
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 is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; 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
charges 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 charge 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"). Class A
Shares are distributed pursuant to a Rule 12b-1 plan whereby the distributor is
paid a fee of up to .25%. Certain purchases of Class A Shares qualify for
reduced sales charges. See "Reducing or Eliminating the Sales Charge." Class A
Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales charge, 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 Class B Shares' higher possible 12b-1 fee
of up to .75%.

CLASS C SHARES

Class C Shares are sold without an initial sales charge 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 Class C Shares' higher possible 12b-1 fee of up to .75%. 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 charge as follows:
<TABLE>
<S> <C> <C> <C>
SALES SALES DEALER
CHARGE CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE*
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%
$1,000,000 or greater 0.00% 0.00% 0.25%
</TABLE>

*See sub-section entitled "DEALER CONCESSION."

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

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge 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 charge 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 charge; 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 charge 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 charge 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 CHARGE

The sales charge 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 or eliminate the sales
charge 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 charge.

In addition, the sales charge, if applicable, is reduced or eliminated 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 charge on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.

To receive the sales charge reduction or elimination, 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 charge after it
confirms or eliminates the purchases.

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has the
privilege of combining concurrent purchases of two or more Class A Shares in the
Federated Funds, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $80,000 in one of the other
Class A Shares in the Federated Funds with a sales charge, and $20,000 in this
Fund, the sales charge would be reduced or eliminated.

To receive this sales charge reduction or elimination, 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
or eliminate the sales charge after it confirms the purchases.

LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of shares of the funds in
the Federated Funds (excluding money market funds) over the next 13 months, the
sales charge may be reduced or eliminated by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales chargeadjustment
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 the
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 charge.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 Federated 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 one-time
right, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. 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 charge. 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
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge 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% 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 charge,
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 charge, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Federated 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 (see "Other Payments to Financial Institution").

PURCHASING SHARES BY WIRE

To purchase Shares directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. Shares cannot be purchased by wire on holidays when wire
transfers are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.

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 Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 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 or savings
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 charge, 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 Federated Funds at net asset value. Neither the Fund nor
any of the funds in the Federated Funds imposes any additional fees on
exchanges.
CLASS B SHARES
Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Federated Funds. (Not all funds in the Federated Funds
currently offer Class B Shares. Contact your financial institution regarding the
availability of other Class B Shares in the Federated 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 Federated 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 Federated Funds at net asset value without a contingent
deferred sales charge. (Not all funds in the Federated Funds currently offer
Class C Shares. Contact your financial institution regarding the availability of
other Class C Shares in the Federated 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 Federated 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."

Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.

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

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.

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

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 Shareholder 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 not receive any
dividend that is payable to shareholders of record on that date. 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 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. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are restricted
should be directed to your shareholder services representative at the telephone
number listed on your account statement.

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

The written request should state: the 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. Normally, a
check for the proceeds is mailed within one business day, but in no event more
than seven days, after the receipt of a proper written redemption request.
Dividends are paid up to and including the day that a redemption request is
processed.

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

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, other than
retirement accounts subject to required minimum distributions. 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 charge, 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 charge 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 Class A Shares at the time of purchase or the net asset value of
the redeemed Class A 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>
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</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.

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
Federated Funds in the same class (see "Exchange Privilege"). In determining the
applicablity of the contingent deferred sales charge, the required holding
period for your new Shares received through an exchange will include the period
for which your original Shares were held. 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

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 the last
surviving shareholder; (2) redemptions representing minimum required
distributions from an Individual Retirement Account or other retirement plan to
a shareholder who has attained the age of 70-1/2; (3) involuntary redemptions by
the Fund of Shares in shareholder accounts that do not comply with the minimum
balance requirements; and (4) qualifying redemptions of Class B Shares under a
Systematic Withdrawal Program. To qualify for elimination of the contingent
deferred sales charge through a Systematic Withdrawal Program, the redemptions
of Class B Shares must

be from an account: that is at least 12 months old, has all Fund distributions
reinvested in Fund Shares, and has a value of at least $10,000 when the
Systematic Withdrawal Program is established. Qualifying redemptions may not
exceed 1.00% monthly of the account value as periodically determined by the
Fund. For more information regarding the elimination of the contingent deferred
sales charge through a Systematic Withdrawal Program contact your financial
intermediary or the Fund. 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, and their
immediate family members; 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 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 Fund reserves the right to discontinue or modify the
elimination of the contingent deferred sales charge. Shareholders will be
notified of a discontinuation. 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 the shareholder is entitled to such
elimination.

- --------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION

CERTIFICATES AND CONFIRMATIONS

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

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.

ACCOUNTS WITH LOW BALANCES

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 CORPORATION

BOARD OF DIRECTORS

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

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to .75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion.

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 $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.

Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992 and
is responsible for managing the allocation of fixed income assets (between
investment grade and high yield). Mr. Balestrino also manages the investment
grade portion of the Fund. Mr. Balestrino joined Federated Investors in 1986 and
has been a Vice President of the Fund's investment adviser since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment adviser from
1991 until 1995. Mr. Balestrino is a Chartered Financial Analyst and received
his Master's Degree in Urban and Regional Planning from the University of
Pittsburgh.

Mark E. Durbiano has been the Fund's portfolio manager since June, 1992 and is
responsible for managing the high yield portion of the Fund. Mr. Durbiano joined
Federated Investors in 1982 and has been a Senior Vice President of the Fund's
investment adviser since January 1996. From 1988 through 1995, Mr. Durbiano was
a Vice President of the Fund's investment adviser. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in 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 will pay dealers an amount equal to 5.5% 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.

The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. 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.

DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), the distributor may be paid a fee in an amount
computed at an annual rate of up to .25% for Class A Shares and up to .75% for
Class B Shares and Class C Shares 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. The Fund does not currently
make payments to the distributor or charge a fee under the Distribution Plan for
Class A Shares, and shareholders of Class A Shares will be notified if the Fund
intends to charge a fee under the Distribution Plan. For Class A Shares and
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 .25% 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.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

With respect to Class A Shares, Class B Shares, and Class C Shares, in addition
to payments made pursuant to the Distribution Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services may pay
supplemental fees from their own

assets to financial institutions as financial assistance for providing
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Corporation. Federated Services
Company 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
ADMINISTRATIVE AVERAGE AGGREGATE
FEE DAILY NET ASSETS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of
$750 million
</TABLE>

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

- --------------------------------------------------------------------------------
SHAREHOLDER 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 of February 5, 1997, MLPF&S, Jacksonville, Florida, acting
in various capacities for numerous accounts, was the owner of record of
approximately 1,021,153 (38.27%) of the Class C Shares of the Fund, and
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters presented for a vote of shareholders.

As a Maryland corporation, the Corporation 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 the Directors or by 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 applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.

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

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, 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.

STATE AND LOCAL TAXES

Fund 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 Class F Shares (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 charge 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 Class F Shares.

From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Class F 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 Class F
Shares to certain indices.

- --------------------------------------------------------------------------------
OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge, 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 Class F Shares are subject to certain of the same expenses; however,
the front-end sales charge for Class F Shares is lower than that for Class A
Shares. Expense differences, however, between Shares and Class F Shares may
affect the performance of each class.

To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial institution.

- --------------------------------------------------------------------------------
APPENDIX
(UNAUDITED)

STANDARD AND POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATINGS

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

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

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

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

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

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.

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.

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.

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.

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 limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.

- --------------------------------------------------------------------------------
ADDRESSES

Investment Series Funds, Inc.
Federated Bond Fund
Class A Shares
Class B Shares
Class C Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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 Shareholder Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Center
Pittsburgh, Pennsylvania 15219

FEDERATED BOND FUND

(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

PROSPECTUS

An Open-End, Diversified
Management Investment Company

February 28, 1997

[LOGO OF FEDERATED INVESTORS]

Federated Investors

Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 461444507
Cusip 461444606
Cusip 461444705
G01271-01 (2/97)

[RECYCLED PAPER LOGO]

FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS F SHARES
(formerly, Fortress Shares)

PROSPECTUS

The investment objective of the Fund is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in a portfolio of investment grade bonds.

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

The Fund has also filed with the Securities and Exchange Commission ("SEC") a
Statement of Additional Information dated February 28, 1997 for Class A Shares,
Class B Shares, Class C Shares, and Class F Shares. The information contained in
the Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge, by calling 1-800-341-7400. To obtain other
information, or make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

Prospectus dated February 28, 1997

TABLE OF CONTENTS

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

Financial Highlights...........................................................2

General Information............................................................3

Investment Information.........................................................3
Investment Objective.........................................................3
Investment Policies..........................................................3
Investment Limitations......................................................13

Net Asset Value...............................................................13

Investing in Class F Shares...................................................14

Share Purchases.............................................................14
Minimum Investment Required.................................................14
What Shares Cost............................................................14
Eliminating the Sales Charge................................................15
Systematic Investment Program...............................................16
Exchange Privileges.........................................................17
Certificates and Confirmations..............................................17
Dividends and Distributions.................................................17
Retirement Plans............................................................17

Redeeming Class F Shares......................................................18

Through a Financial Institution.............................................18
Contingent Deferred Sales Charge............................................19
Systematic Withdrawal Program...............................................20
Accounts with Low Balances..................................................20
Exchanges for Shares of Other Funds.........................................20

Fund Information..............................................................21
Management of the Corporation...............................................21

Distribution of Class F Shares..............................................22

Administration of the Fund..................................................23

Shareholder Information.......................................................23
Voting Rights...............................................................23

Tax Information...............................................................24
Federal Income Tax..........................................................24
State & Local Taxes.........................................................24

Performance Information.......................................................24

Other Classes of Shares.......................................................25

Appendix......................................................................25
Addresses.....................................................................28

SUMMARY OF FUND EXPENSES
FEDERATED BOND FUND
<TABLE>
<CAPTION>
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................... 1.00%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................................ None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1)..................................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.55%
12b-1 Fee........................................................................................................ None
Total Other Expenses............................................................................................. 0.53%
Shareholder Services Fee (after waiver) (3)....................................................... 0.23%
Total Operating Expenses (4)............................................................................ 1.08%

<CAPTION>
CLASS F SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).........................
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).................................................................
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable) (1)..........................................................
Redemption Fee (as a percentage of amount redeemed, if applicable)....................................
Exchange Fee..........................................................................................
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).....................................................................
12b-1 Fee.............................................................................................
Total Other Expenses..................................................................................
Shareholder Services Fee (after waiver) (3).......................................................
Total Operating Expenses (4).................................................................
</TABLE>

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within
four years of their purchase date. (See "Contingent Deferred Sales Charge").

(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder
service provider can terminate this voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.

(4) The total operating expenses were 1.30% absent the voluntary waivers of
portions of the management fee and shareholder services fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class F Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Investing in Class F 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 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period; and (3)
payment of the maximum sales charge.......................................... $31 $55 $69 $140
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $21 $44 $69 $140
</TABLE>

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

FEDERATED BOND FUND
FINANCIAL HIGHLIGHTS--CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996 is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's Financial Statements and Notes thereto, which may be
obtained from the Fund.

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992(A) 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 9.76 $ 9.08 $ 10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79 $ 9.86
- -----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------
Net investment income 0.71 0.79 0.76 0.77 0.59 1.01 1.08 1.23
- -----------------------------------
Net realized and unrealized gain
(loss) on investments (0.04) 0.65 (1.09) 1.07 0.43 1.92 (1.84) (1.07)
- ----------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total from investment operations 0.67 1.44 (0.33) 1.84 1.02 2.93 (0.76) 0.16
- ----------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
LESS DISTRIBUTIONS
- -----------------------------------
Distributions from net investment
income (0.71) (0.76) (0.75) (0.77) (0.60) (1.01) (1.14) (1.23)
- -----------------------------------
Distributions from net realized
gain on investment transactions -- -- (0.14) -- -- -- -- --
- ----------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
Total distributions (0.71) (0.76) (0.89) (0.77) (0.60) (1.01) (1.14) (1.23)
- ----------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.76 $ 9.08 $ 10.30 $ 9.23 $ 8.81 $ 6.89 $ 8.79
- ----------------------------------- --------- --------- --------- --------- ----------- --------- --------- ---------
TOTAL RETURN (C) 7.18% 16.51% (3.41%) 20.61% 11.79% 44.62% (9.59%) 1.32%
- -----------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------
Expenses 1.08% 1.03% 1.05% 1.04% 0.49%* 1.00% 1.01% 1.14%
- -----------------------------------
Net investment income 7.38% 8.20% 7.92% 7.69% 8.05%* 12.17% 13.43% 12.81%
- -----------------------------------
Expense waiver/reimbursement (d) 0.22% 0.31% 0.33% 0.61% 2.01%* 1.50% 1.49% 1.36%
- -----------------------------------
SUPPLEMENTAL DATA
- -----------------------------------
Net assets, end of period
(000 omitted) $267,720 $195,502 $146,270 $125,762 $54,886 $6,068 $7,484 $4,734
- -----------------------------------
Portfolio Turnover 49% 77% 74% 51% 49% 33% 28% 38%
- -----------------------------------

<CAPTION>
1988(B)
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.06
- -----------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------
Net investment income 0.61
- -----------------------------------
Net realized and unrealized gain
(loss) on investments (0.16)
- ----------------------------------- -----------
Total from investment operations 0.45
- ----------------------------------- -----------
LESS DISTRIBUTIONS
- -----------------------------------
Distributions from net investment
income (0.65)
- -----------------------------------
Distributions from net realized
gain on investment transactions --
- ----------------------------------- -----------
Total distributions (0.65)
- ----------------------------------- -----------
NET ASSET VALUE, END OF PERIOD $ 9.86
- ----------------------------------- -----------
TOTAL RETURN (C) 4.62%
- -----------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------
Expenses 1.00%*
- -----------------------------------
Net investment income 12.58%*
- -----------------------------------
Expense waiver/reimbursement (d) 1.00%*
- -----------------------------------
SUPPLEMENTAL DATA
- -----------------------------------
Net assets, end of period
(000 omitted) $4,968
- -----------------------------------
Portfolio Turnover 31%
- -----------------------------------
</TABLE>

* Computed on an annualized basis.

(a) During the ten month period, the Fund changed its fiscal year-end from
December 31 to October 31.

(b) Reflects operations for the period from July 8, 1988 (date of initial
public investment) to December 31, 1988.

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

(d) 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 October 31, 1996, which can be obtained
free of charge.

GENERAL INFORMATION

The Corporation was organized under the laws of the State of Maryland on May 20,
1992. Prior to February 5, 1993, the Fund was operated as a portfolio of
Investment Series Trust, a Massachusetts business trust established pursuant to
a Declaration of Trust dated March 17, 1987. The Articles of Incorporation
permit the Fund to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in any
one portfolio may be offered in separate classes. With respect to this Fund, as
of the date of this prospectus, the Board of Directors (the "Directors") has
established four classes of shares, known as Class A Shares, Class B Shares,
Class C Shares, and Class F Shares. This prospectus relates only to Class F
Shares ("Shares," or "Class F Shares," as the context requires) of the Fund.

Shares of the Fund are designed primarily for individuals and institutions
seeking as high a level of current income as is consistent with the preservation
of capital by investing in a portfolio of investment grade bonds. A minimum
initial investment of $1,500 is required, unless the investment is in a
retirement account, in which case the minimum initial investment is $50.

Shares are sold at net asset value plus an applicable sales charge and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed on Shares, other than shares purchased through reinvestment of
dividends, which are redeemed within one to four years of their purchase date.

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund invests primarily in a professionally managed, diversified portfolio of
bonds. Under normal circumstances, at least 65% of the Fund's net assets will be
invested in such bonds. Additionally, at least 65% of the Fund's net
assets will be invested in investment grade securities, including repurchase
agreements collateralized by such investment grade securities. Investment
grade securities are generally described as securities that are rated in one of
the top four rating categories by a nationally recognized statistical rating
organization ("NRSRO"), such as Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc.
("Fitch") or that are unrated but determined by the Fund's investment adviser
to be of comparable quality. Permitted investments include:

domestic or foreign corporate debt obligations;

obligations of the United States;

notes, bonds, and discount notes of the following 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 and Banks for Cooperatives),
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union
Administration;
taxable municipal debt obligations (as a matter of operating policy, the lowest
rated municipal debt obligations in which the Fund will invest will be rated
BBB or better by an NRSRO, or which are of comparable quality in the judgment
of the Fund's investment adviser);

asset-backed securities;
commercial paper that matures in 270 days or less and is rated A-1 or A-2 by
S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;

time and savings deposits (including certificates of deposit) in commercial or
savings banks whose accounts are insured by the Bank Insurance Fund ("BIF"), or
in institutions whose accounts are insured by the Savings Association Insurance
Fund ("SAIF"), including certificates of deposit issued by, and other time
deposits in, foreign branches of BIF-insured banks which, if negotiable, mature
in six months or less or if not negotiable, either mature in ninety days or
less, or may be withdrawn upon notice not exceeding ninety days;
bankers' acceptances issued by a BIF-insured bank, or issued by the bank's Edge
Act subsidiary and guaranteed by the bank, with remaining maturities of nine
months or less. The total acceptances of any bank held by the Fund cannot
exceed 0.25% of such bank's total deposits according to the bank's last
published statement of condition preceding the date of acceptance;

convertible securities, irrespective of their ratings;

preferred stock and other equity-related securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;

convertible securities, irrespective of their ratings;

equity securities;
- -

other securities which are deemed by the Fund's investment adviser, Federated
Advisers (the "Adviser"), to be consistent with the Fund's investment
objective; and

repurchase agreements collateralized by acceptable investments.

Under normal circumstances, the Fund will not invest more than 10% of its total
assets in equity securities.

CORPORATE DEBT OBLIGATIONS

issuer's credit quality. In addition, lower rated securities may be more
difficult to dispose of or to value than higher rated, lower-yielding
securities. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments with
respect to these securities than for higher rated securities.

The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
MARKET VALUE OF BOND
CREDIT RATING HOLDINGS AS OF OCTOBER 31, 1996
<S> <C>
BB 11.0%
B 14.1%
CC & CCC 0.4%
------
25.5%
------
</TABLE>

U.S. GOVERNMENT OBLIGATIONS

The U.S. government obligations in which the Fund invests are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities. These
securities include, but are not limited to:

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

notes, bonds, and discount notes issued or guaranteed by U.S. government
- -
agencies and instrumentalities supported by the full faith and credit of the
United States;

notes, bonds, and discount notes of U.S. government agencies or
- -
instrumentalities which receive or have access to federal funding; and

notes, bonds and discount notes of other U.S. government instrumentalities
- -
supported only by the credit of the instrumentalities.

the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;

discretionary authority of the U.S. government to purchase certain obligations
of an agency or instrumentality; or

the credit of the agency or instrumentality.

MUNICIPAL SECURITIES

ASSET-BACKED SECURITIES

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

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

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

NON-MORTGAGE RELATED
ASSET-BACKED SECURITIES

MORTGAGE RELATED
ASSET-BACKED SECURITIES

ADJUSTABLE RATE MORTGAGE
SECURITIES ("ARMS")

ARMs are pass-through mortgage securities representing interests in adjustable
rather than

fixed interest rate mortgages. The ARMs in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC") and are actively traded. The underlying mortgages which collateralize
ARMs issued by GNMA are fully guaranteed by the Federal Housing Administration
("FHA") or Veterans Administration ("VA"), while those collateralizing ARMs
issued by FHLMC or FNMA are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.

COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")

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;

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

All CMOs purchased by the Fund are investment grade, as rated by a NRSRO.

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 (the "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
taxed to the person or persons who hold interests in the REMIC. A REMIC interest
must consist of one or more classes of "regular interests," some of which may
offer adjustable rates of interest, and a single class of "residual interests."
To qualify as a REMIC, substantially all the assets of the entity must be in
assets directly or indirectly secured principally by real property.

RESETS OF INTEREST

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

BANK INSTRUMENTS

The Fund only invests in bank instruments either issued by an institution having
capital, surplus and undivided profits over $100 million or insured by BIF or
SAIF. Bank instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar Time Deposits
("ETDs"). Due to the fact that institutions issuing such instruments are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as the reserve requirements, loan limitations, examination,
accounting, auditing, recordkeeping, and the public availability of information,
these investments may present additional risks to investors.

CONVERTIBLE SECURITIES

same as DECS; the difference is little more than who initially underwrites the
issue).

ZERO COUPON CONVERTIBLE SECURITIES

RESTRICTED AND ILLIQUID SECURITIES

Directors, are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by the
Directors, including Section 4(2) commercial paper, as determined by the
Adviser, as liquid and not subject to the investment limitations applicable to
illiquid securities.

FOREIGN SECURITIES

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

TEMPORARY INVESTMENTS

The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity.

REPURCHASE AGREEMENTS

any sale of such securities. Repurchase agreements are included within the
definition of investment grade securities.

WHEN-ISSUED OR DELAYED
DELIVERY TRANSACTIONS

LENDING OF PORTFOLIO SECURITIES

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

PUT AND CALL OPTIONS

options are third-party contracts with standardized strike prices and expiration
dates and are purchased from the Clearing Corporation. Strike prices are not
adjusted for dividends, and options are marked to market, thereby obviating the
need to amortize the time premium. Exchange traded options have a continuous
liquid market while over-the-counter options do not.

The Fund may attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.

DERIVATIVE CONTRACTS
AND SECURITIES

INVESTMENT LIMITATIONS

The Fund will not:

borrow money directly or through reverse repurchase agreements (arrangements in

which the Fund sells a portfolio instrument for a percentage of its cash value
with an agreement to buy it back on a set date) or pledge securities except,
under certain circumstances, the Fund may borrow up to one-third of the value
of its total assets and pledge up to 10% of the value of 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;
sell securities short except, under strict limitations, it may maintain open
short positions so long as not more than 10% of the value of its net assets is
held as collateral for those positions; nor

The above investment limitations cannot be changed without shareholder approval.

NET ASSET VALUE

The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of the Class F Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of the
Class F Shares in the liabilities of the Fund and those attributable to Class F
Shares, and dividing the remainder by the total number of Class F Shares
outstanding. The net asset value for Class F Shares may differ from that of
Class A Shares, Class B Shares, and Class C Shares 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 is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no shares are tendered for redemption and no
orders to purchase shares are received; 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 CLASS F SHARES

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open. Shares may
be purchased through a financial institution that has a sales agreement with the
distributor, or directly from the distributor, Federated Securities Corp.,
either by mail or by wire. In connection with the sale of Shares, Federated
Securities Corp. may from time to time offer certain items of nominal value to
any shareholder or investors. The Fund reserves the right to reject any purchase
request.

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 through a financial
institution are considered received when the Fund is notified of the purchase
order. Purchase orders through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be ransmitted 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.

The financial institution which maintains investor accounts 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 (see
"Other Payments to Financial Institutions").

DIRECTLY BY MAIL

To purchase Shares by mail directly from Federated Securities Corp.:

complete and sign the new account form available from the Fund;

enclose a check made payable to Federated Bond Fund--Class F Shares; and

mail both to the Fund's transfer agent, Federated Shareholder Services Company,
P.O. Box 8600, Boston, Massachusetts 02266-8600.

Orders by mail are considered received after payment by check is converted by
the transfer agent's bank into federal funds. This is generally the next
business day after the transfer agent's bank receives the check.

DIRECTLY BY WIRE

To purchase Shares directly from Federated Securities Corp. by Federal Reserve
wire, call the Fund. All information needed will be taken over the telephone,
and the order is considered received when the transfer agent's bank receives
payment by wire.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $1,500, except for an IRA account,
which requires a minimum initial investment of $50. Subsequent investments must
be in amounts of at least $100, except for an IRA account, which must be in
amounts of at least $50.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received, plus a sales charge of 1.00% of the offering price (which

is 1.01% of the net amount invested). There is no sales charge for purchases of
$1 million or more.

In addition, no sales charge is imposed for Shares purchased through bank trust
departments or investment advisers registered under the Investment Advisers Act
of 1940 purchasing on behalf of their clients, or by sales representatives,
Directors, and employees of the Fund, the Adviser, and Federated Securities
Corp., or their affiliates, or any investment dealer who has a sales agreement
with Federated Securities Corp., their spouses and children under age 21, or any
trusts or pension or profit-sharing plans for these persons or retirement plans
where the third party administrator has entered into certain arrangements with
Federated Securities Corp., or its affiliates, to the extent that no payment was
advanced for purchases made by such entities. Unaffiliated institutions through
whom Shares are purchased may charge fees for services provided which may be
related to the ownership of Fund Shares. This prospectus should, therefore, be
read together with any agreement between the customer and the institution with
regard to services provided, the fees charged for these services, and any
restrictions and limitations imposed. Under certain circumstances, described
under "Redeeming Class F Shares," shareholders may be charged a contingent
deferred sales charge by the distributor at the time Shares are redeemed.

DEALER CONCESSION

For sales of Shares, broker/dealers will normally receive 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a
broker/dealer will be retained by the distributor. However, from time to time,
and at the sole discretion of the distributor, all or a part of that portion may
be paid to a dealer. The sales charge 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 charge 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.

ELIMINATING THE SALES CHARGE

The sales charge can be eliminated on the purchase of Shares through:

quantity discounts and accumulated purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

concurrent purchases.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

There is no sales charge for purchases of $1 million or more. The Fund will
combine purchases made on the same day by the investor, his spouse, and his
children under age 21 when it calculates the sales charge.

If an additional purchase of Shares is made, the Fund will consider the previous
purchases still invested in the Fund. For example, if a shareholder already owns
Shares having a current value at the public offering price of $900,000 and he
purchases $100,000 more at the current public offering price, there will be no
sales charge on the additional purchase. The Fund will also combine purchases
for the purpose of reducing the contingent deferred sales charge imposed on some
Share redemptions. For example, if a shareholder already owns Shares having
current value at a public offering price of $1 million and purchases an
additional $1 million at the current public offering price, the applicable
contingent deferred sales charge would be reduced to .50% of those additional
Shares. For more information on the levels of contingent deferred sales charges
and holding periods, see the section entitled "Contingent Deferred Sales
Charge."

To receive the sales charge elimination and/or the contingent deferred sales
charge reduction, Federated Securities Corp. must be notified by the shareholder
in writing or by the shareholder's financial institution at the time the
purchase is made that Shares are already owned or that purchases are being
combined. The Fund will eliminate the sales charge and/or reduce the contingent
deferred sales charge after it confirms the purchases.

LETTER OF INTENT

If a shareholder intends to purchase at least $1 million of Shares over the next
13 months, the sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
elimination depending on the amount actually purchased within the 13-month
period and a provision for the Fund's custodian to hold 1.00% of the total
amount intended to be purchased in escrow (in Shares) until such purchase is
completed.
The 1.00% held in escrow will be applied to the shareholder's account at the end
of the 13-month period unless the amount specified in the letter of intent,
which must be $1 million or more of Shares, is not purchased. In this event, an
appropriate number of escrowed Shares may be redeemed in order to realize the
1.00% sales charge.

This letter of intent also includes a provision for reductions in the contingent
deferred sales charge and holding period depending on the amount actually
purchased within the 13-month period. For more information on the various levels
of contingent deferred sales charges and holding periods, see the section
entitled "Contingent Deferred Sales Charge."

This letter of intent will not obligate the shareholder to purchase Shares. The
letter may be dated as of a prior date to include any purchases made within the
past 90 days (purchases within the prior 90 days may be used to fulfill the
requirements of the letter of intent; however, the sales charge on such
purchases will not be adjusted to reflect a lower sales charge).

REINVESTMENT PRIVILEGE

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge elimination, a shareholder has the
privilege of combining concurrent purchases of two or more Class F Shares in
certain other funds for which affiliates of Federated Investors serve as
principal underwriter or investment adviser ("Federated Funds"), the purchase
price of which includes a sales charge. For example, if a shareholder
concurrently invested $400,000 in Class F Shares of one of the other Federated
Funds, and $600,000 in Shares, the sales charge would be eliminated.

To receive this sales charge elimination, 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 eliminate the sales charge
after it confirms the purchases.

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in amounts of not less than $100 per transaction. Under this
program, funds may be automatically withdrawn periodically from the

shareholder's checking account and invested in Shares at the net asset value
next determined after an order is received by the Fund, plus the 1.00% sales
charge for purchases under $1 million. A shareholder may apply for participation
in this program through Federated Securities Corp. or his financial institution.

EXCHANGE PRIVILEGES

Class F Shares in the Federated Funds may be exchanged for Shares at net asset
value without a sales charge (if previously paid) or a contingent deferred sales
charge.

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. Shareholders who desire to automatically exchange Shares of a
predetermined amount on a monthly, quarterly, or annual basis may take advantage
of a systematic exchange privilege. Further information on these exchange
privileges is available by calling Federated Securities Corp. or the
shareholder's financial institution.

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
on the application or by contacting the Fund.

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

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared and paid monthly to all shareholders invested in the Fund
on the record date. Distributions of any net realized long-term capital gains
will be made at least once every twelve months. Dividends and distributions are
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent.

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans
(including 401(k) and 403(b) plans) or for individual retirement accounts
(IRAs). For further details, contact Federated Securities Corp. and consult with
a tax adviser.

REDEEMING CLASS F SHARES

The Fund redeems Shares 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
through a financial institution or directly from the Fund by written request.

THROUGH A FINANCIAL INSTITUTION

A shareholder may redeem Shares by calling his financial institution (such as a
bank or an investment dealer) 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 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 to the Fund. The financial
institution may charge customary fees and commissions for this service. If, at
any time, the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified.

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. Proceeds from redemption requests received on holidays when
wire transfers are restricted will be wired the following business day.
Questions about the telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative at the
telephone number listed on your account statement.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.
The written request should state: the Fund name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.

CONTINGENT DEFERRED SALES CHARGE

Shareholders redeeming Shares from their Fund accounts within certain time
periods of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor of the lesser of the original
price or the net asset value of the Shares redeemed as follows:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
<S> <C> <C>
4 full years or
Up to $1,999,999 less 1.00%
$2,000,000 to 2 full years or
$4,999,999 less .50%
1 full year or
$5,000,000 or more less .25%
</TABLE>

In determining the applicability of the contingent deferred sales charge, the
required holding period for your new Class F Shares received through an exchange
will include the period for which your original Class F Shares were held.

In instances in which Shares have been acquired in exchange for Class F Shares
in the Federated Funds, (i) the purchase price is the price of the shares when
originally purchased and (ii) the time period during which the shares are held
will run from the date of the original purchase. The contingent deferred sales
charge will not be imposed on shares acquired through the reinvestment of
dividends or distributions of long-term capital gains. In computing the amount
of contingent deferred sales charge for accounts with shares subject to a single
holding period, if any, redemptions are deemed to have occurred in the following
order: 1) first of shares acquired through the reinvestment of dividends and
long-term capital gains, 2) second of purchases of shares occurring prior to the
number of years necessary to satisfy the applicable holding period, and 3)
finally of purchases of shares occurring within the current holding period. For
accounts with shares subject to multiple share holding periods, the redemption
sequence will be determined first, with reinvested dividends and long-term
capital gains, and second, on a first-in, first-out basis.

The contingent deferred sales charge will not be imposed when a redemption
results from a tax-free return under the following circumstances: (i) a total or
partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a
custodial account, following retirement; (ii) a total or partial distribution
from an IRA, Keogh Plan, or a custodial account after the beneficial owner
attains age 59-1/2; or (iii) from the death or disability of the beneficial
owner. The exemption from the contingent deferred sales charge for qualified
plans, an IRA, Keogh Plan, or a custodial account does not extend to account
transfers, rollovers, and other redemptions made for purposes of reinvestment.
Contingent deferred sales charges are not charged in connection with

exchanges of Shares for Class F Shares in the Federated Funds, or in connection
with redemptions by the Fund of accounts with low balances. Shares of the Fund
originally purchased through a bank trust department or investment adviser
registered under the Investment Advisers Act of 1940, and third-party
administrators acting on behalf of deferred contribution plans, are not subject
to the contingent deferred sales charge, to the extent that no payment was
advanced for purchases made by such entities.

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive monthly or quarterly payments of a
predetermined amount 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; the minimum withdrawal amount
is $100. 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, other than retirement accounts subject to required minimum
distributions.

A shareholder may apply for participation in this program through Federated
Securities Corp. Due to the fact that Shares are sold with a sales charge and
contingent deferred sales charge, it is not advisable for shareholders to be
purchasing Shares while participating in this program.

A contingent deferred sales charge is charged for Shares redeemed through this
program within four years of their purchase dates.

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 minimum required value of
$1,000. This requirement does not apply, however, if the balance falls below
$1,000 because of changes in the Fund's net asset value.

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

EXCHANGES FOR SHARES
OF OTHER FUNDS

Shares may be exchanged for Class F Shares in the Federated Funds at net asset
value without a contingent deferred sales charge or a sales charge.

Shareholders using this privilege must exchange shares having a net asset value
equal to the minimum investment required for the fund into which the exchange is
being made. A shareholder may obtain information on the exchange privilege, and
may obtain prospectuses for other Fortress Funds and Federated Funds by calling
Federated Securities Corp. or his financial institution.
Please contact your financial institution directly or Federated Securities Corp.
at 1-800-341-7400 for information on and prospectuses for the Federated Funds
into which your Shares may be exchanged free of charge.

FUND INFORMATION

MANAGEMENT OF THE CORPORATION

BOARD OF DIRECTORS

INVESTMENT ADVISER

ADVISORY FEES

ADVISER'S BACKGROUND

Joseph M. Balestrino has been the Fund's portfolio manager since June, 1992 and
is responsible for managing the allocation of fixed income

assets (between investment grade and high yield). Mr. Balestrino also manages
the investment grade portion of the Fund. Mr. Balestrino joined Federated
Investors in 1986 and has been a Vice President of the Fund's investment adviser
since 1995. Mr. Balestrino served as an Assistant Vice President of the
investment adviser from 1991 until 1995. Mr. Balestrino is a Chartered Financial
Analyst and received his Master's Degree in Urban and Regional Planning from the
University of Pittsburgh.

DISTRIBUTION OF CLASS F SHARES

SHAREHOLDER SERVICES

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 .25% of the average daily net asset value of Class F
Shares, computed at an annual rate, to obtain certain personal services for
shareholders and to maintain shareholder accounts. 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.

SUPPLEMENTAL PAYMENT TO
FINANCIAL INSTITUTIONS

The distributor will pay financial institutions, for distribution and/or
administrative services, an amount equal to 1.00% of the offering price of the
Shares acquired by their clients or customers on purchases up to $1,999,999,
..50% of the offering price on purchases of $2,000,000 to $4,999,999, and .25% of
the offering price on purchases of $5,000,000 or more. (This fee is in addition
to the 1.00% sales charge on purchases of less that $1 million.) The 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.

Furthermore, in addition to payments made pursuant to the Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of sales services, distribution-related support services, or
shareholder services. The support may include participating in sales,
educational and training seminars at recreational-type facilities, 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 Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Corporation and the Fund. Federated
Services Company 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
ADMINISTRATIVE FEE DAILY NET ASSETS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of
$750 million
</TABLE>

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

SHAREHOLDER INFORMATION

VOTING RIGHTS

Each Share 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.

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

STATE AND LOCAL TAXES

Fund 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 Class F
Shares and the Fund's other classes of shares (described below under "Other
Classes of Shares").

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

The performance information reflects the effect of the maximum sales charge and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return. Total return and
yield will be calculated separately for Class A Shares, Class C Shares, and
Class F Shares.

OTHER CLASSES OF SHARES

The Fund also offers other classes of shares called Class A Shares, Class B
Shares, and Class C Shares which are all sold primarily to customers of
financial institutions.

Class A Shares are sold subject to a front-end sales charge, a Rule 12b-1 Plan
and a Shareholder Services Agreement. Investments in Class A Shares are subject
to a minimum initial investment of $500, unless the investment is in a
retirement account, in which the minimum investment is $50.

Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Agreement.
Investments in Class B Shares are subject to a minimum initial investment of
$1,500, unless the investment is in a retirement account, in which the minimum
investment is $50.

Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Agreement.
Investments in Class C Shares are subject to a minimum investment of $1,500,
unless the investment is in a retirement account, in which the minimum
investment is $50.

Class A Shares, Class B Shares, Class C Shares and Class F Shares are subject to
certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, Class C Shares and Class F Shares may affect the
performance of each class.

To obtain more information and a combined prospectus for Class A Shares, Class B
Shares and Class C Shares, investors may call 1-800-341-7400.

APPENDIX
(UNAUDITED)

STANDARD AND POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATINGS

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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.

B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal payments.

Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB rating.

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.

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.

FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS

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.

ADDRESSES

Investment Series Funds, Inc.
Federated Bond Fund
Class F Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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 Shareholder Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Center
Pittsburgh, Pennsylvania 15219

FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT
SERIES FUNDS, INC.)
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)

PROSPECTUS

An Open-End, Diversified
Management Investment Company

Prospectus dated February 28, 1997

[LOGO FEDERATED INVESTORS]

FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

FEDERATED SECURITIES CORP. IS THE DISTRIBUTOR OF THE FUND
AND IS A SUBSIDIARY OF FEDERATED INVESTORS.

Cusip 461444309 [Recycled logo}
G01271-02-F (2/97)

FEDERATED BOND FUND
(A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES
(FORMERLY, FORTRESS SHARES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares and
the prospectus of Class F Shares of Federated Bond Fund (the
``Fund') dated February 28, 1997. This Statement is not a prospectus.
You may request a copy of a prospectus or a paper copy of this
Statement, if you have received it electronically, free of charge by
calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
Statement dated February 28, 1997

FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
CUSIP 461444507
CUSIP 461444606
CUSIP 461444705
CUSIP 461444309
2041304B (2/97)

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Equity Securities 1
Convertible Securities 1
Futures and Options Transactions 1
Investing in Foreign Currencies 3
When-Issued and Delayed Delivery Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 5
INVESTMENT LIMITATIONS 5

INVESTMENT SERIES FUNDS, INC. MANAGEMENT 7

Fund Ownership 11
Directors' Compensation 11
INVESTMENT ADVISORY SERVICES 12

Adviser to the Fund 12
Advisory Fees 12
BROKERAGE TRANSACTIONS 12

OTHER SERVICES 13

Custodian and Portfolio Accountant 13
Transfer Agent 13
Independent Auditors 13

PURCHASING SHARES 13

Distribution Plan and Shareholder Services 13
Other Payments to Financial Institutions (Class
F Shares Only) 14
Purchases by Sales Representatives, Directors
and Employees 14
Conversion to Federal Funds 14
DETERMINING NET ASSET VALUE 14

Determining Market Value of Securities 14
REDEEMING SHARES 15

Elimination of the Contingent
Deferred Sales Charge 15
Redemption in Kind 15
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY) 15

Reduced Sales Charge 16
Requirements for Exchange 16
Tax Consequences 16
Making an Exchange 16
REDEEMING SHARES 16

TAX STATUS 16

The Fund's Tax Status 16
Shareholder's Tax Status 17
TOTAL RETURN 17

YIELD 17

PERFORMANCE COMPARISONS 17

Duration 19
ABOUT FEDERATED INVESTORS 19

FINANCIAL STATEMENTS 20

APPENDIX 21

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio of Investment Series Funds, Inc. (the
"Corporation"). The Fund was established as a portfolio of Investment
Series Trust, a Massachusetts business trust, on March 17, 1987. On June
15, 1992, the shareholders of `High Income Securities Fund'','' the Fund's
original name, approved a change to the investment objective of the Fund as
well as the name change of the Fund to `Fortress Bond Fund.'' On February
3, 1993, the shareholders of the Fund voted to reorganize the Fund as a
portfolio of the Corporation, effective February 5, 1993, which is
organized under the laws of the State of Maryland. On June 27, 1995,
shareholders approved the name of the Fund to be changed to `Federated
Bond Fund.'' On June 2, 1996, the name of the ``Fortress Shares'' class
of the Fund was changed to `Class F Shares.'' The Corporation is
qualified to do business as a foreign corporation in Pennsylvania. Shares
of the Fund are offered in four classes known as Class A Shares, Class B
Shares, Class C Shares, and Class F Shares (individually and collectively
referred to as "Shares," as the context may require). This Statement
relates to all classes of Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide as high a level of
current income as is consistent with the preservation of capital. The
investment objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
As a matter of investment policy, which may be changed without shareholder
approval, the Fund will, under normal circumstances, invest at least 65% of
the value of its net assets in investment grade bonds. Permitted
investments include:

domestically-issued and foreign-issued corporate debt obligations;
asset-backed securities;
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities;
taxable municipal debt obligations; and
repurchase agreements.
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's investment adviser, Federated Advisers (the
`Adviser''), may choose to exceed this 10% limitation if unusual market
conditions suggest such investments represent a better opportunity to reach
the Fund's investment objective.
CONVERTIBLE SECURITIES
DECS offer a substantial dividend advantage with the possibility of
unlimited upside potential if the price of the underlying common stock
exceeds a certain level. DECS convert to common stock at maturity. The
amount received is dependent on the price of the common at the time of
maturity. DECS contain two call options at different strike prices. The
DECS participate with the common up to the first call price. They are
effectively capped at that point unless the common rises above a second
price point, at which time they participate with unlimited upside
potential.
PERCS offer a substantial dividend advantage, but capital appreciation
potential is limited to a predetermined level. PERCS are less risky and
less volatile than the underlying common stock because their superior
income mitigates declines when the common falls, while the cap price limits
gains when the common rises.

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 generally
moves inversely to interest rates. Thus, a rise in rates generally
means a drop in price. Conversely, a drop in rates generally 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 "go long" (agree
to purchase securities in the future at a predetermined price) 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) as 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).
INVESTING IN 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,
Federated Advisers (the "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. There is no limitation as to the percentage of the Fund's
assets that may be committed to such contracts. The Fund does not
enter into forward foreign currency exchange contracts or maintain a
net exposure in such contracts when the Fund would be obligated to

deliver an amount of foreign currency in excess of the value of the
Fund's 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 Adviser believes will tend to be
closely correlated with the currency with regard to price movements.
Generally, the Fund does not enter into a forward foreign currency
exchange contract with a term longer than one year.
FOREIGN CURRENCY EXCHANGE 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 were 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 its 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 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. 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.
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. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
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 Adviser to be creditworthy pursuant
to guidelines established by the Fund's Board of Directors (the
"Directors").
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are 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. The securities are marked-to-market daily and
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 objectives. Securities in the Fund's
portfolio will be sold whenever the Adviser believes it is appropriate to
do so in light of 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. Any such trading will increase the Fund's portfolio turnover
rate and transaction costs. For the fiscal years ended October 31, 1996,
and 1995, the portfolio turnover rates were 49% and 77%, respectively.
INVESTMENT LIMITATIONS

BUYING ON MARGIN
The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its net 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 any such borrowings in excess of 5% of its
total assets are outstanding.
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 10%
of the value of total assets at the time of the borrowing.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by any one issuer(other than
cash, cash items or securities issued or guaranteed by the government of

the United States or its agencies or instrumentalities and repurchase
agreements collateralized by such securities) if as a result more than 5%
of the value of its total assets would be invested in the securities of
that issuer.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or interests
in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put options on portfolio securities and on financial futures
contracts. In addition, the Fund reserves the right to hedge the portfolio
by entering into financial futures contracts and to sell calls on financial
futures contracts. The Fund will notify shareholders before such a
change in its operating policies is implemented.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the federal securities laws (except
for commercial paper issued under Section 4(2) of the Securities Act of
1933).
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 securities in accordance with its investment objectives,
policies, and limitations.

LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities, on a
short-term or long-term basis, up to one-third of the value of its total
assets, to broker/dealers, banks, or other institutional borrowers of
securities.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry. However, investing in U.S. government obligations shall
not be considered investments in any one industry.
SELLING SHORT
The Fund will not sell securities short unless:
during the time the short position is open, it owns an equal
amount of the securities sold or securities readily and freely
convertible into or exchangeable, without payment of additional
consideration, for securities of the same issuer as, and equal
in amount to, the securities sold short; and
not more than 10% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice.
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 those limitations becomes effective.

WRITING COVERED CALL OPTIONS AND PURCHASING PUT OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment. The Fund will not purchase put options on
securities unless the securities are held in the Fund's portfolio.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no more
than 3% of the total outstanding voting stock of any investment company,
invest no 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. The Fund will limit its investments in the securities of other
investment companies to those of money market funds having investment
objectives and policies similar to its own. The Fund will purchase
securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of assets. While it is the
Fund's policy to waive its investment advisory fee on assets invested in
securities of open-end investment companies, it should be noted that
investment companies incur certain expenses such as custodian and transfer
agent fees, and therefore any investment by a Fund in shares of another
investment company would be subject to such duplicate expenses.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.

For purposes of its limitations, the Fund considers instruments issued by a
U.S. branch of a domestic bank having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items."
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period than
it might otherwise, the Fund's investment objective of current income is
furthered.
The Fund did not borrow money, sell securities short, engage in foreign
currency options, or purchase financial futures contracts in excess of 5%
of the value of its net assets during the last fiscal year and has no
present intent to do so in the coming fiscal year.
INVESTMENT SERIES FUNDS, INC. MANAGEMENT

Officers and Directors are listed with their addresses, present positions
with Investment Series Funds, 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. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.

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

William J. Copeland
One PNC Plaza - 23rd Floor

Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.

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

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

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

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

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

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

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Director
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.

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

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

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

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

Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; WesMark Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding shares.
As of February 5, 1997, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: Youth Services
International, Inc., Ownings Mills, Maryland, owned approximately 540,660
shares (11.80%); and BHC Securities, Inc., Philadelphia, Pennsylvania,
owned approximately 543,727 shares (11.87%).
As of February 5, 1997, the following shareholder of record owned 5% or
more of the outstanding Class B Shares of the Fund: Merrill Lynch Pierce

Fenner & Smith, Jacksonville, Florida, owned approximately 884,657 shares
(6.06%).
As of February 5, 1997, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, owned approximately 1,021,153 shares
(38.27%).
As of February 5, 1997, the following shareholder of record owned 5% or
more of the outstanding Class F Shares of the Fund: Merrill Lynch Pierce
Fenner & Smith, Jacksonville, Florida, owned approximately 6,052,802 shares
(20.34%)
DIRECTORS' COMPENSATION

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

John F. Donahue $ -0- $-0- for the Fund and
Chairman and Director 56 other investment companies in
the Fund Complex

J. Christopher Donahue$ -0- $-0- for the Fund and
President 18 other investment companies in
the Fund
and Director Complex

Thomas G. Bigley $745.20 $108,725 for the Fund and

Director 56 other investment companies in
the Fund Complex

John T. Conroy, Jr. $816.31 $119,615 for the Fund and
Director 56 other investment companies in
the Fund Complex

William J. Copeland $816.31 $119,615 for the Fund and
Director 56 other investment companies in
the Fund Complex

James E. Dowd $816.31 $119,615 for the Fund and
Director 56 other investment companies in
the Fund Complex

Lawrence D. Ellis, M.D. $816.31 $108,725 for the Fund
and
Director 56 other investment companies in
the Fund Complex

DIRECTORS' COMPENSATION (CONT'D.)
Edward L. Flaherty, Jr. $816.31 $119,615 for the Fund and
Director 56 other investment companies in
the Fund Complex

Peter E. Madden $745.20 $108,725 for the Fund and

Director 56 other investment companies in
the Fund Complex

Gregor F. Meyer $745.20 $108,725 for the Fund and
Director 56 other investment companies in
the Fund Complex

John E. Murray, Jr. $745.20 $108,725 for the Fund and
Director 56 other investment companies in
the Fund Complex

Wesley W. Posvar $745.20 $108,725 for the Fund and
Director 56 other investment companies in
the Fund Complex

Marjorie P. Smuts $745.20 $108,725 for the Fund and
Director 56 other investment companies in
the Fund Complex

*Information is furnished for the fiscal year ended October 31, 1996.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary of
Federated Investors. All of the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his wife,

and his son, J. Christopher Donahue. The Adviser shall not be liable to the
Corporation, the Fund, or any shareholder of the Fund for any losses that
may be sustained in the purchase, holding, or sale of any security, or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Corporation.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual
investment advisory fee for the Fund as described in the prospectus. For
the fiscal years ended October 31, 1996, 1995, and 1994, the Adviser earned
$2,650,984, $1,271,771, and $1,081,066, respectively, of which $705,603,
$505,263, and $481,690, were voluntarily waived because of undertakings to
limit the Fund's 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
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to guidelines established 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. Research services provided by brokers and dealers may be
used by the adviser or its affiliates in advising the Fund and other

accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid,
it would tend to reduce their expenses. The adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are
reasonable in relationship to the value of the brokerage and research
services provided. During the fiscal years ended October 31, 1996, 1995,
and 1994, the Fund paid total brokerage commissions of $0, $5,595, and $0,
respectively.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's

Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and
Federated Administrative Services, Inc. may hereinafter collectively be
referred to as the "Administrators." For the fiscal years ended October
31, 1996, 1995, and 1994, the Administrators collectively earned $267,242,
$156,316, and $192,379, respectively.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, Boston, MA, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
PA provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent Federated
Shareholder Services Company, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based on the size, type
and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
PURCHASING SHARES

Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge on days the New York
Stock Exchange is open for business. The procedure for purchasing shares of
the Fund is explained in the prospectus under "Investing in the Fund."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate

distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses. By adopting
the Distribution Plan, 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.
For the fiscal year ended October 31, 1996, payments in the amount of
$615,497 and $100,671 were made pursuant to the Distribution Plan for Class
B Shares and Class C Shares, respectively. For the fiscal year ended
October 31, 1996, payments in the amount of $57,618, $205,166, $33,557, and
$587,321 (of which $11,524, $0, $0, and $46,986 were waived) were made

pursuant to the Shareholder Services Agreement for Class A Shares, Class B
Shares, Class C Shares, and Class F Shares, respectively.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS (CLASS F SHARES ONLY)
The administrative services for which the Distributor will pay financial
institutions include, but are not limited to, providing office space,
equipment, telephone facilities, and various clerical, supervisory and
computer personnel, as is necessary or beneficial to establish and maintain
shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash
balances, answer routine client inquiries regarding the Fund, assist
clients in changing dividend options, account designations, addresses, and
providing such other services as the Fund may reasonably request.
PURCHASES BY SALES REPRESENTATIVES, DIRECTORS AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp., or their affiliates and their
immediate family members, or any investment dealer who has a sales
agreement with Federated Securities Corp., their spouses, and their
children under 21, may buy Class A Shares at net asset value without a
sales charge. Shares may also be sold without a sales charge 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.
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. State Street Bank and Trust Company acts as the

shareholder's agent in depositing checks and converting them to federal
funds.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
according to the last sale price on a national securities
exchange, if available;
in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices, and for
bonds and other fixed income securities as determined 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 Board
determines this is not fair value; or
at fair value as determined in good faith by the Fund's 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.

Over-the-counter put options will be valued at the mean between the bid and
the asked prices.
REDEEMING SHARES

The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions of Class B Shares,
Class C Shares, and Class F Shares may be subject to a contingent deferred
sales charge. Redemption procedures are explained in the respective
prospectuses under "Redeeming Class A Shares," "Redeeming Class B Shares,"
"Redeeming Class C Shares" or "Redeeming Class F 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 F Shares redeemed within one to 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 advance
payment 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 advance payment 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.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for the elimination of the Contingent Deferred Sales
Charge may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the fiscal year end. Redemptions on a qualifying
Systematic Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%

quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the Contingent Deferred Sales
Charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated 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 12 month holding
requirement. However, for purposes of meeting the $10,000 minimum account
value requirement, Class B Share account values will not be aggregated.
REDEMPTION IN KIND
The Trust is obligated to redeem shares solely in cash up to $250,000 or 1%
of the respective Fund's net asset value, whichever is less, for any one
shareholder within a 90-day period. Any redemption beyond this amount will
also be in cash unless the Trustees determine that payments should be in
kind. In such a case, the Fund will pay all or a portion of the remainder
of the redemption in portfolio instruments, valued in the same way that net
asset value is determined. The portfolio instruments will be selected in a
manner that the Trustees deem fair and equitable. Redemption in kind is not
as liquid as a cash redemption. If redemption is made in kind,
shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities
and could incur certain transaction costs.
EXCHANGE PRIVILEGE (CLASS F SHARES ONLY)

This section relates only to Class F 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 respective prospectuses for
these classes of Shares. The Securities and Exchange Commission (the "SEC")
has issued an order exempting the Corporation from certain provisions of

the Investment Company Act of 1940. As a result, Fund shareholders are
allowed to exchange all or some of their shares for shares in certain
Federated Funds which are sold with a sales charge that differs from that
of the Fund's or which impose no sales charge so long as the Federated
Funds are advised by subsidiaries or affiliates of Federated Investors.
These exchanges are made at net asset value plus the difference between the
Fund's sales charge already paid and any sales charge of the fund into
which the shares are to be exchanged, if higher. The order also allows
certain other funds, including funds that are not advised by subsidiaries
or affiliates of Federated Investors, which do not have a sales charge, to
exchange their shares for Fund shares on a basis other than their current
offering price. These exchanges may be made to the extent that such shares
were acquired in a prior exchange, at net asset value, for shares of a
Federated Fund carrying a sales charge.
REDUCED SALES CHARGE
If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp. or Federated Shareholder Services Company in writing.
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 residing in any state in which the
fund shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, Class F 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 the 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 ircumstances, a short or long-term
capital gain or loss may be realized.
MAKING AN EXCHANGE
Instructions for exchanging Shares must be given in writing by the
shareholder. Written instructions may require a signature guarantee.
REDEEMING SHARES

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 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.
SHAREHOLDER'S TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction
available to corporations. These 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

Class F Shares' average annual total returns for the one-year and five-
year periods ended October 31, 1996, and for the period from July 8, 1988

(effective date of the Fund's registration statement) to October 31, 1996,
were 5.00%, 10.38%, and 9.81%, respectively.
For the one-year period ended October 31, 1996, Class A Shares, Class B
Shares, and Class C total returns were 2.39%, 0.59%, and 5.30%,
respectively. For the period from June 28, 1995 to October 31, 1996, Class
A Shares, Class B Shares and Class C Shares total returns were 4.77%,
3.80%, and 7.62%, respectively.
The average annual total return for all classes of Shares of the Fund is
the average compounded rate of return for a given period that would equate
a $1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the 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 charge, adjusted over the
period by any additional Shares, assuming a quarterly reinvestment of all
dividends and distributions. Any applicable contingent deferred sales
charge is deducted from the ending value of the investments based on the
lesser of the original purchase price or the offering price of Shares
redeemed. Total return assumes and is reduced by the payment of the
maximum sales charge and contingent deferred sales charge, if applicable.
YIELD

The yields for Class A Shares, Class B Shares, Class C Shares, and Class
F Shares for the thirty-day period ended October 31, 1996, were 6.99%,
6.51%, 6.51%, and 7.22%, respectively.
The yield for all classes of Shares of the Fund is determined each day by
dividing the net investment income per share (as defined by the SEC) earned
by the Fund over a thirty-day period by the maximum offering price per

share of the Fund 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 shareholders. To
the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, performance will be reduced for those shareholders paying those fees.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any
class of Shares, the performance will be reduced for those shareholders
paying those fees.
PERFORMANCE COMPARISONS

The Fund's 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 Fund's expenses; and
various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return. Investors may use financial publications and/or indices to

obtain a more complete view of the Fund's performance. When comparing
performance, investors should consider all relevant factors such as the
composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities
and compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) 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.
SALOMON BROTHERS AAA-AA CORPORATES INDEX calculates total returns
of approximately 775 issues which include long-term, high grade
domestic corporate taxable bonds, rated AAA-AA with maturities of
twelve years or more and companies in industry, public utilities,
and finance.
MERRILL LYNCH CORPORATE & GOVERNMENT MASTER INDEX is an unmanaged
index comprised of approximately 4,821 issues which include
corporate debt obligations rated BBB or better and publicly issued,
non-convertible domestic debt of the U.S. government or any agency
thereof. These quality parameters are based on composites of ratings
assigned by Standard and Poor's Ratings Group and Moody's Investors

Service, Inc. Only notes and bonds with a minimum maturity of one
year are included.
MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better.
These quality parameters are based on composites of ratings assigned
by Standard and Poor's Corporation and Moody's Investors Service,
Inc. Only bonds with a minimum maturity of one year are included.
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 advertising and sales
literature.
THE LEHMAN BROTHERS CORPORATE BOND INDEX is comprised of a large
universe of bonds issued by industrial, utility and financial
companies which have a minimum rating of Baa by Moody's Investors
Service, Inc., BBB by Standard and Poor's Ratings Group or, in the
case of bank bonds not rated by either of the previously mentioned
services, BBB by Fitch Investors Service, Inc.
LEHMAN BROTHERS HIGH YIELD INDEX covers the universe of fixed
rate, publicly issued, noninvestment grade debt registered with the
SEC. All bonds included in the High Yield Index must be dollar-
denominated and nonconvertible and have at least one year remaining
to maturity and an outstanding par value of at least $100 million.
Generally securities must be rated Ba1 or lower by Moody's Investors
Service, including defaulted issues. If no Moody's rating is
available, bonds must be rated BB+ or lower by S&P; and if no S&P

rating is available, bonds must be rated below investment grade by
Fitch Investor's Service. A small number of unrated bonds is
included in the index; to be eligible they must have previously held
a high yield rating or have been associated with a high yield
issuer, and must trade accordingly.
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 any class of Shares may quote
total returns which are calculated on nonstandardized base periods. These
total returns also represent the historic change in the value of an
investment in any class of Shares based on quarterly reinvestment of
dividends over a specified period of time.
From time to time, the Fund may advertise the performance of any class of
Shares using charts, graphs, and descriptions, compared to federally
insured bank products, including certificates of deposit and time deposits,
and to money market funds using the Lipper Analytical Services money market
instruments average. In addition, advertising and sales literature for the
Fund may use charts and graphs to illustrate the principals of dollar-cost
averaging and may disclose the amount of dividends paid by the Fund over
certain periods of time. Advertisements may quote performance information
which does not reflect the effect of a sales charge or contingent deferred
sales charge, as applicable.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of fixed

income securities, prior to maturity. Volatility is the magnitude of the
change in the price of a bond relative to a given change in the market rate
of interest. A bond's price volatility depends on three primary variables:
the bond's coupon rate; maturity date; and the level of market yields of
similar fixed income securities. Generally, bonds with lower coupons or
longer maturities will be more volatile than bonds with higher coupons or
shorter maturities. Duration combines these variables into a single
measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When the Fund
invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Fund.
ABOUT FEDERATED INVESTORS

Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making-structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers. The company's
disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts,
and traders dedicated to specific market sectors. These traders handle
trillions of dollars in annual trading volume.
In the equity sector, Federated Investors has more than 26 years'
experience. As of December 31, 1996, Federated managed 31 equity funds

totaling approximately $7.6 billion in assets across growth, value, equity
income, international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitative and qualitative
analysis and features a structured, computer-assisted composite modeling
system that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds and 17 bond funds with assets approximating
$17.2 billion and $4.0 billion, respectively. Federated's corporate bond
decision making--based on intensive, diligent credit analysis--is backed
by over 21 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the
industry. In 1983, Federated was one of the first fund managers to
participate in the asset-backed securities market, a market totaling more
than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees
the management of Federated Investors' international and global portfolios.
MUTUAL FUND MARKET
Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000
funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:

INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
BANK MARKETING
Other institutional clients include close relationships with more than
1,600 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated Funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Federated Securities Corp.
*Source: Investment Company Institute
FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended October 31, 1996, are
incorporated herein by reference to the Annual Report of the Fund dated

October 31, 1996. (File Nos. 33-48847 and 811-07021). A copy of this
report may be obtained without charge by contacting the Fund.

APPENDIX

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.

B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal payments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is
being paid.
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 Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
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.
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
conditionsand 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
couldassist 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 limited margin of
safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of 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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS

A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated A-1.
MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment. F-
1--Very Strong Credit Quality. Issues assigned this rating reflect

anassurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.

PART C.OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Financial Statements for the fiscal year
ended October 31, 1996, are incorporated herein by reference to
the Annual Report of the Fund dated October 31, 1996; File Nos.
33-48847 and 811-07021)
(b) Exhibits:
(1) Copy of Articles of Incorporation of the Registrant; (1)
(2) Copy of By-Laws of the Registrant; (1)
(3) Not applicable;
(4) Copy of Specimen Certificates for Shares of Capital Stock
of Federated Bond Fund; (5)
(i) Copy of Speciman Certificate for Shares of
Common Stock of Class F Shares of Federated
Bond Fund; (7)
(5) Conformed Copy of Investment Advisory Contract of the
Registrant; (3)
(6) (i) Copy of Distributor's Contract of Registrant; (2)

(a) Conformed Copy of Exhibit C and D to
Distributor's Contract; (4)
(b) Conformed Copy of Exhibit E, F, and G to
Distributor's Contract; (5)
(ii) The Registrant incorporates the conformed copy of
the specimen Mutual Fund Services Agreement; Mutual
Fund Sales and Services Agreement; and Plan
Trustee/Mutual Funds Service Agreement from Item
24(b)(6) of the Cash Trust Series II Registration
Statement filed with the SEC on July 24, 1995. (File
Nos. 33-38550 and 811-2669); (6)
(7) Not applicable;
(8) Conformed Copy of Custodian Agreement of the Registrant;(3)

+ All exhibits have been filed electronically via EDGAR.

(1)Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 21, 1992. (File No.
33-48847)
(2)Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-
48847)
(3)Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed December 29, 1993 (File No. 33-
48847)

(4)Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed December 23, 1994 (File No. 33-
48847)
(5)Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed July 27, 1995 (File No. 33-48847)
(6) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed December 28, 1995
(File No. 33-48847)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed February 18,1997 (File No. 33-
48847)

(9) (i) Conformed Copy of Agreement for Fund Accounting
Services, Administrative Services, Transfer Agency
Services, and Custody Services Procurement; (7)
(ii) The response and exhibits described in Item
24(b)(6)(ii) are hereby incorporated by reference;(6)
(10) Copy of Opinion and Consent of Counsel as to legality
of shares being registered; (2)
(11) Copy of Consent of Independent Auditors; +
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) (i) Copy of Distribution Plan; (2)
(a) Conformed Copy of Exhibits B and C to
Distribution Plan; (4)

(b) Conformed Copy of Exhibits D, E, and F to
Distribution Plan; (5)
(16) Not applicable;
(17) Financial Data Schedules; (7)
(18) Not applicable;
(19) (i) Power of Attorney; (7)
(ii) Limited Power of Attorney; (4)

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 February 5, 1997

Federated Bond Fund
Shares of capital stock
(.0001 par value)

Class A Shares 1,669

Class B Shares 7,422

Class C Shares 1,071

Class F Shares 8,135

+ All exhibits have been filed electronically via EDGAR.

(2)Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-
48847)
(4)Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed December 23, 1994 (File No. 33-
48847)
(5)Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed July 27, 1995 (File No. 33-48847)
(6) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed December 28, 1995
(File No. 33-48847)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed February 18,1997 (File No. 33-
48847)

Item 27. Indemnification: (1)

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 "Investment Series Funds, Inc.,
Information - Management of the Corporation" in Part A. The
affiliations with the Registrant of four of the Trustees and one of
the Officers of the investment adviser are included in Part B of
this Registration Statement under "Investment Series Funds, Inc.
Management." 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; Peter R. Anderson, Drew J.
Collins, Jonathan C. Conley, Deborah A. Cunningham, Mark E.
Durbiano, J. Alan Minteer, and Mary Jo Ochson, Senior Vice
Presidents; J. Scott Albrecht, Joseph M. Balestrino, Randall S.
Bauer, David F. Belton, Christine A. Bosio, David A. Briggs,
Kenneth J. Cody, Alexandre de Bethmann, Linda A. Duessel, Michael
J. Donnelly, Michael P. Donnelly, Kathleen M. Foody-Malus, Thomas
M. Franks; Edward C. Gonzales, James E. Grefenstette, Susan R.
Hill, Stephen A. Keen, Robert M. Kowit, Mark S. Kopinski, Jeff A.
Kozemchak, Marian R. Marinack, Sandra L. McInerney, Susan M. Nason,
Robert J. Ostrowski, Charles A. Ritter, Frank Semack, Aash M. Shah,
Scott B. Schermerhorn, William F. Stotz, Tracy P.Stouffer, Edward
J. Tiedge, Paige M. Wilhelm, Jolanta M. Wysocka, Vice Presidents;
Todd A. Abraham, Stafanie L. Bachhuber, Michael W. Casey, William
R. Jamison, Constantine Kartsonsas, Robert M. March, Joseph M.

Natoli, Keith J. Sabol, and Michael W. Sirianni, Assistant Vice
Presidents; Stephen A. Keen, Secretary; Thomas R. Donahue,
Treasurer and Assistant Secretary; Richard B. Fisher, Assistant
Secretary and Assistant Treasurer; Christine I. McGonigle,
Assistant Secretary. The business address of each of the Officers
of the investment adviser is Federated Investors Tower, Pittsburgh,
Pennsylvania 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.

Item 29. (a) Principal Underwriters:

111 Corcoran Funds; Arrow Funds; Automated Government Money Trust;
BayFunds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones &
Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government
Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs Fund;
Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated Fund
for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust; Federated
High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,

Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; High Yield Cash Trust; Independence One Mutual Funds;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.; Money
Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds;
RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The Biltmore Funds; The
Biltmore Municipal Funds; The Monitor Funds; The Planters Funds; The
Starburst Funds; The Starburst Funds II; The Virtus Funds; Tower Mutual
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Vision Group of Funds, Inc.; WesMark Funds; 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 Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Thomas R. Donahue Director, Assistant --
Federated Investors Tower Treasurer, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

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

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

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

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, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

David M. Taylor Executive Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

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

Richard W. Boyd 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

James M. Heaton 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

Byron F. Bowman Vice President, Secretary, --
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

R. Leonard Corton, Jr. 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

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites
Corp.
Pittsburgh, PA 15222-3779

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

Mark D. Fisher 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

John K. Goettlicher 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

James E. Hickey Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

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

Stephen A. La Versa 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

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

Thomas A. Peters III 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

Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

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

Richard Suder 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

Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 1522-3779

Richard B. Watts Vice President, --

Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

Edward J. Wojnarowski 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

Edward R. Bozek 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

J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities
Corp.
Pittsburgh, PA 15222-3779

Item 30. Location of Accounts and Records: (1)

Item 31. Management Services: Not applicable.

(1)Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File No. 33-
48847)

Item 32. Undertakings:

Registrant hereby undertakes, if requested to do so by the holders
of at least 10% of the registrant's outstanding shares, to call a
meeting of shareholders for the purpose of voting upon the question
of removal of a Director or Directors and to assist in
communications with other shareholders as required by Section
16(c).

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

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, INVESTMENT SERIES FUNDS,
INC., certifies that it meets all the requirements for effectiveness of
this 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 28th day of February, 1997.

INVESTMENT SERIES FUNDS, INC.

BY: /s/S. ELLIOTT COHAN
S. ELLIOTT COHAN, Assistant Secretary
Attorney in Fact for John F. Donahue
February 28, 1997

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/S. ELLIOTT COHAN
S. ELLIOTT COHAN Attorney In Fact February 28, 1997
ASSISTANT SECRETARY For the Persons
Listed Below

NAME TITLE

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

J. Christopher Donahue* President and Director

John W. McGonigle* Executive Vice President, Secretary
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

John E. Murray, Jr.* Director

Wesley W. Posvar* Director

Marjorie P. Smuts* Director

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

Consent of Ernst & Young LLP, Independent Auditors

We consent to the reference to our firm under the caption `Financial
Highlights''in Post-Effective Amendment Number 12 to the Registration
Statement (Form N-1A No. 33-48847) and the related Prospectuses of the
Federated Bond Fund (a portfolio of Investment Series Funds, Inc.) dated
February 28, 1997 and to the incorporation by reference therein of our
report dated December 16, 1996, with respect to the financial statements of
Federated Bond Fund ( a portfolio of Investment Series Funds, Inc.)
included in its Annual Report for the year ended October 31, 1996.

By:/s/ERNST & YOUNG LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
February 25, 1997