INVESTMENT SERIES FUNDS INC, 497, 1998-12-31

INVESTMENT SERIES FUNDS INC
497, 1998-12-31

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Federated Bond Fund

A Portfolio of Investment Series Funds, Inc.

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking to provide as high a level of current income as is
consistent with the preservation of capital by investing primarily in a
professionally managed, diversified portfolio of fixed income securities.

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

<TABLE>
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CONTENTS

<S> <C>
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 6
What do Shares Cost? 7
How is the Fund Sold? 9
How to Purchase Shares 10
How to Redeem and Exchange Shares 11
Account and Share Information 14
Who Manages the Fund? 15
Financial Information 16
</TABLE>
DECEMBER 31, 1998

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective 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 strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests at least 65% of its assets in investment grade fixed income
securities. The Fund may invest up to 35% of its assets in fixed income
securities rated below investment grade.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

. a general rise in interest rates, and

. defaults or an increase in the risk of defaults on portfolio securities.

Fixed income securities rated below investment grade, also known as junk bonds,
generally entail greater risks than investment grade fixed income securities.

Other risks of investing in the Fund include call risks, liquidity risks, and
risks related to foreign investing.

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

Risk/Return Bar Chart and Table

(The graphic presentation displayed here consists of a bar chart
representing the annual total returns of Class B Shares of Federated Bond Fund
as of the calendar year-end for each of two years.

The `y' axis reflects the "% Total Return" beginning with "0" and
increasing in increments of 2 up to 12.

The `x' axis represents calculation periods from the earliest calendar year
end of the Fund's Class B Shares' start of business through the calendar year
ended 1997. The light gray shaded chart features two distinct vertical bars,
each shaded in charcoal, and each visually representing by height the total
return percentages for the calendar year stated directly at its base. The
calculated total return percentage for the Class B Shares of the Fund for each
calendar year is stated directly at the top of each respective bar, for the
calendar years 1996 through 1997, are 4.60% and 10.09%.)

The bar chart shows the variability of the Fund's Class B Shares on a calendar
year-end basis.

The Fund's Class B Shares are sold subject to a contingent deferred sales charge
(load). The impact of the sales charges are not reflected in the total returns
above, and if these amounts were reflected, returns would be less than those
shown.

The Fund's Class B Shares year-to-date total return as of the most recent
calendar quarter of September 30, 1998 was 4.88%.

Within the period shown in the chart, the Fund's Class B Shares highest
quarterly return was 4.18% (quarter ended June 30, 1997). Its lowest quarterly
return was (1.91%) (quarter ended March 31, 1996).

Average Annual Total Return

Average Annual Returns for the Fund's Class A, Class B, and Class C Shares,
compared to the Lehman Brothers Corporate Bond Index (LBCBI) and Lipper
Corporate Debt Funds BBB Rated Average (LCDBBB).

Class A Class B Class C LBCBI LCDBBB

/1/ The start of performance dates for Class A, Class B, and Class C Shares
was June 28, 1995.

The table shows the Fund's Class A Shares, Class B Shares, and Class C
Shares total returns averaged over a period of years relative to the
LBCBI, a broad-based market index and the LCDBBB, an average of funds with
similar investment objectives.

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

What are the Fund's Fees and Expenses?

FEDERATED BOND FUND

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund's Class A, Class B, and C Shares.

Shareholder Fees

Fees Paid Directly From Your Investment Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 4.50% None None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price None 5.50% 1.00%
or redemption proceeds, as applicable)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) None None None
(as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if applicable) None None None
Exchange Fee None None None

Annual Fund Operating Expenses (Before Waivers)/1/

Expenses That are Deducted From Fund Assets (as a percentage of average net assets)

Management Fee/2/ 0.75% 0.75% 0.75%
Distribution (12b-1) Fee3 0.25% 0.75% 0.75%
Shareholder Services Fee4 0.25% 0.25% 0.25%
Other Expenses 0.20% 0.20% 0.20%
Total Annual Fund Operating Expenses 1.45% 1.95%/5/ 1.95%
/1/ Although not contractually obligated to do so, the adviser and shareholder services provider
waived certain amounts. These are shown below along with the net expenses the Fund
actually paid for the fiscal year ended October 31, 1998.

Waivers of Fund Expenses 0.15% 0.10% 0.10%
Total Actual Annual Fund Operating Expenses (after waivers) 1.05% 1.85% 1.85%
/2/ The adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time. The
management fee paid by the Fund (after the voluntary waiver) was 0.65% for Class A Shares, Class B Shares, and Class C Shares,
respectively, for the year ended October 31, 1998.

/3/ The Fund's Class A Shares did not pay or accrue the distribution (12b-1) fee during the fiscal year ended October 31, 1998.
Class A Shares have no present intention of paying or accruing the distribution (12b-1) fee during the fiscal year ending
October 1999.

/4/ The shareholder services fee has been voluntarily reduced. This voluntary reduction can be terminated at any time. The
shareholder services fee paid by the Fund (after voluntary reduction) was 0.20% for Class A Shares, for the year ended October
31, 1998.

/5/ Class B Shares convert to Class A Shares (which pay lower ongoing expenses) approximately eight years after purchase.
</TABLE>

EXAMPLE

The following Example is intended to help you compare the cost of investing in
the Fund's Class A, Class B, and Class C Shares with the cost of investing in
other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Class A, Class B,
and Class C Shares for the time periods indicated and then redeem all of your
shares at the end of those periods. Expenses assuming no redemption are also
shown. The Example also assumes that your investment has a 5% return each year
and that the Fund's Class A, Class B, and Class C Shares operating expenses are
before waivers as shown above and remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:

Share Class 1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------------------------------
Class A

- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expenses assuming $246 $ 554 $ 884 $1,818
redemption

- ---------------------------------------------------------------------------------
Expenses assuming no $246 $ 554 $ 884 $1,818
redemption
- ---------------------------------------------------------------------------------
Class B

- ---------------------------------------------------------------------------------
Expenses assuming $748 $1,021 $1,252 $2,146
redemption
- ---------------------------------------------------------------------------------
Expenses assuming no $198 $ 612 $1,052 $2,146
redemption
- ---------------------------------------------------------------------------------
Class C

- ---------------------------------------------------------------------------------
Expenses assuming $301 $ 612 $1,052 $2,275
redemption
- ---------------------------------------------------------------------------------
Expenses assuming no $198 $ 612 $1,052 $2,275
redemption
- ---------------------------------------------------------------------------------
</TABLE>

What are the Fund's Investment Strategies?

The Fund invests at least 65% of its assets in investment grade fixed income
securities. The Adviser allocates the Fund's portfolio among business sectors
and adjusts the credit quality of the portfolio by analyzing current economic
and securities market conditions, particularly changes in interest rates and
expected trends in corporate earnings. These factors also guide the selection of
maturity and duration of portfolio securities. Duration measures the price
sensitivity of a fixed income security to changes in interest rates. In
selecting a portfolio security, the Adviser analyzes the business, competitive
position, and financial condition of the issuer to assess whether the security's
risk is commensurate with its potential return.

The Fund may invest up to 35% of its assets in noninvestment grade fixed
income securities. Although the selection of noninvestment grade securities
involves the same factors as investment grade securities, the Adviser gives
greater emphasis to its analysis of the issuer. The Fund will invest in
noninvestment grade securities primarily by investing in another mutual fund
advised by an affiliate of the Adviser. The other mutual fund is managed
independently of the Fund and may incur additional expenses. The Fund may also
invest directly in noninvestment grade securities.

Temporary Defensive Investments

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

What are the Principal Securities in Which the Fund Invests?

FIXED INCOME SECURITIES

Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be fixed or adjusted periodically. The issuer must also repay
the principal amount of the security, normally within a specified time. Fixed
income securities provide more regular income than equity securities. However,
the returns on fixed income securities are limited and normally do not increase
with the issuer's earnings. This limits the potential appreciation of fixed
income securities as compared to equity securities.

A security's yield measures the annual income earned on a security as a
percentage of its price. Securities with higher credit risks generally have
higher yields.

The following describes the principal types of fixed income securities in
which the Fund invests. The securities may be issued by companies based outside
of the U.S.

Corporate debt securities

Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.

Municipal securities

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

Zero Coupon Securities

Zero Coupon Securities do not pay interest or principal until final maturity.
Most debt securities provide periodic payments of interest (referred to as a
"coupon payment"). In contrast, investors buy zero coupon securities at a price
below the amount payable at maturity. The difference between the price and the
amount paid at maturity represents interest on the zero coupon security. This
increases the market and credit risk of a zero coupon security.

Preferred stocks

Preferred stocks have the right to receive specified dividends or distributions
before the payment of dividends or distributions on common stock. Some preferred
stocks also participate in dividends and distributions paid on common stock.
Issuers often have the right to redeem their preferred stock. The Fund treats
redeemable preferred stock as a fixed income security.

INVESTMENT RATINGS

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

Securities rated BBB or below by Standard and Poor's or Baa by Moody's
Investors Services, Inc., also known as junk bonds or high yield bonds, have
speculative characteristics.

What are the Specific Risks of Investing in the Fund?

MARKET RISK

Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

* Interest rate changes have a greater affect on fixed income securities
with longer durations.

CREDIT RISK

Credit risk is the possibility that an issuer will default (the issuer fails to
repay interest and principal when due). If an issuer defaults, the Fund will
lose money.

*Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Services. Fixed income securities receive
different credit ratings depending on the rating company's assessment of the
likelihood of default by the issuer. The lower the rating of the fixed income
security, the greater the credit risk.

*Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of the
security and the yield of a U.S. Treasury security with a comparable maturity
(the "spread") measures the additional interest received for taking risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating is
lowered, or the security is perceived to have an increased credit risk. An
increase in the spread will cause the price of the security to decline.

CALL RISK

Call risk is the possibility that an issuer may redeem a fixed income security
before maturity ("call") at a price below it's current market price. An increase
in the likelihood of a call may reduce the security's price.

If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

LIQUIDITY RISKS

Fixed income securities that have noninvestment grade credit ratings, have not
been rated or that are not widely held may trade less frequently than other
securities. This may increase the price volatility of these securities.

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

Securities rated below investment grade, also known as junk bonds, generally
entail greater risks than investment grade securities. For example, their prices
are more volatile, their values are more negatively impacted by economic
downturns, and their trading market may be more limited.

RISK OF FOREIGN INVESTING

Foreign securities pose additional risks because foreign economic or political
conditions may be less favorable than those of the United States. Foreign
financial markets may also have fewer investor protections. Securities in
foreign markets may also be subject to taxation policies that reduce returns for
U.S. investors. Due to these risk factors, foreign securities may be more
volatile and less liquid than similar securities traded in the U.S.

What do Shares Cost?

You can purchase, redeem, or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next determined net asset value (NAV) plus any applicable
sales charge (public offering price). NAV is determined at the end of regular
trading (normally 4:00 p.m. Eastern time) each day the NYSE is open.

The Fund's current NAV and public offering price may be found in the Mutual
Funds section in newspapers under "Federated" and the appropriate class
designation listing.

The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.
<TABLE>
<CAPTION>

Maximum Sales Charge
Minimum

Initial/

Subsequent Contingent
Investment Front-End Deferred

Shares Offered Amounts/1/ Sales Charge/2/ Sales Charge/3/

- ----------------------------------------------------------------------
<S> <C> <C> <C>
Class A $1500/$100 4.50% 0.00%
Class B $1500/$100 None 5.50%
Class C $1500/$100 None 1.00%
</TABLE>

1 The minimum initial and subsequent investment amounts for retirement plans
are $250 and $100, respectively. The minimum subsequent investment amounts
for Systematic Investment Programs is $50. Investment professional may
impose higher or lower minimum investment requirements on their customers
than those imposed by the Fund. Orders for $250,000 or more will be
invested in Class A Shares instead of Class B Shares to maximize your
return and minimize the sales charges and marketing fees. Accounts held in
the name of an investment professional may be treated differently Class B
Shares will automatically convert into Class A Shares after eight full
years from the purchase date. This conversion is a non-taxable event.
2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase".

3 See "Sales Charge When You Redeem".

SALES CHARGE WHEN YOU PURCHASE

Class A Shares
Sales

Charge as a Sales Charge
Percentage of as a

Public Offering Percentage of

Purchase Amount Price NAV

- ---------------------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.50% 4.71%
- ---------------------------------------------------------------------
$100,000 but less

than $250,000 3.75% 3.90%
- ---------------------------------------------------------------------
$250,000 but less

than $500,000 2.50% 2.56%
- ---------------------------------------------------------------------
$500,000 but less than $1

million 2.00% 2.04%
- ---------------------------------------------------------------------
$1 million or greater/1/ 0.00% 0.00%
- ---------------------------------------------------------------------
</TABLE>

1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance
payment on the transaction.

The sales charge at purchase may be reduced or eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales
charge;

. combining concurrent purchases of Shares:
- - by you, your spouse, and your children under age 21; or
- - of the same share class of two or more Federated Funds (other than money

market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still
invested in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;
. by exchanging shares from the same share class of another Federated Fund

(other than a money market fund);

. through wrap accounts or other investment pro grams where you pay the
investment professional directly for services;

. through investment professionals that receive no portion of the sales charge;

. as a Federated Life Member (Class A Shares only) and their immediate family
members; or

. director or employee of the Fund, the Adviser, the Distributor and their
affiliates, and the immediate family members of these individuals.

If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor,
Federated Securities Corp., at the time of purchase. If the Distributor is not
notified, you will receive the reduced sales charge only on additional
purchases, and not retroactively on previous purchases.

SALES CHARGE WHEN YOU REDEEM

Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).

Class A Shares

A contingent deferred sales charge or 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase under certain investment
programs where an investment professional received an advance payment on the
transaction.

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<CAPTION>

Class B Shares

Shares Held Up To: CDSC

- ----------------------------------------------------------------
<S> <C>
1 year 5.50%

- ----------------------------------------------------------------
2 years 4.75%
- ----------------------------------------------------------------
3 years 4.00%
- ----------------------------------------------------------------
4 years 3.00%
- ----------------------------------------------------------------
5 years 2.00%
- ----------------------------------------------------------------
6 years 1.00%
- ----------------------------------------------------------------
7 years or more 0.00%
- ----------------------------------------------------------------
</TABLE>

Class C Shares

You will pay a 1% CDSC if you redeem Shares within one year of the purchase
date.

You will not be charged a CDSC when redeeming Shares:

. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser amount;
. that you exchanged into the same share class of another Federated Fund where

the shares were held for the applicable CDSC holding period (other than a
money market fund);

. purchased through investment professionals that did not receive advanced
sales payments; or

If after you purchase Shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for not meeting the
minimum balance requirement;

. if your redemption is a required retirement plan distribution;
. upon the death of the last surviving shareholder(s) of the account.

If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.

To keep the sales charge as low as possible, the Fund redeems your Shares in
this order:

. Shares that are not subject to a CDSC;

. Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that
have been exchanged for Shares of this Fund); and

. then, the CDSC is calculated using the share price at the time of purchase or
redemption, whichever is lower.

How is the Fund Sold?

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

The Fund's Distributor markets the Shares described in this prospectus to
institutions or individuals, directly or through investment professionals. When
the Distributor receives sales charges and marketing fees, it may pay some or
all of them to investment professionals. The Distributor and its affiliates may
pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

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

================================================================================
How to Purchase Shares

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

Where the Fund offers more than one Share Class and you do not specify the Class
choice on your New Account Form or form of payment (Federal Reserve wire or
check), you automatically will receive Class A Shares.

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and

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

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

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New Account

Form; and

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

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

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

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston, MA

Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE

Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

By Check

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

Federated Shareholder Services Company

P.O. Box 8600
Boston, MA 02266-8600

If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company

1099 Hingham Street
Rockland, MA 02370-3317

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

THROUGH AN EXCHANGE

You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.

BY SYSTEMATIC INVESTMENT PROGRAM

Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.

BY AUTOMATED CLEARINGHOUSE (ACH)

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

RETIREMENT INVESTMENTS

You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or roll over of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

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

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

THROUGH AN INVESTMENT PROFESSIONAL

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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by calling the Fund once you have completed
the appropriate authorization form for telephone transactions. If you call
before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time)
you will receive a redemption amount based on that day's NAV.

By Mail

You may redeem or exchange Shares by mailing a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV
after the Fund receives your written request in proper form. Send requests by
mail to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317

All requests must include:

. Fund Name and Class Share, account number and account registration;
. amount to be redeemed or exchanged;
. signatures of all Shareholders exactly as registered; and
. if exchanging, the Fund Name and Share Class, account number and account

registration into which you are exchanging.

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

Signature Guarantees

Signatures must be guaranteed if:

. your redemption will be sent to an address other than the address of record;
. your redemption will be sent to an address of record that was changed within

the last thirty days;

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

. if exchanging (transferring) into another fund with a different shareholder
registration.

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

PAYMENT METHODS FOR REDEMPTIONS

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

when the account was opened:

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

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

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

. to allow your purchase to clear;
. during periods of market volatility; or

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

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGES

You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:

. ensure that the account registrations are identical;
. meet any minimum initial investment requirements; and
. receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.

The Fund may modify or terminate the exchange privilege at any time. The Fund's
management or investment adviser may determine from the amount, frequency and
pattern of exchanges that a shareholder is engaged in excessive trading that is
detrimental to the Fund and other shareholders. If this occurs, the Fund may
terminate the availability of exchanges to that shareholder and may bar that
shareholder from purchasing other Federated Funds.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis. Complete the appropriate section of the New Account Form or an
Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Shares subject to a sales
charge while redeeming Shares using this program.

Systematic Withdrawal Program (SWP) On Class B Shares

You will not be charged a CDSC on SWP redemptions if:
. you redeem 12% or less of your account value in a single year;
. your account is at least one year old;

. you reinvest all dividends and capital gains distributions; and

. your account has at least a $10,000 balance when you establish the SWP (You
cannot aggregate multiple Class B Share accounts to meet this minimum
balance).

You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem only at
a rate of 1% monthly, 3% quarterly, or 6% semi-annually.

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays any dividends monthly to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own shares in order to
earn a dividend.

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

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

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

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

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

Who Manages the Fund?

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

THE FUND'S PORTFOLIO MANAGERS ARE:

Joseph M. Balestrino

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 has been a Portfolio Manager of
various Federated Funds for the past five years. Mr. Balestrino joined Federated
Investors, Inc. or its predecessor in 1986 and has been a Vice President of the
Fund's investment adviser and Federated Research Corp. since 1995. Mr.
Balestrino served as Assistant Vice President of the investment adviser and
Federated Research Corp. 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

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 has
been a Portfolio Manager of various Federated Funds for the past five years. Mr.
Durbiano joined Federated Investors, Inc. or its predecessor in 1982 and has
been a Senior Vice President of the Fund's investment adviser and Federated
Research Corp. since January 1996. From 1988 through 1995, Mr. Durbiano was a
Vice President of the Fund's investment adviser and Federated Research Corp. Mr.
Durbiano is a Chartered Financial Analyst and received his M.B.A. in Finance
from the University of Pittsburgh.

The Adviser and other subsidiaries of Federated advise and/or provide
administrative services to more than 300 mutual funds and private accounts,
which total over $120 billion in assets as of December 31, 1997. Federated was
established in 1955 and is one of the largest mutual fund investment managers in
the United States with more than 2,000 employees. Over 4,000 investment
professionals make Federated Funds available to their customers.

The Adviser receives an annual investment advisory fee of 0.75% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.

YEAR 2000 READINESS

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

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

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

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.

However, this may be difficult with certain issuers. For example, funds
dealing with foreign service providers or investing in foreign securities, will
have difficulty determining the Year 2000 readiness of those entities. This is
especially true of entities or issuers in emerging markets.

The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.

Financial Information

FINANCIAL HIGHLIGHTS

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

This information has been audited by Ernst & Young LLP, whose report, along
with the Fund's audited financial statements, is included in the Annual Report.

Financial Highlights_Class A 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 21, 1998, on the Fund's
financial statements for the year ended October 31, 1998, 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.

Year Ended October 31 1998 1997 1996 1995/1/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.02 $ 9.72 $ 9.76 $ 9.64
- -------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:

- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.70 0.74 0.71 0.26
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.19) 0.26 (0.04) 0.11
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.51 1.00 0.67 0.37
- -------------------------------------------------------------------------------------------------------------------
Less Distributions:

- -------------------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.71) (0.70) (0.71) (0.25)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.82 $ 10.02 $ 9.72 $ 9.76
- -------------------------------------------------------------------------------------------------------------------
Total Return/2/ 5.14% 10.73% 7.21% 3.92%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------

Ratios to Average Net Assets:

- -------------------------------------------------------------------------------------------------------------------
Expenses 1.05% 1.05% 1.05% 1.02%3
- -------------------------------------------------------------------------------------------------------------------
Net investment income 6.89% 7.30% 7.46% 8.22%3
- -------------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/3/ 0.15% 0.20% 0.25% 0.35%3
- -------------------------------------------------------------------------------------------------------------------
Supplemental Data:

- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $210,768 $111,377 $37,045 $ 5,070
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 20% 55% 49% 77%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

1 Reflects operations for the period from June 28, 1995 (date of initial public
investment) to October 31, 1995.
2 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

3 Computed on an annualized basis.

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

Financial Highlights_Class B Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Year Ended October 31 1998 1997 1996 1995/1/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period 10.02 9.72 $ 9.76 $ 9.64
- -------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:

- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.61 0.64 0.64 0.24
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.18) 0.28 (0.04) 0.11
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.43 0.92 0.60 0.35
- -------------------------------------------------------------------------------------------------------------------
Less Distributions:

- -------------------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.62) (0.62) (0.64) (0.23)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.83 10.02 $ 9.72 $ 9.76
- -------------------------------------------------------------------------------------------------------------------
Total Return/2/ 4.34% 9.86% 6.40% 3.72%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------

Ratios to Average Net Assets:

- -------------------------------------------------------------------------------------------------------------------
Expenses 1.85% 1.85% 1.85% 1.81%3
- -------------------------------------------------------------------------------------------------------------------
Net investment income 6.09% 6.50% 6.66% 7.36%3
- -------------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/4/ 0.10% 0.15% 0.20% 0.30%3
- -------------------------------------------------------------------------------------------------------------------
Supplemental Data:

- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $302,010 $191,600 $125,620 $27,768
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover 20% 55% 49% 77%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

3 Computed on an annualized basis.

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

Financial Highlights_Class C Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Year Ended October 31 1998 1997 1996 1995/1/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.02 $ 9.72 $ 9.76 $ 9.64
- ----------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:

- ----------------------------------------------------------------------------------------------------------------------
Net investment income 0.61 0.64 0.64 0.24
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.18) 0.28 (0.04) 0.11
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.43 0.92 0.60 0.35
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions:

- ----------------------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.62) (0.62) (0.64) (0.23)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.83 $ 10.02 $ 9.72 $ 9.76
- ----------------------------------------------------------------------------------------------------------------------
Total Return/2/ 4.35% 9.86% 6.40% 3.72%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:

- ----------------------------------------------------------------------------------------------------------------------
Expenses 1.85% 1.85% 1.85% 1.81%3
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 6.09% 6.50% 6.70% 7.31%3
- ----------------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/4/ 0.10% 0.15% 0.20% 0.30%3
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Data:

- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $76,645 $39,398 $22,897 $ 5,508
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 20% 55% 49% 77%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

3 Computed on an annualized basis.

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

Federated Bond
Fund

A Portfolio of Investment Series
Funds, Inc.

CLASS A SHARES

CLASS B SHARES

CLASS C SHARES

DECEMBER 31, 1998

A Statement of Additional Information (SAI) dated December 31, 1998, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. The
annual report discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the annual report, and other information without charge call
your investment professional or the Fund at 1-800-341-7400.

You can call 1-800-SEC-0330 for information on the Public Reference
Room's operations and copying charges.

Investment Company Act File No. 811-07021
Cusip 461444507

Cusip 461444606
Cusip 461444705
G01271-01 (12/98)

Federated Bond Fund

A Portfolio of Investment Series Funds, Inc.

CLASS F SHARES

<TABLE>
<CAPTION>
CONTENTS

<S> <C>
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the
Fund Invests? 4
What are the Specific Risks of Investing in the Fund? 5
What do Shares Cost? 6
How is the Fund Sold? 8
How to Purchase Shares 8
How to Redeem Shares and Exchange Shares 10
Account and Share Information 12
Who Manages the Fund? 13
Financial Information 14
DECEMBER 31, 1998
</TABLE>

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests at least 65% of its assets in investment grade fixed income
securities. The Fund may invest up to 35% of its assets in fixed income
securities rated below investment grade.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

. a general rise in interest rates, and

. defaults or an increase in the risk of defaults on portfolio securities.

Fixed income securities rated below investment grade, also known as junk
bonds, generally entail greater risks than investment grade fixed income
securities.

Other risks if investing in the Fund include call risks, liquidity risks, and
risks relating to foreign investing.

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

Risk/Return Bar Chart and Table

(The graphic presentation displayed here consists of a bar chart
representing the annual total returns of Class F Shares of Federated Bond Fund
as of the calendar year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with (10) and
increasing in increments of 10 up to 50.

The `x' axis represents calculation periods for the last ten calendar years
of Class F Shares of the Fund, beginning with 1988. The light gray shaded chart
features ten distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentage for the Fund's
Class F Shares for each calendar year is stated directly at the top of each
respective bar, for the calendar years 1988 through 1997, are 9.08%, 1.32%,
(9.59%), 44.62%, 15.94%, 16.31%, (3.36%), 20.18%, 5.40%, and 10.92%.)

The Bar Chart shows the variability of the Fund's Class F Shares on a calendar
year-end basis.

The Fund's Class F Shares are sold subject to a sales charge and a contingent
deferred sales charge (load). The impact of the sales charge and contingent
deferred sales charge is not reflected in the total returns above, and if this
amount was reflected, the returns would be less than that shown.

The Fund's Class F Shares year-to-date total return as of the most recent
calendar quarter of September 30, 1998 was 5.48%.

Within the period shown in the chart, the Fund's Class F Shares highest
quarterly return was 21.02% (quarter ended March 31, 1991). Its lowest quarterly
return was (7.31%) (quarter ended September 30, 1990).

Average Annual Total Return

Average Annual Returns for the Fund's

Class F Shares, compared to the Lehman Brothers Corporate Bond Index (LBCBI) and
the Lipper Corporate Debt Funds BBB Rated Average (LCDBBB).

Calendar Period Class F Shares LBCBI LCDBBB
<S> <C> <C> <C>
1 Year 8.70% 10.15% 10.28%
5 Years 9.34% 8.30% 8.26%
10 Years 10.11% 9.83% 9.25%
Life of Fund/1/ 9.90% 9.67% 9.01%
</TABLE>

1 The start of performance for Class F Shares was May 20, 1987.

The table shows the Fund's Class F Shares total returns averaged over a
period of years relative to the LBCBI, a broad-based market index and the
LCDBBB, an average of funds with similar investment objectives.

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

What are the Fund's Fees and Expenses?

FEDERATED BOND FUND

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund's Class F Shares.

Shareholder Fees

Fees Paid Directly From Your Investment

<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) 1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase 1.00%
price or redemption proceeds, as applicable)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) None
(as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

Annual Fund Operating Expenses (Before Waivers)1

Expenses That are Deducted From Fund Assets (as a percentage of average net assets)

Management Fee2 0.75%
Distribution (12b-1) Fee None
Shareholder Services Fee3 0.25%
Other Expenses 0.20%
Total Annual Fund Operating Expenses 1.20%

</TABLE>

1 Although not contactually obligated to do so, the adviser and shareholder
services provider waived certain amounts. These are shown below along with
net expenses the Fund actually paid for the fiscal year ended October 31,
1998.

Waiver of Fund Expenses 0.12%
Total Actual Annual Fund Operating Expenses (after waivers) 1.08%

2 The adviser voluntarily waived a portion of the management fee. The adviser
can terminate this voluntary waiver at any time. The management fee paid by
the Fund (after the voluntary waiver) was 0.65% for the year ended October
31, 1998.

3 The shareholder services fee has been voluntarily reduced. This voluntary
reduction can be terminated at any time. The shareholder services fee paid by
the Fund (after voluntary reduction) was 0.23% for the year ended October 31,
1998.

EXAMPLE

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

The Example assumes that you invest $10,000 in the Fund's Class F Shares for the
time periods indicated and then redeem all of your shares at the end of those
periods. Expenses assuming no redemption are also shown. The Example also
assumes that your investment has a 5% return each year and that the Fund's Class
F Shares operating expenses are before waivers as shown above and remain the
same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

1 Year 3 Years 5 Years 10 Years
Class F Shares

<S> <C> <C> <C> <C>
Expenses assuming $321 $577 $753 $1,540
redemption

Expenses assuming no $221 $477 $753 $1,540
redemption
</TABLE>

What are the Fund's Investment Strategies?

TEMPORARY DEFENSIVE INVESTMENTS

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

What are the Principal Securities in Which the Fund Invests?

Fixed Income Securities

A security's yield measures the annual income earned on a security as a
percentage of its price. Securities with higher credit risks generally have
higher yields.

The following describes the principal types of fixed income securities in
which the Fund invests. The securities may be issued by companies based outside
of the U.S.

Corporate Debt Securities

Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities.

Municipal Securities

Zero Coupon Securities

Preferred Stocks

INVESTMENT RATINGS

Securities rated BBB by Standard and Poor's or Baa by Moody's Investors
Services, Inc., also known as junk bonds or high yield bonds, have speculative
characteristics.

What are the Specific Risks of Investing in the Fund?

MARKET RISK

Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

Interest rate changes have a greater effect on fixed income securities with
longer durations.

CREDIT RISK

Credit risk is the possibility that an issuer will default (the issuer fails to
repay interest and principal when due). If an issuer defaults, the Fund will
lose money.

Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Services. Fixed income securities receive
different credit ratings depending on the rating company's assessment of the
likelihood of default by the issuer. The lower the rating of the fixed income
security, the greater the credit risk.

Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of the security and
the yield of a U.S. Treasury security with a comparable maturity (the "spread")
measures the additional interest received for taking risk. Spreads may increase
generally in response to adverse economic or market conditions. A security's
spread may also increase if the security's rating is lowered, or the security is
perceived to have an increased credit risk. An increase in the spread will cause
the price of the security to decline.

CALL RISK

LIQUIDITY RISKS

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

RISK OF FOREIGN INVESTING

What do Shares Cost?

You can purchase, redeem, or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next determined net asset value (NAV) plus any applicable
sales charge (public offering price). The Fund's current NAV and offering price
may be found in the Mutual Funds section in newspapers under "Federated" and the
appropriate class designation listing. NAV is determined at the end of regular
trading (normally 4:00 p.m. Eastern time) each day the NYSE is open.

Shares Offered Minimum Maximum Sales Charge
Initial/

Subsequent Front-End Contingent
Investment Sales Deferred

Amounts/1/ Charge/2/ Sales Charge/3/

<S> <C> <C> <C>
Class F $1500/$100 1.00% 1.00%
</TABLE>

2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase".

3 See "Sales Charge When You Redeem".

SALES CHARGE WHEN YOU PURCHASE

Class F Shares

Purchase Amount Sales Charge as a Sales Charge as a
Percentage of Percentage of NAV

Public Offering
Price

<S> <C> <C>
Less than $1 million 1.00% 1.01%
$1 million or greater 0.00% 0.00%
</TABLE>

The sales charge at purchase may be eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales charge;

. combining concurrent purchases of Shares:

. by you, your spouse, and your children under age 21; or

. of the same share class of two or more Federated Funds (other than money
market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;

. when the Fund's Distributor does not advance payment to the investment
professional for your purchase;

. by exchanging shares from the same share class of another Federated Fund;

. for trusts or pension or profit- sharing plans where the third- party
administrator has an arrangement with the Fund's Distributor or its
affiliates to purchase shares without a sales charge; or

. through investment professionals that receive no portion of the sales charge.

SALES CHARGE WHEN YOU REDEEM

Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).

Class F Shares

Purchase Amount Shares Held CDSC
<S> <C> <C>
Up to $2 million 4 years or 1.00%

less

$2 - $5 million 2 years or 0.50%
less

$5 million or more 1 year or less 0.25%

$25 million or more N/A None

</TABLE>

You will not be charged a CDSC when redeeming Shares:

. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser amount;

. that you exchanged into the same share class of another Federated Fund where
the shares were held for the applicable CDSC holding period (other than a
money market fund);

. purchased through investment professionals that did not receive advanced
sales payments; or

. if after you purchase Shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for not meeting the
minimum balance requirement;

. if your redemption is a required retirement plan distribution;

. upon the death of the last surviving shareholder(s) of the account.

To keep the sales charge as low as possible, the Fund redeems your Shares in
this order:

. Shares that are not subject to a CDSC;

. then, the CDSC is calculated using the share price at the time of purchase or
redemption, whichever is lower.

How is the Fund Sold?

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

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and

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

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New

Account Form; and

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

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

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire

ABA Number 011000028
Attention: EDGEWIRE

Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

By Check

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

Federated Shareholder Services Company
P.O. Box 8600

Boston MA 02266-8600

If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317

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

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARINGHOUSE (ACH)

RETIREMENT INVESTMENTS

You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or rollover of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

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

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

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

By Mail

You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV
after the Fund receives your written request in proper form. Send requests by
mail to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317

All requests must include:

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

. amount to be redeemed or exchanged;

. signatures of all Shareholders exactly as registered; and

. if exchanging, the Fund Name and Share Class, account number and account
registration into which you are exchanging.

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

Signature Guarantees

Signatures must be guaranteed if:

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

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

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

. if exchanging (transferring) into another fund with a different shareholder
registration.

PAYMENT METHODS FOR REDEMPTIONS

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

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

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

. to allow your purchase to clear;

. during periods of market volatility; or

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

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

EXCHANGE PRIVILEGES

You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:

. ensure that the account registrations are identical;

. meet any minimum initial investment requirements; and

. receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares on a regular basis. Complete the
appropriate section of the New Account Form or an Account Service Options Form
or contact your investment professional or the Fund. Your account value must
meet the minimum initial investment amount at the time the program is
established. This program may reduce, and eventually deplete, your account.

Payments should not be considered yield or income.

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

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

Who Manages the Fund?

THE FUND'S PORTFOLIO MANAGERS ARE:

Joseph M. Balestrino

Mark E. Durbiano

YEAR 2000 READINESS

The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.

Financial Information

FINANCIAL HIGHLIGHTS

This information has been audited by Ernst & Young LLP, whose report, along
with the Fund's audited financial statements, is included in the Annual Report.

Financial Highlights--Class F Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Year Ended October 31 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.02 $ 9.72 $ 9.76 $ 9.08 $ 10.30
- -----------------------------------------------------------------------------------------------------------------
Income from Investment Operations:

- -----------------------------------------------------------------------------------------------------------------
Net investment income 0.69 0.72 0.71 0.79 0.76
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized

- -----------------------------------------------------------------------------------------------------------------
gain (loss) on investments (0.18) 0.28 (0.04) 0.65 (1.09)
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 0.51 1.00 0.67 1.44 (0.33)
- -----------------------------------------------------------------------------------------------------------------
Less Distributions:

- -----------------------------------------------------------------------------------------------------------------
Distributions from net investment (0.70) (0.70) (0.71) (0.76) (0.75)
income

- -----------------------------------------------------------------------------------------------------------------
Distributions from net realized

- -----------------------------------------------------------------------------------------------------------------
gain on investment transactions -- -- -- -- (0.14)
- -----------------------------------------------------------------------------------------------------------------
Total distributions (0.70) (0.70) (0.71) (0.76) (0.89)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.83 $ 10.02 $ 9.72 $ 9.76 $ 9.08
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------

Total Return/1/ 5.12% 10.70% 7.18% 16.51% (3.41%)
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:

- -----------------------------------------------------------------------------------------------------------------
Expenses 1.08% 1.08% 1.08% 1.03% 1.05%
- -----------------------------------------------------------------------------------------------------------------
Net investment income 6.86% 7.27% 7.38% 8.20% 7.92%
- -----------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/2/ 0.12% 0.17% 0.22% 0.31% 0.33%
- -----------------------------------------------------------------------------------------------------------------
Supplemental Data:

- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $393,905 $325,531 $267,720 $195,502 $146,270
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover 20% 55% 49% 77% 74%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

[LOGO OF FEDERATED INVESTORS]

Federated
Bond Fund

A Portfolio of Investment Series
Funds, Inc.

CLASS F SHARES

DECEMBER 31, 1998

A Statement of Additional Information (SAI) dated December 31, 1998, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. The
annual report discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the annual report and other information without charge call your
investment professional or the Fund at 1-800-341-7400.

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

[LOGO OF FEDERATED INVESTORS]

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

1-800-341-7400

www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-07021
Cusip 461444309

G01271-02-F (12/98)

Federated is a registered mark
of Federated Investors, Inc.

1998 (C)Federated Investors, Inc. [RECYCLED PAPER LOGO]

STATEMENT OF ADDITIONAL INFORMATION DECEMBER 31, 1998

FEDERATED BOND FUND

[A PORTFOLIO OF INVESTMENT SERIES FUNDS, INC.]
CLASS A SHARES, CLASS B SHARES, CLASS C SHARES, CLASS F SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectuses for Federated Bond Fund (Fund),
dated December 31, 1998.

This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectuses or the Annual Report without charge by calling 1-800-341-7400.

TABLE OF CONTENTS

HOW IS THE FUND ORGANIZED?
SECURITIES IN WHICH THE FUND INVESTS

WHAT DO SHARES COST?
HOW IS THE FUND SOLD?

EXCHANGING SECURITIES FOR SHARES
SUBACCOUNTING SERVICES
REDEMPTION IN KIND
ACCOUNT AND SHARE INFORMATION
TAX INFORMATION
WHO MANAGES AND PROVIDES

SERVICES TO THE FUND?
HOW DOES THE FUND MEASURE PERFORMANCE?
WHO IS FEDERATED INVESTORS, INC.?
INVESTMENT RATINGS
ADDRESSES

[Federated Investors Logo]
Federated Securities Corp., Distributor,
subsidiary of Federated Investors

CUSIP 461444507
CUSIP 461444606
CUSIP 461444705
CUSIP 461444309
2041304b (12/98)

<PAGE>

HOW IS THE FUND ORGANIZED?

The Fund is a diversified portfolio of Investment Series Funds, Inc.
(Corporation). The Corporation is an open-end, management investment company
that was established under the laws of the State of Maryland on May 19, 1992.
The Corporation may offer separate series of shares representing interests in
separate portfolios of securities. On May 20, 1994, Class A and Class C Shares
were added to the Fund. On May 19, 1995, Class B Shares were added. 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 Fund's "Fortress Shares" class was
changed to "Class F Shares."

The Board of Directors (the Board) has established four classes of shares
of the Fund, known as Class A Shares, Class B Shares, Class C Shares and Class F
Shares (Shares). This SAI relates to all of the above-mentioned Shares.

SECURITIES IN WHICH THE FUND INVESTS

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

FIXED INCOME SECURITIES

Fixed income securities pay interest, dividends or distributions at a
specified rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.

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

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

TREASURY SECURITIES

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

AGENCY SECURITIES

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

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

CORPORATE DEBT SECURITIES

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

In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt securities
have a higher priority than lower ranking (subordinated) securities. This means
that the issuer might not make payments on subordinated securities while
continuing to make payments on senior securities. In addition, in the event of
bankruptcy, holders of senior securities may receive amounts otherwise payable
to the holders of subordinated securities. Some subordinated securities, such as
trust preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer any
payment that would reduce its capital below regulatory requirements.

COMMERCIAL PAPER

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

DEMAND INSTRUMENTS

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

MUNICIPAL SECURITIES

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

MORTGAGE BACKED SECURITIES

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

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

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying pass-through
certificate among holders of different classes of mortgage backed securities.
This creates different PREPAYMENT AND MARKET RISKS for each CMO class.

SEQUENTIAL CMOS

In a sequential pay CMO, one class of CMOs receives all principal payments
and prepayments. The next class of CMOs receives all principal payments after
the first class is paid off. This process repeats for each sequential class of
CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks
of subsequent classes.

PACS, TACS AND COMPANION CLASSES

More sophisticated CMOs include planned amortization classes (PACs) and
targeted amortization classes (TACs). PACs and TACs are issued with companion
classes. PACs and TACs receive principal payments and prepayments at a specified
rate. The companion classes receive principal payments and prepayments in excess
of the specified rate. In addition, PACs will receive the companion classes'
share of principal payments, if necessary, to cover a shortfall in the
prepayment rate. This helps PACs and TACs to control prepayment risks by
increasing the risks to their companion classes.

IOS AND POS

CMOs may allocate interest payments to one class (Interest Only or IOs) and
principal payments to another class (Principal Only or POs). POs increase in
value when prepayment rates increase. In contrast, IOs decrease in value when
prepayments increase, because the underlying mortgages generate less interest
payments. However, IOs tend to increase in value when interest rates rise (and
prepayments decrease), making IOs a useful HEDGE against market risks.

FLOATERS AND INVERSE FLOATERS

Another variant allocates interest payments between two classes of CMOs.
One class (Floaters) receives a share of interest payments based upon a market
index such as LIBOR. The other class (Inverse Floaters) receives any remaining
interest payments from the underlying mortgages. Floater classes receive more
interest (and Inverse Floater classes receive correspondingly less interest) as
interest rates rise. This shifts PREPAYMENT AND MARKET RISKS from the Floater to
the Inverse Floater class, reducing the price volatility of the Floater class
and increasing the price volatility of the Inverse Floater class.

Z CLASSES AND RESIDUAL CLASSES

CMOs must allocate all payments received from the underlying mortgages to
some class. To capture any unallocated payments, CMOs generally have an accrual
(Z) class. Z classes do not receive any payments from the underlying mortgages
until all other CMO classes have been paid off. Once this happens, holders of Z
class CMOs receive all payments and prepayments. Similarly, REMICs have residual
interests that receive any mortgage payments not allocated to another REMIC
class.

The degree of increased or decreased prepayment risks depends upon the
structure of the CMOs. However, the actual returns on any type of mortgage
backed security depend upon the performance of the underlying pool of mortgages,
which no one can predict and will vary among pools.

ASSET BACKED SECURITIES

Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed income
assets (including other fixed income securities) may be used to create an asset
backed security. Asset backed securities may take the form of commercial paper,
notes, or pass through certificates. Asset backed securities have PREPAYMENT
RISKS. Like CMOs, asset backed securities may be structured like Floaters,
Inverse Floaters, IOs and POs.

BANK INSTRUMENTS

Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.

INSURANCE CONTRACTS

Insurance contracts include guaranteed investment contracts, funding
agreements and annuities. The Fund treats these contracts as fixed income
securities.

ZERO COUPON SECURITIES

Zero coupon securities do not pay interest or principal until final
maturity unlike debt securities that provide periodic payments of interest
(referred to as a coupon payment). Investors buy zero coupon securities at a
price below the amount payable at maturity. The difference between the purchase
price and the amount paid at maturity represents interest on the zero coupon
security. Investors must wait until maturity to receive interest and principal,
which increases the MARKET AND CREDIT RISKS of a zero coupon security.

There are many forms of zero coupon securities. Some are issued at a
discount and are referred to as zero coupon or capital appreciation bonds.
Others are created from interest bearing bonds by separating the right to
receive the bond's coupon payments from the right to receive the bond's
principal due at maturity, a process known as coupon stripping. Treasury STRIPs,
IOs and POs are the most common forms of stripped zero coupon securities. In
addition, some securities give the issuer the option to deliver additional
securities in place of cash interest payments, thereby increasing the amount
payable at maturity. These are referred to as pay-in-kind or PIK securities.

CREDIT ENHANCEMENT

Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some cases
the company providing credit enhancement makes all payments directly to the
security holders and receives reimbursement from the issuer. Normally, the
credit enhancer has greater financial resources and liquidity than the issuer.
For this reason, the Adviser usually evaluates the credit risk of a fixed income
security based solely upon its credit enhancement.

Common types of credit enhancement include guarantees, letters of credit,
bond insurance and surety bonds. Credit enhancement also includes arrangements
where securities or other liquid assets secure payment of a fixed income
security. If a default occurs, these assets may be sold and the proceeds paid to
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.

EQUITY SECURITIES

Equity securities represent a share of an issuer's earnings and assets,
after the issuer pays its liabilities. The Fund cannot predict the income it
will receive from equity securities because issuers generally have discretion as
to the payment of any dividends or distributions. However, equity securities
offer greater potential for appreciation than many other types of securities,
because their value increases directly with the value of the issuer's business.
The following describes the types of equity securities in which the Fund
invests.

COMMON STOCKS

Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings directly
influence the value of its common stock.

INTERESTS IN OTHER LIMITED LIABILITY COMPANIES

Entities such as limited partnerships, limited liability companies,
business trusts and companies organized outside the United States may issue
securities comparable to common or preferred stock.

REAL ESTATE INVESTMENT TRUSTS (REITS)

REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial real
estate market.

WARRANTS

Warrants give the Fund the option to buy the issuer's equity securities at
a specified price (the exercise price) at a specified future date (the
expiration date). The Fund may buy the designated securities by paying the
exercise price before the expiration date. Warrants may become worthless if the
price of the stock does not rise above the exercise price by the expiration
date. This increases the MARKET RISKS of warrants as compared to the underlying
security. Rights are the same as warrants, except companies typically issue
rights to existing stockholders.

CONVERTIBLE SECURITIES

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

Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.

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

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United
States. The Fund considers an issuer to be based outside the United States if:

it is organized under the laws of, or has a principal office located in,
another country;

the principal trading market for its securities is in another country; or

it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along
with the risks normally associated with domestic securities of the same type,
foreign securities are subject to CURRENCY RISKS AND RISKS OF FOREIGN INVESTING.
TRADING IN CERTAIN FOREIGN MARKETS IS ALSO SUBJECT TO LIQUIDITY RISKS.

DEPOSITARY RECEIPTS

Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs), and International Depositary
Receipts (IDRs), are traded globally or outside the United States. Depositary
receipts involve many of the same risks of investing directly in foreign
securities, including CURRENCY RISKS AND RISKS OF FOREIGN INVESTING.

FOREIGN EXCHANGE CONTRACTS

In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivative contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivative contracts may be higher or lower than the spot exchange rate. Use of
these derivative contracts may increase or decrease the Fund's exposure to
CURRENCY RISKS.

FOREIGN GOVERNMENT SECURITIES

Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.

Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political unit
that are not backed by the national government's full faith and credit. Further,
foreign government securities include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.

DERIVATIVE CONTRACTS

Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.

Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract except
for the price. Investors make payments due under their contracts through the
exchange. Most exchanges require investors to maintain margin accounts through
their brokers to cover their potential obligations to the exchange. Parties to
the contract make (or collect) daily payments to the margin accounts to reflect
losses (or gains) in the value of their contracts. This protects investors
against potential defaults by the counterparty. Trading contracts on an exchange
also allows investors to close out their contracts by entering into offsetting
contracts.

For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.

The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.

Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to MARKET AND
CURRENCY RISKS, and may also expose the Fund to LIQUIDITY AND LEVERAGE RISKS.
OTC contracts also expose the Fund to CREDIT RISKS in the event that a
counterparty defaults on the contract.

The Fund may trade in the following types of derivative contracts.

FUTURES CONTRACTS

Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. Futures contracts traded OTC are
frequently referred to as forward contracts. The Fund can buy or sell futures
contracts on portfolio securities or indexes and engage in foreign currency
forward contracts.

OPTIONS

Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call option
gives the holder (buyer) the right to buy the underlying asset from the seller
(writer) of the option. A put option gives the holder the right to sell the
underlying asset to the writer of the option. The writer of the option receives
a payment, or premium, from the buyer, which the writer keeps regardless of
whether the buyer uses (or exercises) the option.

The Fund may:

Buy put options on portfolio securities and listed put options on futures (in
anticipation of a decrease in the value of the underlying asset).
Write call options on futures and portfolio securities (to generate income
from premiums, and in anticipation of a decrease or only limited increase in
the value of the underlying asset). If a call written by a Fund is exercised,
the Fund foregoes any possible profit from an increase in the market price of
the underlying asset over the exercise price plus the premium received.
When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.

HYBRID INSTRUMENTS

Hybrid instruments combine elements of derivative contracts with those of
another security (typically a fixed income security). All or a portion of the
interest or principal payable on a hybrid security is determined by reference to
changes in the price of an underlying asset or by reference to another benchmark
(such as interest rates, currency exchange rates or indices). Hybrid instruments
also include convertible securities with conversion terms related to an
underlying asset or benchmark.

The risks of investing in hybrid instruments reflect a combination of the
risks of investing in securities, options, futures and currencies, and depend
upon the terms of the instrument. Thus, an investment in a hybrid instrument may
entail significant risks in addition to those associated with traditional fixed
income or convertible securities. Hybrid instruments are also potentially more
volatile and carry greater MARKET RISKS than traditional instruments. Moreover,
depending on the structure of the particular hybrid, it may expose the Fund to
LEVERAGE RISKS or carry LIQUIDITY RISKS.

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually agreed
upon time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.

Repurchase agreements are subject to CREDIT RISKS.

REVERSE REPURCHASE AGREEMENTS

Reverse repurchase agreements are repurchase agreements in which the Fund
is the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase agreement
may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements
are subject to CREDIT RISKS. In addition, reverse repurchase agreements create
LEVERAGE RISKS because the Fund must repurchase the underlying security at a
higher price, regardless of the market value of the security at the time of
repurchase.

DELAYED DELIVERY TRANSACTIONS

Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create MARKET
RISKS for the Fund. Delayed delivery transactions also involve CREDIT RISKS in
the event of a counterparty default.

TO BE ANNOUNCED SECURITIES (TBAS)

As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the particular
securities to be delivered. Instead, the Fund agrees to accept any security that
meets specified terms. For example, in a TBA mortgage backed transaction, the
Fund and the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. The seller would not identify the specific underlying
mortgages until it issues the security. TBA mortgage backed securities increase
MARKET RISKS because the underlying mortgages may be less favorable than
anticipated by the Fund.

DOLLAR ROLLS

Dollar rolls are transactions where the Fund sells mortgage-backed
securities with a commitment to buy similar, but not identical, mortgage-backed
securities on a future date at a lower price. Normally, one or both securities
involved are TBA mortgage backed securities. Dollar rolls are subject to MARKET
RISKS AND CREDIT RISKS.

SECURITIES LENDING

The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.

The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.

Loans are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are on loan,
but it will terminate a loan in anticipation of any important vote. The Fund may
pay administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.

Securities lending activities are subject to MARKET RISKS AND CREDIT RISKS.

ASSET COVERAGE

In order to secure its obligations in connection with derivatives contracts
or special transactions, the Fund will either own the underlying assets, enter
into an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations entering into an offsetting derivative contract or terminating
a special transaction. This may cause the Fund to miss favorable trading
opportunities or to realize losses on derivative contracts or special
transactions.

INVESTMENT RISKS

The following risks relate to investments in fixed income securities.

MARKET RISK

o Prices of fixed income securities rise and fall in response to
interest rate changes for similar securities. Generally, when interest
rates rise, prices of fixed income securities fall.

o Interest rate changes have a greater effect on fixed income securities
with longer durations.

CREDIT RISK

o Credit risk is the possibility that an issuer will default (the issuer
fails to repay interest and principal when due). If an issuer
defaults, the Fund will lose money.

o Many fixed income securities receive credit ratings from companies
such as Standard & Poor's and Moody's Investor Services. Fixed income
securities receive different credit ratings depending on the rating
company's assessment of the likelihood of default by the issuer. The
lower the rating of the fixed income security, the greater the credit
risk.

o Fixed income securities generally compensate for greater credit risk
by paying interest at a higher rate. The difference between the yield
of the security and the yield of a U.S. Treasury security with a
comparable maturity (the "spread") measures the additional interest
received for taking risk. Spreads may increase generally in response
to adverse economic or market conditions. A security's spread may also
increase if the security's rating is lowered, or the security is
perceived to have an increased credit risk. An increase in the spread
will cause the price of the security to decline.

CALL RISK

o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity ("call") at a price below it's current market
price. An increase in the likelihood of a call may reduce the
security's price.

o If a fixed income security is called, the Fund may have to reinvest
the proceeds in other fixed income securities with lower interest
rates, higher credit risks, or other less favorable characteristics.

LIQUIDITY RISKS

o Fixed income securities that have noninvestment grade credit ratings,
have not been rated or that are not widely held may trade less
frequently than other securities. This may increase the price
volatility of these securities.

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

o Securities rated below investment grade, also known as junk bonds,
generally entail greater risks than investment grade securities. For
example, their prices are more volatile, their values are more
negatively impacted by economic downturns, and their trading market
may be more limited.

RISK OF FOREIGN INVESTING

o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable than those of the United
States. Foreign financial markets may also have fewer investor
protections. Securities in foreign markets may also be subject to
taxation policies that reduce returns for U.S. investors. Due to these
risk factors, foreign securities may be more volatile and less liquid
than similar securities traded in the U.S.

The following risks relate to investments in equity securities.

STOCK MARKET RISKS

o The value of equity securities in the Fund's portfolio will go up and
down. These fluctuations could be a sustained trend or a drastic
movement. The Fund's portfolio will reflect changes in prices of
individual portfolio stocks or general changes in stock valuations.
Consequently, the Fund's share price may decline and you could lose
money.

o The Fund's investment adviser attempts to manage market risk of
investing in individual securities by limiting the amount the Fund
invests in each stock.

LIQUIDITY RISKS

o Equity securities that are not widely held may trade less frequently
than more widely held securities. This limits trading opportunity
making it more difficult to sell or buy the securities at a favorable
price or time. In response, the fund may have to lower the price, sell
other securities, or give up an investment opportunity, any of which
could have a negative effect on its performance. Infrequent trading
may also lead to greater price volatility.

RISKS RELATED TO COMPANY SIZE

o Generally, the smaller the market capitalization of a company, the
fewer the number of shares traded daily, the less liquid its stock and
the more volatile its price. Market capitalization is determined by
multiplying the number of outstanding shares by the current market
price per share.

o In addition, investing in small capitalization companies entails
greater risk because these companies may have unproven track records,
limited product or service base, limited access to capital and may be
more likely to fail than larger, more established companies.

SECTOR RISK

O Companies with similar characteristics may be grouped together in
broad categories called sectors. Sector risk is the possibility that a
certain sector may perform differently than other sectors or as the
market as a whole. As the adviser allocates more of the Fund's
portfolio holdings to a particular sector, the Fund's performance will
be more susceptible to any economic, business or other developments
which generally affect that sector.

LEVERAGE RISK

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

<PAGE>

RISK OF FOREIGN INVESTING

o Exchange rates for currency fluctuate daily. The combination of
currency risk and market risks tends to make securities traded in
foreign markets more volatile than securities traded exclusively in
the U.S.

o Foreign securities pose additional risks because foreign economic or
political conditions may be less favorable that those of the United
States. Foreign financial markets may also have fewer investor
protections. Securities in foreign markets may also be subject to
taxation policies that reduce returns for U.S. investors.

o Due to these risk factors, foreign securities may be more volatile and
less liquid than similar securities traded in the U.S.

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 of any one issuer(other than cash, cash
items, securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized by
such U.S. government securities, and securities of other investment companies)
if as a result more than 5% of the value of its total assets would be in the
securities of that issuer, or would own more than 10% of the outstanding voting
securities of that issuer.

INVESTING IN REAL ESTATE

The Fund will not buy or sell real estate, 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.

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:

o 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

o 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.

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

INVESTING IN RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may invest pursuant to its investment objective and
policies but which are subject to restrictions on resale under federal
securities law. Under criteria established by the Trustees, certain restricted
securities are determined to be liquid. To the extent that restricted securities
are not determined to be liquid the Fund will limit their purchase, together
with other illiquid securities, to 15% of its net assets.

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.

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.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities are determined as follows:

o for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;

o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;

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

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

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

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

The Fund values futures contracts and options at their market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for the
option as provided by an investment dealer or other financial institution that
deals in the option. The Board may determine in good faith that another method
of valuing such investments is necessary to appraise their fair market value.

TRADING IN FOREIGN SECURITIES

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

WHAT DO SHARES COST?

The Fund's net asset value (NAV) per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ due to the variance in daily net income realized by
each class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

You can reduce or eliminate the applicable front-end sales charge, as follows.

QUANTITY DISCOUNTS

Larger purchases of the same Share class can reduce or eliminate the sales
charge you pay. You can combine purchases of Shares made on the same day by you,
your spouse, and your children under age 21. In addition, purchases made at one
time by a trustee or fiduciary for a single trust estate or a single fiduciary
account can be combined.

ACCUMULATED PURCHASES

If you make an additional purchase of Shares, you can count previous Share
purchases still invested in the Fund in calculating the applicable sales charge
on the additional purchase.

CONCURRENT PURCHASES

You can combine concurrent purchases of the same Share class of two or more
Federated Funds in calculating the applicable sales charge.

LETTER OF INTENT - CLASS A SHARES AND CLASS F SHARES

You can sign a Letter of Intent committing to purchase a certain amount of
the same class of Shares within a 13 month period to combine such purchases in
calculating the sales charge. The Fund's custodian will hold Shares in escrow
equal to the maximum applicable sales charge. If you complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account. If you
do not fulfill the Letter of Intent, the Custodian will redeem the appropriate
amount from the Shares held in escrow to pay the sales charges that were not
applied to your purchases.

REINVESTMENT PRIVILEGE

You may reinvest, within 120 days, your redemption proceeds at the next
determined NAV, without any sales charge.

PURCHASES BY AFFILIATES OF THE FUND

The following individuals and their immediate family members may buy Shares
at NAV without any sales charge because there are nominal sales efforts
associated with their purchases:

o the Directors, employees, and sales representatives of the Fund, the
Adviser, the Distributor and their affiliates;

o Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc.
(Federated) on December 31, 1997;

o any associated person of an investment dealer who has a sales agreement
with the Distributor; and

o trusts, pension or profit-sharing plans for these individuals.

FEDERATED LIFE MEMBERS

Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:

o through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1987 (the Liberty Account and Liberty Family
of Funds are no longer marketed); or

o as Liberty Account shareholders by investing through an affinity group
prior to August 1, 1987.

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

These reductions or eliminations are offered because no sales commissions
have been advanced to the selling investment professional, the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC), or nominal sales efforts
are associated with the original purchase of Shares.

Upon notification to the Distributor or the Fund's transfer agent, no CDSC
will be imposed on redemptions:

o following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;

o representing minimum required distributions from an Individual Retirement
Account or other retirement plan in Federated Funds to a shareholder who
has attained the age of 70-1/2;

o representing a total or partial distribution from a qualified plan. A total
or partial distribution does not include an account transfer, rollover or
other redemption made for purposes of reinvestment. A qualified plan does
not include an Individual Retirement Account, Keogh Plan, or a custodial
account;

o which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements;

o which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;

o of Shares that represent a reinvestment within 120 days of a previous
redemption;

o of Shares held by the Directors, employees, and sales representatives of
the Fund, the Adviser, the Distributor and their affiliates; employees of
any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the
above persons; and

o of Shares originally purchased through a bank trust department, a
registered investment adviser or retirement plans where the third party
administrator has entered into certain arrangements with the Distributor or
its affiliates, or any other investment professional, to the extent that no
payments were advanced for purchases made through these entities.

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.

FRONT-END SALES CHARGE REALLOWANCES

The Distributor receives a front-end sales charge on certain Share sales.
The Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professional for sales and/or administrative services. Any payments
to investment professional in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.

RULE 12B-1 PLAN (CLASS A, B, AND C SHARES)

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

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

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

Federated and its subsidiaries may benefit from arrangements where the Rule
12b-1 Plan fees related to Class B Shares may be paid to third-parties who have
advanced commissions to investment professional.

SHAREHOLDER SERVICES

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

<PAGE>

SUPPLEMENTAL PAYMENTS

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

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

When a investment professional's customer purchases shares, the investment
professional may receive:

o an amount equal to 0.50% of the NAV of Class A Shares under certain
qualified retirement plans as approved by the Distributor. (Such payments are
subject to a reclaim from the investment professional should the assets leave
the program within 12 months after purchase.)

o an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and
C Shares.

o an amount on the NAV of Class F Shares purchased as follows: up to 1% on
purchases below $2 million; 0.50% on purchases from $2 million but below $5
million; and 0.25% on purchases of $5 million or more.

In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A and Class F that its customer
has not redeemed over the first year.

CLASS A SHARES

Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:

Advance Payments
as a Percentage of

AMOUNT PUBLIC OFFERING PRICE

First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%

For accounts with assets over $1 million, the dealer advance payments
resets annually to the first breakpoint on the anniversary of the first
purchase.

Class A Share purchases under this program may be made by Letter of Intent
or by combining concurrent purchases. The above advance payments will be paid
only on those purchases that were not previously subject to a front-end sales
charge and dealer advance payments. Certain retirement accounts may not be
eligible for this program.

A contingent deferred sales charge of 0.75% of the redemption amount
applies to Class A Shares redeemed up to 24 months after purchase. The CDSC does
not apply under certain investment programs where the investment professional
does not receive an advance payment on the transaction including, but not
limited to, trust accounts and wrap programs where the investor pays an account
level fee for investment management.

CLASS F SHARES. Investment professionals purchasing Class F Shares for
their customers are eligible to receive an advance payment from the distributor
of 0.25% of the purchase price.

<PAGE>

EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in an
exchange for securities you own. The Fund reserves the right to determine
whether to accept your securities and the minimum market value to accept. The
Fund will value your securities in the same manner as it values its assets. This
exchange is treated as a sale of your securities for federal tax purposes.

SUBACCOUNTING SERVICES

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

REDEMPTION IN KIND

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

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

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

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

ACCOUNT AND SHARE 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 the
Corporation have equal voting rights, except that in matters affecting only a
particular Fund or class, only Shares of that Fund or class are entitled to
vote.

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

<PAGE>

As of December 9, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class A Shares of the Fund:
Charles Schwab & Co., Inc., San Francisco, CA, owned 5.58%; and MLPF&S,
Jacksonville, FL, owned 18.21%.

As of December 9, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class B Shares of the Fund:
MLPF&S, Jacksonville, FL, owned 9.46%.

As of December 9, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class C Shares of the Fund:
MLPF&S, Jacksonville, FL, owned 35.18%.

As of December 9, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Class F Shares of the Fund:
MLPF&S, Jacksonville, FL, owned 12.20%; and Nationwide QPVA, Columbus, OH, owned
11.60%.

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

TAX INFORMATION

FEDERAL INCOME TAX

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

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

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

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

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

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

<PAGE>

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD OF DIRECTORS

The Board is responsible for managing the Corporation's business affairs
and for exercising all the Corporation's powers except those reserved for the
shareholders. Information about each Board member is provided below and includes
the following data: name, address, birthdate, present position(s) held with the
Corporation, principal occupations for the past five years and other notable
positions held, total compensation received as a Director from the Corporation
for its most recent fiscal year, and the total compensation received from the
Federated Fund Complex for the most recent calendar year. The Corporation is
comprised of one fund and the Federated Fund Complex is comprised of 56
investment companies, whose investment advisers are affiliated with the Fund's
Adviser. As of December 9, 1998, the Fund's Board and Officers as a group owned
less than 1% of the Fund's outstanding Class A, B, C, F Shares.

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

<TABLE>

<PAGE>

NAME

BIRTHDATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITION WITH PRINCIPAL OCCUPATIONS FROM FROM CORPORATION
CORPORATION FOR PAST 5 YEARS CORPORATION AND FUND COMPLEX
JOHN F. DONAHUE## Chief Executive Officer and Director or $0 $0 for the
Birthdate: July 28, 1924 Trustee of the Federated Fund Complex. Corporation and
Federated Investors Chairman and Director, Federated Investors, 56 other
Tower Inc.; Chairman and Trustee, Federated investment
1001 Liberty Avenue Advisers, Federated Management, and companies
Pittsburgh, PA Federated Research; Chairman and Director, in the Fund
CHAIRMAN AND DIRECTOR Federated Research Corp., and Federated Complex
Global Research Corp.; Chairman, Passport
Research, Ltd.

THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,491.83 $111,222 for
Birthdate: February 3, Complex; Director, Member of Executive the
1934 Committee, Children's Hospital of Corporation and
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst 56 other
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, investment
DIRECTOR Inc.; Director, Member of Executive companies
Committee, University of Pittsburgh. in the Fund
Complex

JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,641.25 $122,362 for
Birthdate: June 23, 1937 Complex; President, Investment Properties the
Wood/IPC Commercial Corporation; Senior Vice President, Corporation and
Dept. John R. Wood and Associates, Inc., 56 other
John R. Wood Realtors; Partner or Trustee in private investment
Associates, Inc. real estate ventures in Southwest Florida; companies
Realtors formerly: President, Naples Property in the Fund
3255 Tamiami Trial Management, Inc. and Northgate Village Complex
North Naples, FL Development Corporation.

DIRECTOR

NICHOLAS CONSTANTAKIS+ Director or Trustee of the Federated Fund $1,133.56 $0 for the
Birthdate: September 3, Complex; formerly: Partner, Andersen Corporation and
1939 Worldwide SC. 36 other
175 Woodshire Drive investment
Pittsburgh, PA companies
DIRECTOR in the Fund

Complex

WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,641.25 $122,362 for
Birthdate: July 4, 1918 Complex; Director and Member of the the
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; Corporation and
Pittsburgh, PA formerly: Vice Chairman and Director, PNC 56 other
DIRECTOR Bank, N.A., and PNC Bank Corp.; Director, investment
Ryan Homes, Inc. companies
in the Fund

Retired: Director, United Refinery; Complex
Director, Forbes Fund; Chairman, Pittsburgh
Foundation; Chairman, Pittsburgh Civic

Light Opera.

JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,641.25 $122,362 for
Birthdate: May 18, 1922 Complex; Attorney-at-law; Director, The the
571 Hayward Mill Road Emerging Germany Fund, Inc. Corporation and
Concord, MA 56 other
DIRECTOR Retired: President, Boston Stock Exchange, investment

Inc.; Regional Administrator, United States companies
Securities and Exchange Commission. in the Fund

Complex

LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,491.83 $111,222 for
Birthdate: October 11, Complex; Professor of Medicine, University the
1932 of Pittsburgh; Medical Director, University Corporation and
3471 Fifth Avenue of Pittsburgh Medical Center - Downtown; 56 other
Suite 1111 Hematologist, Oncologist, and Internist, investment
Pittsburgh, PA Presbyterian and Montefiore Hospitals; companies
TRUSTEE Member, National Board of Trustees, in the Fund
Leukemia Society of America. Complex

EDWARD L. FLAHERTY, Director or Trustee of the Federated Fund $1,641.25 $122,362 for
JR., ESQ. # Complex; Attorney, of Counsel, Miller, the
Birthdate: June 18, 1924 Ament, Henny & Kochuba; Director, Eat'N Corporation and
Miller, Ament, Henny & Park Restaurants, Inc.; formerly: Counsel, 56 other
Kochuba Horizon Financial, F.A., Western Region; investment
205 Ross Street Partner, Meyer and Flaherty. companies
Pittsburgh, PA in the Fund
DIRECTOR Complex
PETER E. MADDEN Director or Trustee of the Federated Fund $1,491.83 $111,222 for
Birthdate: March 16, Complex; formerly: Representative, the
1942 Commonwealth of Massachusetts General Corporation and
One Royal Palm Way Court; President, State Street Bank and 56 other
100 Royal Palm Way Trust Company and State Street Corporation. investment
Palm Beach, FL companies
DIRECTOR Retired: Director, VISA USA and VISA in the Fund
International; Chairman and Director, Complex
Massachusetts Bankers Association;

Director, Depository Trust Corporation.

JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,491.83 $111,222 for
J.D., S.J.D. Complex; President, Law Professor, Duquesne the
Birthdate: December 20, University; Consulting Partner, Mollica & Corporation and
1932 Murray. 56 other
President, Duquesne investment
University Retired: Dean and Professor of Law, companies
Pittsburgh, PA University of Pittsburgh School of Law; in the Fund
DIRECTOR Dean and Professor of Law, Villanova Complex
University School of Law.

WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,491.83 $111,222 for
Birthdate: September Complex; President, World Society of the
14, 1925 Ekistics, Athens; Professor, International Corporation and
1202 Cathedral of Politics; Management Consultant; Trustee, 56 other
Learning Carnegie Endowment for International Peace, investment
University of Pittsburgh RAND Corporation, Online Computer Library companies
Pittsburgh, PA Center, Inc., National Defense University in the Fund
DIRECTOR and U.S. Space Foundation; President Complex
Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management Center,

Prague.

Retired: Professor, United States Military
Academy; Professor, United States Air Force

Academy.

MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,491.83 $111,222 for
Birthdate: June 21, 1935 Complex; Public the
4905 Bayard Street Relations/Marketing/Conference Planning. Corporation and
Pittsburgh, PA 56 other
DIRECTOR Retired: National Spokesperson, Aluminum investment
Company of America; business owner. companies

in the Fund
Complex

J. CHRISTOPHER President or Executive Vice President of $0 $0 for the
DONAHUE##* the Federated Fund Complex; Director or Corporation and
Birthdate: April 11, Trustee of some of the Funds in the 18 other
1949 Federated Fund Complex; President and investment
Federated Investors Director, Federated Investors, Inc.; companies
Tower President and Trustee, Federated Advisers, in the Fund
1001 Liberty Avenue Federated Management, and Federated Complex
Pittsburgh, PA Research; President and Director, Federated
PRESIDENT AND DIRECTOR Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.

<PAGE>

EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birthdate: October 22, the Federated Fund Complex; President, Corporation and
1930 Executive Vice President and Treasurer of 1 other
Federated Investors some of the Funds in the Federated Fund investment
Tower Complex; Vice Chairman, Federated companies
1001 Liberty Avenue Investors, Inc.; Vice President, Federated in the Fund
Pittsburgh, PA Advisers, Federated Management, Federated Complex
EXECUTIVE VICE PRESIDENT 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.

JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birthdate: October 26, the Federated Fund Complex; Executive Vice Corporation and
1938 President, Secretary, and Director, 56 other
Federated Investors Federated Investors, Inc.; Trustee, investment
Tower Federated Advisers, Federated Management, companies
1001 Liberty Avenue and Federated Research; Director, Federated in the Fund
Pittsburgh, PA Research Corp. and Federated Global Complex
EXECUTIVE VICE Research Corp.; Director, Federated
PRESIDENT AND SECRETARY Services Company; Director, Federated
Securities Corp.

RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birthdate: June 17, Vice President - Funds Financial Services Corporation and
1954 Division, Federated Investors, Inc.; 56 other
Federated Investors Formerly: various management positions investment
Tower within Funds Financial Services Division of companies
1001 Liberty Avenue Federated Investors, Inc. in the Fund
Pittsburgh, PA Complex
TREASURER

RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birthdate: May 17, 1923 Funds in the Federated Fund Complex; Corporation and
Federated Investors Director or Trustee of some of the Funds in 6 other
Tower the Federated Fund Complex; Executive Vice investment
1001 Liberty Avenue President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities in the Fund
VICE PRESIDENT Corp. Complex
WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: March 3, 1949 various other Funds in the Federated Fund Corporation and
Federated Investors Complex; Executive Vice President, 41 other
Tower Federated Investment Counseling, Federated investment
1001 Liberty Avenue Global Research Corp., Federated Advisers, companies
Pittsburgh, PA Federated Management, Federated Research, in the Fund
Chief Investment Officer and Passport Research, Ltd.; Registered Complex
Representative, Federated Securities Corp.;
Portfolio Manager, Federated Administrative
Services; Vice President, Federated
Investors, Inc.; Formerly: Executive Vice
President and Senior Vice President,
Federated Investment Counseling
Institutional Portfolio Management Services
Division; Senior Vice President, Federated
Research Corp., Federated Advisers,
Federated Management, Federated Research,
and Passport Research, Ltd.

JOSEPH M. BALESTRINO Senior Portfolio Manager and Vice President $0 $0 for the
Birthdate: November 3, of four investment companies in the Corporation and
1954 Federated Fund Complex; Vice President, 3 other
Federated Investors Federated Investment Counseling, Federated investment
Tower Advisers, Federated Global Research Corp., companies
1001 Liberty Avenue Federated Management, Federated Research, in the Fund
Pittsburgh, PA Federated Research Corp. and Passport Complex
SENIOR PORTFOLIO Research, Ltd.; Formerly: Assistant Vice
MANAGER/VICE PRESIDENT President, Federated Advisers, Federated
Management, Federated Research, Federated
Research Corp. , Passport Research, Ltd.
and Federated Global Research Corp.

</TABLE>

## Mr. Donahue is the father of J. Christopher Donahue, President and
Director of the Corporation.

+Mr. Constantakis became a member of the Board of Directors on April 28,
1998. He did not earn any fees for serving the Fund Complex since these fees are
reported as of the end of the last calendar year.

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions for
the Fund. The Adviser is a wholly-owned subsidiary of Federated.

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

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

BROKERAGE TRANSACTIONS

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

RESEARCH SERVICES. Research services 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 may be used by the Adviser or by affiliates
of Federated in advising other accounts. To the extent that receipt of these
services may replace 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 those 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.

For the fiscal year ended, October 31, 1998, the Fund's adviser directed
brokerage transactions to certain brokers due to research services they
provided. The total amount of these transactions was $3,579,790,760 for which
the Fund paid $40 in brokerage commissions.

On October 31, 1998, the Fund owned securities of the following regular
broker/dealers:

Donaldson, Lufkin, Jenrette - $7,314,021; Lehman Brothers -$7,415,976;
Merrill Lynch - $435,468.

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

<PAGE>

ADMINISTRATOR

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

MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million

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

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

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

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

INDEPENDENT PUBLIC ACCOUNTANTS

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

FEES PAID BY THE FUND FOR SERVICES

FOR THE YEAR ENDED OCTOBER 31,

1998 CURRENT FYE PRIOR FYE PRIOR FYE

Advisory Fee Earned $6,185,961 $4,127,217 $2,650,984
Advisory Fee Reduction $855,524 $842,462 $705,603
Brokerage Commissions $40 $0 $0
Administrative Fee $621,951 $415,495 $267,242
12b-1 Fee
Class A Shares $0 ---- ----
Class B Shares $1,778,450 ---- ----
Class C Shares $425,963 ---- ----
Shareholder Services Fee

Class A Shares $321,581 ---- ----
Class B Shares $592,816 ---- ----
Class C Shares $141,988 ---- ----
Class F Shares $851,190 ---- ----

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

HOW DOES THE FUND MEASURE PERFORMANCE?

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

Unless otherwise stated, any quoted Share performance reflects the effect
of non-recurring charges, such as maximum sales charges, which, if excluded,
would increase the total return and yield. The performance of Shares depends
upon such variables as: portfolio quality; average portfolio maturity; type and
value of portfolio securities; changes in interest rates; changes or differences
in the Fund's or any class of Shares' expenses; and various other factors.

Share performance fluctuates on a daily basis largely because net earnings
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.

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns given for the one-, five- and ten-year or since inception
periods ended October 31, 1998.

Yield given for the 30-day period ended October 31, 1998.

<S> <C> <C> <C> <C> <C>
30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
SINCE
INCEPTION

CLASS A SHARES 6/28/95
Total Return NA 0.43% NA NA 6.62%
Yield 5.84% NA NA NA NA

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
SINCE
INCEPTION

CLASS B SHARES 6/25/95
Total Return NA (1.06%) NA NA 6.51%
Yield 5.30% NA NA NA NA

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
SINCE
INCEPTION

CLASS C SHARES 6/25/95
Total Return NA 3.36% NA NA 7.28%
Yield 5.31% NA NA NA NA

30-DAY PERIOD 1 YEAR 5 YEARS 10 YEARS
SINCE

CLASS F SHARES INCEPTION

5/20/87

Total Return NA 3.11% 6.81% 9.65% 9.46%
Yield 6.03% NA NA NA NA

</TABLE>

TOTAL RETURN

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

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

<PAGE>

YIELD

The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a thirty-day period; by (ii) the
maximum offering price per Share on the last day of the period. This number is
then annualized using semi-annual compounding. This means that the amount of
income generated during the 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 Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

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

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

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

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

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

LEHMAN BROTHERS HIGH YIELD INDEX. Covers the universe of fixed rate,
publicly issued, non-investment 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 IBCA, Inc. 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.

LIPPER ANALYTICAL SERVICES, INC. Ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specified period of time.

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.

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.

MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed Mutual Funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.

WHO IS FEDERATED INVESTORS, INC.?

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

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

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS

In the municipal sector, as of December 31, 1997, Federated managed 11 bond
funds with approximately $2.1 billion in assets and 22 money market funds with
approximately $10.9 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

EQUITY FUNDS

In the equity sector, Federated has more than 27 years' experience. As of

December 31, 1997, Federated managed 29 equity funds totaling approximately
$11.7 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

CORPORATE BOND FUNDS

In the corporate bond sector, as of December 31, 1997, Federated managed 11
money market funds and 16 bond funds with assets approximating $17.1 billion and
$5.6 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 22 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.

GOVERNMENT FUNDS

In the government sector, as of December 31, 1997, Federated manages 9
mortgage-backed, 6 government/ agency and 18 government money market mutual
funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion,
respectively. Federated trades approximately $400 million in U.S. government and
mortgage-backed securities daily and places approximately $23 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $36 billion in government funds within these
maturity ranges.

MONEY MARKET FUNDS

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1997, Federated managed more than $63.1 billion in assets across 51 money market
funds, including 18 government, 11 prime and 22 municipal with assets
approximating $35 billion, $17.1 billion and $10.9 billion, respectively.

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

companies.

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $4 trillion to the more than 6,700 funds
available, according to the Investment Company Institute.

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

FEDERATED CLIENTS OVERVIEW

INSTITUTIONAL CLIENTS

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

BANK MARKETING

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

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

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

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31,
1998 are incorporated herein by reference to the Annual Report to Shareholders
of Federated Bond Fund dated October 31, 1998.

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INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:

o Leading market positions in well established industries.

o High rates of return on funds employed.

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

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

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

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

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS

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

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

FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS

FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.

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

<PAGE>

ADDRESSES

FEDERATED BOND FUND

Class A, Class B, Class C, Class F Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

Distributor

FEDERATED SECURITIES CORP. Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

Investment Adviser

FEDERATED ADVISERS Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

Custodian

STATE STREET BANK AND TRUST COMPANY P.O. Box 8600
Boston, MA 02266-8600

Transfer Agent and Dividend Disbursing Agent
FEDERATED SHAREHOLDER SERVICES COMPANY P.O. Box 8600

Boston, MA 02266-8600

Independent Auditors

ERNST & YOUNG LLP 200 Clarendon Street

Boston, MA 02116-5072