FEDERATED SHORT-TERM MUNICIPAL TRUST

485BPOS 1 fstmtform.htm FEDERATED SHORT-TERM MUNICIPAL TRUST



                                                       1933 Act File No. 2-72277
                                                      1940 Act File No. 811-3181

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933               X
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     Pre-Effective Amendment No.
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     Post-Effective Amendment No.   42                                X
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                                     and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940       X
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     Amendment No.    33                                              X
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                      FEDERATED SHORT-TERM MUNICIPAL TRUST
               (Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

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

If appropriate, check the following box:

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


                                   Copies to:

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

Federated Investors
World-Class Investment Manager

Federated Short-Term Municipal Trust

PROSPECTUS

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August 31, 2004

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INSTITUTIONAL SHARES

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A mutual fund seeking to provide dividend income which is exempt from federal regular income tax by investing in a portfolio of tax-exempt securities with a dollar-weighted average maturity of less than three years.

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

NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 13

What Do Shares Cost? 15

How is the Fund Sold? 16

How to Purchase Shares 16

How to Redeem Shares 17

Account and Share Information 20

Who Manages the Fund? 21

Legal Proceedings 22

Financial Information 23

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Risk/Return Summary

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WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

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The Fund's investment objective is to provide dividend income which is exempt from federal regular income tax. 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.

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WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

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The Fund pursues its objective by investing its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations (AMT). The Fund's dollar- weighted average portfolio maturity will be less than three years. The Fund may invest in derivatives contracts to implement its investment strategies as more fully described herein.

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WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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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:

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Interest Rate Risks. Prices of tax-exempt securities generally fall when interest rates rise. Interest rate changes have a greater effect on the price of tax-exempt securities with longer durations.
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Credit Risks. Issuers of tax-exempt securities may default on the payment of interest or principal when due.
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Call Risks. Issuers of tax-exempt securities may redeem the securities prior to maturity at a price below their current market value.
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Liquidity Risks. Trading opportunities are more limited for tax-exempt securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Over-the-counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts.
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Tax Risks. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Consequently, the Fund may receive payments that are treated as ordinary income for federal income tax purposes.
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Leverage Risks. 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.
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Risks of Investing in Derivative Contracts. Changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Also, derivative contracts may involve other risks described in this prospectus, such as interest rate, credit, liquidity, and leverage risks.
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Other risk factors associated with an investment in the Fund include prepayment risk and sector risk.

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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.

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Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Institutional Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The Fund's Institutional Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

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The Fund's Institutional Shares total return for the six-month period from January 1, 2004 to June 30, 2004 was (0.08)%.

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Within the periods shown in the bar chart, the Fund's Institutional Shares highest quarterly return was 3.08% (quarter ended March 31, 1995). Its lowest quarterly return was (0.59)% (quarter ended March 31, 1994).

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Average Annual Total Return Table

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Return Before Taxes is shown for the Fund's Institutional Shares. In addition, Return After Taxes is shown for the Fund's Institutional Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Lehman Brothers 1-Year Municipal Index (LB1MI) and Lehman Brothers 3-Year Municipal Index (LB3MI), broad-based market indexes. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

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(For the periods ended December 31, 2003)

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	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R>2.43%</R>	<R>3.92%</R>	<R>4.10%</R>
Return After Taxes on Distributions¹	<R>2.43%</R>	<R>3.92%</R>	<R>4.10%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R>2.54%</R>	<R>3.90%</R>	<R>4.08%</R>
LB1MI	<R>1.91%</R>	<R>3.94%</R>	<R>4.19%</R>
LB3MI	<R>2.68%</R>	<R>4.82%</R>	<R>4.86%</R>

1 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold Institutional Shares of the Fund.

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee^2,3		0.40%
Distribution (12b-1) Fee		None
Shareholder Services Fee⁴		0.25%
Other Expenses⁵		0.18%
Total Annual Fund Operating Expenses		0.83%
Total Waivers of Fund Expenses (contractual)		0.36%
Total Actual Annual Fund Operating Expenses (after waivers)		0.47%

1 The percentages shown are based on expenses for the entire fiscal year ended June 30, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage.
2 Under the investment advisory contract, the Adviser is required to reimburse the Fund's Institutional Shares the amount, limited to the amount of the advisory fee, by which the Fund's Institutional Shares aggregate annual operating expenses, including the investment advisory fee but excluding interest, taxes, brokerage commissions, expenses of registering or qualifying the Fund and its shares under federal and state laws and regulations, expenses of withholding taxes and extraordinary expenses exceed 0.45% of the Fund's Institutional Shares average daily net assets. Shareholders must approve any change to the contractual waiver/reimbursement.
3 To comply with the investment advisory contract, a portion of the management fee has been waived. The management fee paid by the Fund (after the contractual waiver) was 0.30% for the fiscal year ended June 30, 2004.
4 To comply with the investment advisory contract, a portion of the shareholder services fee has been waived. The shareholder services fee paid by the Fund's Institutional Shares (after the contractual waiver) was 0.00% for the fiscal year ended June 30, 2004.
5 To comply with the investment advisory contract, a portion of the transfer agent fee was waived. Total other expenses paid by the Fund's Institutional Shares (after the contractual waiver) were 0.17% for the fiscal year ended June 30, 2004.

EXAMPLE

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

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

1 Year	$	48

3 Years	$	151

5 Years	$	263

10 Years	$	591

What are the Fund's Investment Strategies?

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The Fund will invest its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. The tax-exempt securities in which the Fund invests are investment grade at the time of purchase. The Fund's dollar-weighted average portfolio maturity is less than three years. Interest from the Fund's investments may be subject to AMT. The Fund's investment adviser (Adviser) actively manages the Fund's portfolio, emphasizing credit quality while seeking to manage the Fund's interest rate risk and provide enhanced levels of income.

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The Adviser performs a fundamental credit analysis on tax-exempt securities before the Fund purchases such securities. The Adviser considers various factors, including the following:

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the economic feasibility of revenue bond financings and general purpose financings;
the financial condition of the issuer or guarantor; and
political developments that may affect credit quality.

The Adviser monitors the credit risks of all securities on an ongoing basis by reviewing periodic financial data and ratings of nationally recognized statistical rating organizations (NRSROs).

The Adviser manages the Fund's interest rate risk by adjusting the duration of its portfolio. "Duration" measures the sensitivity of a security's price to changes in interest rates. The greater a portfolio's duration, the greater the change in the portfolio's value in response to a change in market interest rates. The Adviser will increase or reduce the Fund's portfolio duration based on its interest rate outlook. When the Adviser expects interest rates to fall, it will maintain a longer portfolio duration. When the Adviser expects interest rates to increase, it will shorten the portfolio duration. The Adviser uses hedging transactions for purposes of duration management. The Adviser considers a variety of factors in formulating its interest rate outlook, including the following:

current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve's monetary policy; and
supply and demand factors related to the municipal market and the effect they may have on the returns offered for various bond maturities.

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The Adviser attempts to provide enhanced levels of income, subject to the Fund's maturity, quality and duration constraints, through the following management techniques. The Adviser will engage in a relative value analysis; that is, the Adviser will assess the cost of a tax-exempt security compared with other tax-exempt securities and taxable securities such as U.S. Treasury obligations. The Adviser may also allocate investments in sectors of the tax-exempt market that offer the highest return. Finally, the Adviser will invest a portion of the portfolio in tax-exempt securities subject to AMT, which may offer higher returns.

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The Fund may enter into derivatives contracts as hedging transactions, as more fully described herein. The Fund also may use derivative contracts to implement its overall investment strategies in a more cost effective or efficient manner. For example, the Fund may purchase derivatives contracts rather than individual securities to gain exposure to the municipal bond sector.

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Because the Fund refers to municipal investments in its name, it has an investment policy that it will normally invest so that at least 80% of the income that it distributes will be exempt from federal regular income tax. This policy may not be changed without shareholder approval.

HEDGING

Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.

TEMPORARY DEFENSIVE INVESTMENTS

The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term 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 receive and distribute taxable income to investors. This may also cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.

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What are the Principal Securities in Which the Fund Invests?

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TAX-EXEMPT SECURITIES

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Tax-exempt securities are fixed-income securities that pay interest that is not subject to federal regular income taxes. 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.

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Typically, states, counties, cities, and other political subdivisions and authorities issue tax-exempt securities. The market categorizes tax-exempt securities by their source of repayment.

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The following describes the principal types of tax-exempt securities in which the Fund may invest:

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General Obligation Bonds

General obligation bonds are supported by the issuer's power to exact property or other taxes. The issuer must impose and collect taxes sufficient to pay principal and interest on the bonds. However, the issuer's authority to impose additional taxes may be limited by its charter or state law.

Special Revenue Bonds

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Special revenue bonds are payable solely from specific revenues received by the issuer such as specific taxes, assessments, tolls or fees. Bondholders may not collect from the municipality's general taxes or revenues. For example, a municipality may issue bonds to build a toll road, and pledge the tolls to repay the bonds. Therefore, a shortfall in the tolls could result in a default on the bonds.

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Municipal Mortgage-Backed Securities

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Municipal mortgage-backed securities are special revenue bonds, the proceeds of which may be used to provide mortgage loans for single family homes or to finance multifamily housing. Municipal mortgage-backed securities represent interests in pools of mortgages. The mortgages that comprise a pool normally have similar interest rates, maturities and other terms. Municipal mortgage-backed securities generally have fixed-interest rates.

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PACs

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PACs (planned amortization classes) are a sophisticated form of mortgage-backed security issued with a company class. PACs receive principal payments and prepayments at a specified rate. In addition, PACs will receive the companies classes' share of principal payments, if necessary, to cover a shortfall in the prepayment rate. This helps PACs to control prepayment risks by increasing the risks to their companion classes.

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Private Activity Bonds

Private activity bonds are special revenue bonds used to finance private entities. For example, a municipality may issue bonds to finance a new factory to improve its local economy. The municipality would lend the proceeds from its bonds to the company using the factory, and the company would agree to make loan payments sufficient to repay the bonds. The bonds would be payable solely from the company's loan payments, not from any other revenues of the municipality. Therefore, any default on the loan normally would result in a default on the bonds.

The interest on many types of private activity bonds is subject to AMT. The Fund may invest in bonds subject to AMT.

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Variable Rate Demand Instruments

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Variable rate demand instruments are tax-exempt securities that require the issuer or a third party, such as a dealer or bank, to repurchase the security for its face value upon demand. The securities also pay interest at a variable rate intended to cause the securities to trade at their face value. The Fund treats demand instruments as short-term securities, because their variable interest rate adjusts in response to changes in market rates, even though their stated maturity may extend beyond 13 months.

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Municipal Notes

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Municipal notes are short-term, tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long- term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. The Fund also invests in tax-exempt auction rate notes that are issued (without a demand feature) for a specified term, during which the interest rate may be subject to reset generally every 7, 28 or 35 days (or longer) by means of a "Dutch Auction" or similar competitive process.

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CREDIT ENHANCEMENT

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The Fund may invest in tax-exempt securities with 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.

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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.

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DERIVATIVE CONTRACTS

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Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, commodities, financial indices or other assets or instruments. 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 or instrument. The other party to a derivative contract is referred to as a counterparty.

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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.

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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument derivative contracts may increase or decrease the Fund's exposure to interest rate 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.

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The Fund may trade in the following types of derivative contracts, as well as combinations of these contracts:

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Futures Contracts

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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.The Fund has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts.

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The Fund may buy or sell the following types of futures contracts: interest rate and index financial futures contracts.

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Options

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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. The seller (or writer) of the option receives payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option. 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. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of underlying assets or instruments, including financial indices, individual securities, and other derivative instruments, such as futures contracts, forward contracts, and swaps.

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Swaps

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Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include: interest rate swaps, cap and floors, and total return swaps.

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Investment Ratings for Investment Grade Securities

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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized statistical rating organizations (NRSROs). For example, Standard & Poor's (S&P), an NRSRO, assigns ratings to investment grade securities (AAA, AA, A, and BBB) based on its 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. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.

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What are the Specific Risks of Investing in the Fund?

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INTEREST RATE RISKS

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Prices of fixed-income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed-income securities fall. However, market factors, such as the demand for particular fixed-income securities, may cause the price of certain fixed-income securities to fall while the prices of other securities rise or remain unchanged.

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Interest rate changes have a greater effect on the price of fixed-income securities with longer durations. Duration measures the price sensitivity of a fixed-income security to changes in interest rates. The Fund attempts to manage interest rate risk by limiting its portfolio maturity and duration.

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CREDIT RISKS

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Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

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Many fixed-income securities receive credit ratings from NRSROs such as S&P and Moody's Investors Service. These NRSROs assign ratings to securities by assessing the likelihood of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must rely entirely on the Adviser's credit assessment.

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The Fund attempts to manage credit risk by purchasing investment grade securities.

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CALL RISKS

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

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PREPAYMENT RISKS

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Unlike traditional fixed-income securities, which pay a fixed rate of interest until maturity (when the entire principal amount is due), payments on municipal mortgage-backed securities include both interest and a partial payment of principal. Partial payment of principal may be comprised of scheduled principal payments as well as unscheduled payments from the voluntary prepayment, refinancing or foreclosure of the underlying loans. These unscheduled prepayments of principal create risks that can adversely affect a fund holding municipal mortgage-backed securities.

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For example, when interest rates decline, the values of municipal mortgage-backed securities generally rise. However, when interest rates decline, unscheduled prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds of the prepayments at the lower interest rates then available. Unscheduled prepayments would also limit the potential for capital appreciation on municipal mortgage-backed securities.

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Conversely, when interest rates rise, the values of municipal mortgage-backed securities generally fall. Since rising interest rates typically result in decreased prepayments, this could lengthen the average lives of municipal mortgage-backed securities, and cause their value to decline more than traditional fixed-income securities.

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SECTOR RISKS

A substantial part of the Fund's portfolio may be comprised of securities credit enhanced by insurance companies, banks or companies with similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political or other developments which generally affect these entities.

LIQUIDITY RISKS

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Trading opportunities are more limited for fixed-income securities that have not received any credit ratings or are not widely held.

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These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund's performance. Infrequent trading of securities may also lead to an increase in their price volatility.

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Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses. OTC derivative contracts generally carry greater liquidity risk than exchange-traded contracts.

TAX RISKS

The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Additionally, the Fund may not be able to close out certain derivative contracts when it wants to. Consequently, the Fund may receive payments that are treated as ordinary income for federal income tax purposes.

LEVERAGE RISKS

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.

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RISKS OF INVESTING IN DERIVATIVES CONTRACTS

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The Fund's use of derivative contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivative contracts may also involve other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks.

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What Do Shares Cost?

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

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The Fund generally values fixed-income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed-income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost. Futures contracts and options are generally valued at market value 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 generally 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.

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The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated."

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

An account may be opened with a smaller amount as long as the $25,000 minimum is reached within 90 days. An institutional investor's minimum investment is calculated by combining all accounts it maintains with the Fund. Accounts established through investment professionals may be subject to a smaller minimum investment amount. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.

How is the Fund Sold?

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

The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to accounts for which financial institutions act in a fiduciary or agency capacity, or to individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans.

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

How to Purchase Shares

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

THROUGH AN INVESTMENT PROFESSIONAL

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 one business day. You will become the owner of Shares and receive dividends when the Fund receives your payment.

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

DIRECTLY FROM THE FUND

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.

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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 incurred by the Fund or State Street Bank and Trust Company, the Fund's transfer agent.

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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

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

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The Federated Funds
P.O. Box 8600
Boston, MA 02266-8600

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

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The Federated Funds
66 Brooks Drive
Braintree, MA 02184

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Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

BY AUTOMATED CLEARING HOUSE (ACH)

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

How to Redeem Shares

You should redeem Shares:

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

DIRECTLY FROM THE FUND

By Telephone

You may redeem Shares by simply calling the Fund at 1-800-341-7400.

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

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You may redeem Shares by sending a written request to the Fund.

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

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Send requests by mail to:

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The Federated Funds
P.O. Box 8600
Boston, MA 02266-8600

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Send requests by private courier or overnight delivery service to:

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The Federated Funds
66 Brooks Drive
Braintree, MA 02184

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All requests must include:

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Fund Name and Share Class, account number and account registration;
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amount to be redeemed;
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signatures of all shareholders exactly as registered.
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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 30 days; or
a redemption is payable to someone other than the shareholder(s) of record.

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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.

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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.

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

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

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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.

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

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ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

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The Fund sends an annual statement of your account activity to assist you in completing your federal, state, and local tax returns. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal regular income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions are taxable sales. Please consult your tax adviser regarding your federal, state, and local tax liability.

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Who Manages the Fund?

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The Board of Trustees (the "Board") governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

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The Adviser and other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

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THE FUND'S PORTFOLIO MANAGERS ARE:

Jeff A. Kozemchak

Jeff A. Kozemchak has been the Fund's Portfolio Manager since June 1996. He is Vice President of the Fund. Mr. Kozemchak joined Federated in 1987 and has been a Senior Portfolio Manager since 1996 and a Senior Vice President of the Fund's Adviser since 1999. He was a Portfolio Manager until 1996 and a Vice President of the Fund's Adviser from 1993 to 1998. Mr. Kozemchak is a Chartered Financial Analyst and received his M.S. in Industrial Administration from Carnegie Mellon University in 1987.

Mary Jo Ochson

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Mary Jo Ochson has been the Fund's Portfolio Manager since January 1997. Ms Ochson was named Chief Investment Officer of tax-exempt, fixed-income products in 2004. She joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance from the University of Pittsburgh.

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ADVISORY FEES

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The Adviser receives an annual investment advisory fee of 0.40% of the Fund's average daily net assets. Under the investment advisory contract, which is subject to annual renewal by the Fund's Board of Trustees, the Adviser is required to reimburse the Fund's Institutional Shares the amount, limited to the amount of the advisory fee, by which the Fund's Institutional Shares aggregate annual operating expenses, including the investment advisory fee but excluding interest, taxes, brokerage commissions, expenses of registering or qualifying the Fund and its shares under federal and state laws and regulations, expenses of withholding taxes, and extraordinary expenses exceed 0.45% of the Fund's Institutional Shares' average daily net assets.

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<R>

Legal Proceedings

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Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds' advisers and distributor (collectively, "Federated"), received detailed requests for information on shareholder trading activities in the Federated funds ("Funds") from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future.

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As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated's internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds' closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the "About Us" section of Federated's website www.federatedinvestors.com, and any future press releases on this subject will also be posted there.

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Shortly after Federated's first public announcement concerning the foregoing matters, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders.

</R>

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Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees, and seeking damages of unspecified amounts.

</R>

<R>

The board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these recent lawsuits and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

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Financial Information

FINANCIAL HIGHLIGHTS

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

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

(For a Share Outstanding Throughout Each Period)

	2004			2003			2002			2001			2000
Net Asset Value, Beginning of Period	10.48			$10.35			$10.27			$10.03			$10.20
Income From Investment Operations:
Net investment income	0.27			0.31			0.39	¹		0.44			0.43
Net realized and unrealized gain (loss) on investments and futures contracts	(0.21	)		0.13			0.08	¹		0.24			(0.17	)

TOTAL FROM INVESTMENT OPERATIONS	0.06			0.44			0.47			0.68			0.26

Less Distributions:
Distributions from net investment income	(0.27	)		(0.31	)		(0.39	)		(0.44	)		(0.43	)

Net Asset Value, End of Period	$10.27			$10.48			$10.35			$10.27			$10.03

Total Return²	0.53	%		4.32	%		4.63	%		6.90	%		2.65	%


Ratios to Average Net Assets:

Expenses	0.47	%		0.47	%		0.47	%		0.47	%		0.47	%

Net investment income	2.56	%		2.98	%		3.75	%¹		4.32	%		4.29	%

Expense waiver/reimbursement³	0.36	%		0.36	%		0.37	%		0.40	%		0.37	%

Supplemental Data:

Net assets, end of period (000 omitted)	$330,354		$342,549			$211,835			$167,025			$172,051

Portfolio turnover	35	%		28	%		33	%		58	%		31	%

1 Effective July 1, 2001, the Fund adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on long-term debt securities. For the year ended June 30, 2002, this change had no effect on the net investment income per share or net realized and unrealized gain on investments per share, or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for the periods prior to July 1, 2001 have not been restated to reflect this change in presentation.

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

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

Further information about the Fund's performance is contained in the Fund's Annual Report, dated June 30, 2004, which can be obtained free of charge.

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A Statement of Additional Information (SAI) dated August 31, 2003, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

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These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated's Internet site at www.federatedinvestors.com.

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You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.

Federated Investors
World-Class Investment Manager

Federated Short-Term Municipal Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com

Contact us at 1-800-341-7400 or
www.federatedinvestors.com/contact

Federated Securities Corp., Distributor

Investment Company Act File No. 811-3181

Federated is a registered mark of Federated Investors, Inc. 2004 ©Federated Investors, Inc.

Cusip 313907107

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8072507A-IS (8/04)

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Federated Investors
World-Class Investment Manager

Federated Short-Term Municipal Trust

PROSPECTUS

August 31, 2004

INSTITUTIONAL SERVICE SHARES

A mutual fund seeking to provide dividend income which is exempt from federal regular income tax by investing in a portfolio of tax-exempt securities with a
dollar-weighted average maturity of less than three years.

NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 4

What are the Fund's Investment Strategies? 5

What are the Principal Securities in Which the Fund Invests? 8

What are the Specific Risks of Investing in the Fund? 13

What Do Shares Cost? 16

How is the Fund Sold? 16

How to Purchase Shares 17

How to Redeem Shares 19

Account and Share Information 21

Who Manages the Fund? 22

Legal Proceedings 23

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

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The Fund pursues its objective by investing its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax for individuals and corporations (AMT). The Fund's dollar-weighted average portfolio maturity will be less than three years. The Fund may invest in derivatives contracts to implement its investment strategies as more fully described herein.

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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:

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Interest Rate Risks. Prices of tax-exempt securities generally fall when interest rates rise. Interest rate changes have a greater effect on the price of tax-exempt securities with longer durations.
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Credit Risks. Issuers of tax-exempt securities may default on the payment of interest or principal when due.
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Call Risks. Issuers of tax-exempt securities may redeem the securities prior to maturity at a price below their current market value.
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Liquidity Risks. Trading opportunities are more limited for tax-exempt securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Over-the-counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts.
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Tax Risks. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Consequently, the Fund may receive payments that are treated as ordinary income for federal income tax purposes.
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Leverage Risks. 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.
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Risks of Investing in Derivative Contracts. Changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Also, derivative contracts may involve other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks.
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Other risk factors associated with an investment in the Fund include prepayment risk and sector risk.

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Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Institutional Service Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

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The Fund's Institutional Service Shares are sold without a sales charge (load). The total returns shown in the bar chart above are based upon net asset value.

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The Fund's Institutional Service Shares total return for the six-month period from January 1, 2004 to June 30, 2004 was (0.20)%.

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Within the periods shown in the bar chart, the Fund's Institutional Service Shares highest quarterly return was 3.02% (quarter ended March 31, 1995). Its lowest quarterly return was (0.65)% (quarter ended March 31, 1994).

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Average Annual Total Return Table

Return Before Taxes is shown for the Fund's Institutional Service Shares. In addition, Return After Taxes is shown for the Fund's Institutional Service Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for the Lehman Brothers 1-Year Municipal Index (LB1MI) and Lehman Brothers 3-Year Municipal Index (LB3MI), broad-based market indexes. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index.

(For the periods ended December 31, 2003)

	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R>2.18%</R>	<R>3.66%</R>	<R>3.84%</R>
Return After Taxes on Distributions¹	<R>2.18%</R>	<R>3.66%</R>	<R>3.84%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R>2.28%</R>	<R>3.64%</R>	<R>3.83%</R>
LB1MI	<R>1.91%</R>	<R>3.94%</R>	<R>4.19%</R>
LB3MI	<R>2.68%</R>	<R>4.82%</R>	<R>4.86%</R>

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold Institutional Service Shares of the Fund.

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		0.40%
Distribution (12b-1) Fee³		0.25%
Shareholder Services Fee		0.25%
Other Expenses⁴		0.18%
Total Annual Fund Operating Expenses		1.08%


1 The percentages shown are based on expenses for the entire fiscal year ended June 30, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the adviser, distributor and transfer agent waived certain amounts. These are shown below along with the net expenses the Fund's Institutional Service Shares actually paid for the fiscal year ended June 30, 2004.
Total Waivers of Fund Expenses		0.36%
Total Actual Annual Fund Operating Expenses (after waivers)		0.72%
2 The Adviser has voluntarily waived a portion of the management fee. This voluntary waiver can be terminated at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.30% for the fiscal year ended June 30, 2004.
3 The distribution (12b-1) fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The distribution (12b-1) fee paid by the Fund's Institutional Service Shares (after the voluntary waiver) was 0.00% for the fiscal year ended June 30, 2004.
4 The transfer agent voluntarily waived a portion of its fee. This voluntary waiver can be terminated at any time. Total other expenses paid by the Fund (after the voluntary waiver) were 0.17% for the fiscal year ended June 30, 2004.

EXAMPLE

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

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

1 Year		$ 110

3 Years		$ 343

5 Years		$ 595

10 Years		$1,317

What are the Fund's Investment Strategies?

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The Adviser performs a fundamental credit analysis on tax-exempt securities before the Fund purchases such securities. The Adviser considers various factors, including the following:

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the economic feasibility of revenue bond financings and general purpose financings;
the financial condition of the issuer or guarantor; and
political developments that may affect credit quality.

The Adviser monitors the credit risks of all securities on an ongoing basis by reviewing periodic financial data and ratings of nationally recognized statistical rating organizations (NRSROs).

current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve's monetary policy; and
supply and demand factors related to the municipal market and the effect they may have on the returns offered for various bond maturities.

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HEDGING

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

TAX-EXEMPT SECURITIES

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Typically, states, counties, cities and other political subdivisions and authorities issue tax-exempt securities. The market categorizes tax-exempt securities by their source of repayment.

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The following describes the principal types of tax-exempt securities in which the Fund may invest:

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General Obligation Bonds

Special Revenue Bonds

Municipal Mortgage-Backed Securities

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PACs

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Private Activity Bonds

The interest on many types of private activity bonds is subject to AMT. The Fund may invest in bonds subject to AMT.

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Variable Rate Demand Instruments

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Municipal Notes

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Municipal notes are short-term, tax-exempt securities. Many municipalities issue such notes to fund their current operations before collecting taxes or other municipal revenues. Municipalities may also issue notes to fund capital projects prior to issuing long-term bonds. The issuers typically repay the notes at the end of their fiscal year, either with taxes, other revenues or proceeds from newly issued notes or bonds. The Fund also invests in tax-exempt auction rate notes that are issued (without a demand feature) for a specified term, during which the interest rate may be subject to reset generally every 7, 28 or 35 days (or longer) by means of a "Dutch Auction" or similar competitive process.

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CREDIT ENHANCEMENT

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DERIVATIVE CONTRACTS

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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument, derivative contracts may increase or decrease the Fund's exposure to interest rate 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.

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The Fund may trade in the following types of derivative contracts, as well as combinations of these contracts:

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Futures Contracts

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The Fund may buy or sell the following types of futures contracts: interest rate and index financial futures contracts.

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Options

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Swaps

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Investment Ratings for Investment Grade Securities

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The Adviser will determine whether a security is investment grade based upon the credit ratings given by one or more nationally recognized statistical rating organizations (NRSROs). For example, Standard & Poor's (S&P), an NRSRO, assigns ratings to investment-grade securities (AAA, AA, A, and BBB) based on its 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. If a security is downgraded below the minimum quality grade discussed above, the Adviser will reevaluate the security, but will not be required to sell it.

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What are the Specific Risks of Investing in the Fund?

INTEREST-RATE RISKS

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CREDIT RISKS

Credit risk is the possibility that an issuer will default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose money.

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The Fund attempts to manage credit risk by purchasing investment- grade securities.

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CALL RISKS

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PREPAYMENT RISKS

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SECTOR RISKS

LIQUIDITY RISKS

Trading opportunities are more limited for fixed-income securities that have not received any credit ratings or are not widely held.

TAX RISKS

LEVERAGE RISKS

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RISKS OF INVESTING IN DERIVATIVES CONTRACTS

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What Do Shares Cost?

<R>

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

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The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated."

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

How is the Fund Sold?

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

The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to retail and private banking customers of financial institutions, or to individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans.

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

RULE 12B-1 PLAN

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

How to Purchase Shares

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

THROUGH AN INVESTMENT PROFESSIONAL

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 one business day. You will become the owner of Shares and receive dividends when the Fund receives your payment.

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

DIRECTLY FROM THE FUND

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.

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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

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

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The Federated Funds
P.O. Box 8600
Boston, MA 02266-8600

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

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The Federated Funds
66 Brooks Drive
Braintree, MA 02184

</R>

BY AUTOMATED CLEARING HOUSE (ACH)

How to Redeem Shares

You should redeem 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

You may redeem Shares by simply calling the Fund at 1-800-341-7400.

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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.

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By Mail

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You may redeem Shares by sending a written request to the Fund.

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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:

<R>

The Federated Funds
P.O. Box 8600
Boston, MA 02266-8600

</R>

Send requests by private courier or overnight delivery service to:

<R>

The Federated Funds
66 Brooks Drive
Braintree, MA 02184

</R>

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed; and
signatures of all shareholders exactly as registered.

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

Signature Guarantees

Signatures must be guaranteed if:

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

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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.

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

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

DIVIDENDS AND CAPITAL GAINS

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ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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Who Manages the Fund?

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THE FUND'S PORTFOLIO MANAGERS ARE:

Jeff A. Kozemchak

Mary Jo Ochson

<R>

Mary Jo Ochson has been the Fund's Portfolio Manager since January 1997. Ms. Ochson was named Chief Investment Officer of tax-exempt, fixed-income products in 2004. She joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance from the University of Pittsburgh.

</R>

ADVISORY FEES

<R>

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

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Legal Proceedings

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FINANCIAL HIGHLIGHTS

</R>

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

(For a Share Outstanding Throughout Each Period)

Year Ended June 30		2004			2003			2002			2001			2000
Net Asset Value, Beginning of Period		$10.48			$10.35			$10.27			$10.03			$10.20
Income From Investment Operations:
Net investment income		0.24			0.29			0.36	¹		0.41			0.41
Net realized and unrealized gain (loss) on investments and futures contracts		(0.21	)		0.13			0.08	¹		0.24			(0.17	)

TOTAL FROM INVESTMENT OPERATIONS		0.03			0.42			0.44			0.65			0.24

Less Distributions:
Distributions from net investment income		(0.24	)		(0.29	)		(0.36	)		(0.41	)		(0.41	)

Net Asset Value, End of Period		$10.27			$10.48			$10.35			$10.27			$10.03

Total Return²		0.28	%		4.06	%		4.37	%		6.64	%		2.39	%


Ratios to Average Net Assets:

Expenses		0.72	%		0.72	%		0.72	%		0.72	%		0.72	%

Net investment income		2.31	%		2.75	%		3.50	%¹		4.08	%		4.03	%

Expense waiver/reimbursement³		0.36	%		0.36	%		0.37	%		0.40	%		0.37	%

Supplemental Data:

Net assets, end of period (000 omitted)	$45,616			$24,230			$28,577			$21,851			$14,282

Portfolio turnover		35	%		28	%		33	%		58	%		31	%

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

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

Further information about the Fund's performance is contained in the Fund's Annual Report, dated June 30, 2004, which can be obtained free of charge.

<R>

A Statement of Additional Information (SAI) dated August 31, 2004, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

</R>

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Investment Company Act File No. 811-3181

<R>

Cusip 313907206

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<R>

8072507A-SS (8/04)

</R>

FEDERATED SHORT - TERM MUNICIPAL TRUST
Statement of additional Information

<R>August 31, 2004</R>

Institutional Shares
Institutional Service Shares

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for the Institutional Shares and
Institutional Service Shares (Shares) of Federated Short - Term Municipal Trust
(Fund) dated August 31, 2004. 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.

<R>Contents
How is the Fund Organized?........................1
--------------------------
Securities in Which the Fund Invests..............1
------------------------------------
What Do Shares Cost?..............................8
--------------------
How is the Fund Sold?.............................8
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Subaccounting Services............................9
----------------------
Redemption in Kind................................9
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Massachusetts Partnership Law.....................9
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Account and Share Information....................10
-----------------------------
Tax Information..................................10
---------------
Who Manages and Provides Services to the Fund?...10
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How Does the Fund Measure Performance?...........20
--------------------------------------
Who is Federated Investors, Inc.?................23
---------------------------------
Financial Information............................25
---------------------
Investment Ratings...............................25
------------------
Addresses........................................27
---------

....... </R>

HOW IS THE FUND ORGANIZED?

The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on May 8, 1981.
The Fund's investment adviser is Federated Investment Management Company
(Adviser).

The Board of Trustees (the "Board") has established two classes of shares of the
Fund, known as Institutional Shares and Institutional Service Shares (Shares).
This SAI relates to both classes of Shares.

SECURITIES IN WHICH THE FUND INVESTS

<R>The principal securities in which the Fund invests are discussed in its
prospectuses. In pursuing its investment strategy, the Fund may also invest in
the following securities for any purpose that is consistent with its investment
objective.</R>

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 addition to
those listed in the prospectuses, in which the Fund may invest:

<R>Inverse Floaters
An inverse floater has a floating or variable interest rate that moves in the
opposite direction of market interest rates. When market interest rates go up,
the interest rate paid on the inverse floater goes down; when market interest
rates go down, the interest rate paid on the inverse floater goes up. Inverse
floaters generally respond more rapidly to market interest rate changes than
fixed rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.

Tax Increment Financing Bonds
Tax increment financing (TIF) bonds are payable from increases in taxes or other
revenues attributable to projects financed by the bonds. For example, a
municipality may issue TIF bonds to redevelop a commercial area. The TIF bonds
would be payable solely from any increase in sales taxes collected from
merchants in the area. The bonds could default if merchants' sales, and related
tax collections, failed to increase as anticipated.

Municipal Leases
Municipalities may enter into leases for equipment or facilities. In order to
comply with state public financing laws, these leases are typically subject to
annual appropriation. In other words, a municipality may end a lease, without
penalty, by not providing for the lease payments in its annual budget. After the
lease ends, the lessor can resell the equipment or facility but may lose money
on the sale.
The Fund may invest in securities supported by individual leases or pools of
municipal leases.

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 interest rate and credit risks of a zero coupon security.
</R>

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

DERIVATIVE CONTRACTS
<R>Derivative contracts are financial instruments that require payments
based upon changes in the values of designated (or underlying) securities,
commodities, currencies, 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 interest
rate 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, as well as
combinations of these contracts, including, but not limited to, options on
futures contracts, options on forward contracts and options on swaps.</R>

Futures Contracts
<R>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. The Fund has claimed an
exclusion from the definition of the term "commodity pool operator" under the
Commodity Exchange Act and, therefore, is not subject to registration or
regulation as a commodity pool operator under that Act. Futures contracts traded
OTC are frequently referred to as forward contracts. The Fund may buy or sell
the following types of contracts: interest rate and index financial futures
contracts.</R>

Options
<R>Options are rights to buy or sell an underlying asset or instrument for
a specified price (the exercise price) during, or at the end of, a specified
period. The seller (or 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. Options can trade on exchanges or in the OTC market and
may be bought or sold on a wide variety of underlying assets or instruments,
including financial indices, individual securities, and other derivative
instruments, such as futures contracts. Options that are written on futures
contracts will be subject to margin requirements similar to those applied to
futures contracts.</R>

Call Options
<R>A call option gives the holder (buyer) the right to buy the underlying
asset from the seller (writer) of the option. The Fund may use call options in
the following ways:

|_|" Buy call options on indices, individual securities, index futures and
financial futures in anticipation of an increase in the value of the
underlying asset or instrument; and

|_|" Write call options on indices, portfolio securities, index futures and
financial futures to generate income from premiums, and in anticipation of a
decrease or only limited increase in the value of the underlying asset. If a
call written by the Fund is exercised, the Fund foregoes any possible profit
from an increase in the market price of the underlying asset over the
exercise price plus the premium received.</R>

Put Options
<R>A put option gives the holder the right to sell the underlying asset to
the writer of the option. The Fund may use put options in the following ways:

|_|" Buy put options on indices, individual securities, index futures and
financial futures in anticipation of a decrease in the value of the
underlying asset; and

|_|" Write put options on indices, portfolio securities, index futures and
financial futures to generate income from premiums, and in anticipation of
an increase or only limited decrease in the value of the underlying asset.
In writing puts, there is a risk that the Fund may be required to take
delivery of the underlying asset when its current market price is lower than
the exercise price.

|_|" The Fund may also buy or write options, as needed, to close out existing
option positions.</R>

Swaps
<R>Swaps are contracts in which two parties agree to pay each other (swap)
the returns derived from underlying assets with differing characteristics. Most
swaps do not involve the delivery of the underlying assets by either party, and
the parties might not own the assets underlying the swap. The payments are
usually made on a net basis so that, on any given day, the Fund would receive
(or pay) only the amount by which its payment under the contract is less than
(or exceeds) the amount of the other party's payment. Swap agreements are
sophisticated instruments that can take many different forms, and are known by a
variety of names including caps, floors and collars. Common swap agreements that
the Fund may use include:

Interest Rate Swaps
Interest rate swaps are contracts in which one party agrees to make regular
payments equal to a fixed or floating interest rate times a stated principal
amount of fixed income securities, in return for payments equal to a different
fixed or floating rate times the same principal amount, for a specific period.
For example, a $10 million London Interbank Offer Rate (LIBOR) swap would
require one party to pay the equivalent of the LIBOR rate of interest (which
fluctuates) on $10 million principal amount in exchange for the right to receive
the equivalent of a stated fixed rate of interest on $10 million principal
amount.

Total Rate of Return Swaps
Total rate of return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset during the specified
period, in return for payments equal to a fixed or floating rate of interest or
the total return from another underlying asset.

Caps And Floors
|_|" Caps and Floors are contracts in which one party agrees to make payments
only if an interest rate or index goes above (Cap) or below (Floor) a
certain level in return for a fee from the other party.</R>

Special Transactions

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

Inter-Fund Borrowing and Lending Arrangements
<R>The Securities and Exchange Commission (SEC) has granted an exemption
that permits the Fund and all other funds advised by subsidiaries of Federated
Investors, Inc. (Federated funds) to lend and borrow money for certain temporary
purposes directly to and from other Federated funds. Participation in this
inter-fund lending program is voluntary for both borrowing and lending Federated
funds, and an inter-fund loan is only made if it benefits each participating
Federated fund. Federated Investors, Inc. (Federated) administers the program
according to procedures approved by the Fund's Board, and the Board monitors the
operation of the program. Any inter-fund loan must comply with certain
conditions set out in the exemption, which are designed to assure fairness and
protect all participating Federated funds.

For example, inter-fund lending is permitted only (a) to meet shareholder
redemption requests, and (b) to meet commitments arising from "failed" trades.
All inter-fund loans must be repaid in seven days or less. The Fund's
participation in this program must be consistent with its investment policies
and limitations, and must meet certain percentage tests. Inter-fund loans may be
made only when the rate of interest to be charged is more attractive to the
lending Federated fund than market-competitive rates on overnight repurchase
agreements (Repo Rate) and more attractive to the borrowing Federated fund than
the rate of interest that would be charged by an unaffiliated bank for
short-term borrowings (Bank Loan Rate), as determined by the Board. The interest
rate imposed on inter-fund loans is the average of the Repo Rate and the Bank
Loan Rate. </R>

Asset Coverage
In order to secure its obligations in connection with futures contracts or
special transactions, the Fund will either own the underlying assets, enter into
an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations without entering into an offsetting futures contract or
terminating a special transaction. This may cause the Fund to miss favorable
trading opportunities or to realize loss on futures contracts or special
transactions.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated investment companies, as an efficient
means of carrying out its investment policies and managing its uninvested cash.

Temporary Defensive Investments
The Fund may make temporary defensive investments in the following taxable
securities:

Treasury Securities
Treasury securities are direct obligations of the federal government of the
United States.

Agency Securities
<R>Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity (GSE) acting under federal authority. Some GSE
securities are supported by the full faith and credit of the United States.
These include the Government National Mortgage Association, Small Business
Administration, Federal Financing Bank, General Services Administration,
Department of Housing and Urban Development, Export-Import Bank, Overseas
Private Investment Corporation, and Washington Metropolitan Area Transit
Authority Bonds.
Other GSEs receive support through federal subsidies, loans or other benefits.
For example, the U.S. Treasury is authorized to purchase specified amounts of
securities issued by (or otherwise make funds available to) the Federal Home
Loan Bank System, Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, Student Loan Marketing Association, and Tennessee Valley
Authority in support of such obligations.
A few GSEs have no explicit financial support, but are regarded as having
implied support because the federal government sponsors their activities. These
include the Farm Credit System, Financing Corporation, and Resolution Funding
Corporation.
Investors regard agency securities as having low credit risks, but not as low as
Treasury securities. A fund treats mortgage-backed securities guaranteed by a
GSE as if issued or guaranteed by a federal agency. Although such a guarantee
protects against credit risks, it does not reduce market and prepayment
risks.</R>

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.

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.

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.

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 place. 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.

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

Credit Risks
The Fund may invest up to 100% of its assets in fixed income securities rated
BBB or in unrated but comparable securities. Fixed income securities generally
compensate for greater credit risk by paying interest at a higher rate. The
difference between the yield of a security and the yield of a AAA-rated general
obligation security or index with a comparable maturity (the spread) measures
the additional interest paid for risk. Spreads may increase generally in
response to adverse economic or market conditions. A security's spread may also
increase if the security's rating is lowered, or the security is perceived to
have an increased credit risk. An increase in the spread will cause the price of
the security to decline.
Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to lose
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.

Tax Risks
In order to be tax exempt, municipal securities must meet certain legal
requirements. Failure to meet such requirements may cause the interest received
and distributed by the Fund to shareholders to be taxable. Changes or proposed
changes in federal tax laws may cause the prices of municipal securities to
fall.

Fundamental INVESTMENT Objective and Policies
The Fund's investment objective is to provide dividend income which is exempt
from federal regular income tax. The Fund attempts to achieve its investment
objective by investing at least 80% of its net assets in a
diversified portfolio of municipal securities or by investing its assets so that
at least 80% of its income will be tax exempt.
The Fund will invest its assets so that at least 80% of the income that it
distributes will be exempt from federal regular income tax.
The investment objective and policies may not be changed by the Fund's Board
without shareholder approval.

INVESTMENT LIMITATIONS

Diversification of Investments
With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase the 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 invested
in the securities of that issuer, or it would own more than 10% of the
outstanding voting securities of that issuer.

Borrowing Money
The Fund will not borrow money except as a temporary measure for extraordinary
or emergency purposes and then: (a) only in amounts not in excess of 5% of the
value of its total assets; or (b) in an amount up to one-third of the value of
its total assets, including the amount borrowed. (This borrowing provision is
not for investment leverage but solely to facilitate management of the portfolio
by enabling the Fund to meet redemption requests where the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.) While any
such borrowings are outstanding, no net purchases of investment securities will
be made by the Fund. If, due to market fluctuations or other reasons, the value
of the Fund's assets falls below 300% of its borrowings, the Fund will reduce
its borrowings within three business days. To do this, the Fund may have to sell
a portion of its investments at a time when it may be disadvantageous to do so.

Pledging Assets
The Fund will not mortgage, pledge, or hypothecate its assets except to secure
permitted borrowings. In those cases, it may mortgage, pledge, or hypothecate
assets having a market value not exceeding 10% of the value of the total assets
at the time of the borrowing.

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 objective, policies and
limitations.

Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in municipal
securities secured by real estate or interests in real estate.

Investing in Commodities
The Fund will not buy or sell commodities or commodity contracts.

Lending
The Fund will not make loans, but may acquire publicly or non- publicly issued
municipal securities as permitted by its investment objective, policies and
limitations.

Selling Short and Buying on Margin
The Fund will not sell any securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for clearance of
purchases and sales of securities.

Issuing Senior Securities
The Fund will not issue senior securities, except as permitted by its investment
objective and policies.

Concentration
The Fund will not make investments that will result in the concentration of its
investments in the securities of issuers primarily engaged in the same industry.
Government securities, municipal securities and bank instruments will not be
deemed to constitute an industry.
The above limitations cannot be changed unless authorized by the Board and by
the "vote of a majority of its outstanding voting securities," as defined by the
Investment Company Act of 1940 (1940 Act). The following limitations, however,
may be changed by the Board without shareholder approval. Shareholders will be
notified before any material change in these limitations becomes effective.

Investing in Illiquid Securities
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for settlement in
more than seven days after notice and certain restricted securities.
For purposes of the above limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items." 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 limitation.

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

o futures contracts and options are generally valued at market values
established by the exchanges on which they are traded at the close of trading
on such exchanges. Options traded in the OTC market are generally 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;

o for fixed income securities, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that fixed
income securities with remaining maturities of less than 60 days at the time
of purchase may be valued at amortized cost; and

o <R>for all other securities at fair value as determined in accordance
with procedures established by and under the general supervision of the
Board.</R>

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.

WHAT DO SHARES COST?

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

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

RULE 12B-1 PLAN (Institutional service shares ONLY)
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor for activities principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses and sales literature to prospective shareholders and financial
institutions) and providing incentives to investment professionals to sell
Shares. The Rule 12b-1 Plan allows the Distributor to contract with investment
professionals to perform activities covered by the Plan. The Rule 12b-1 Plan is
expected to benefit the Fund in a number of ways. For example, it is anticipated
that the Plan will help the Fund attract and retain assets, thus providing cash
for orderly portfolio management and Share redemptions and possibly helping to
stabilize or reduce other operating expenses. In addition, the Plan is integral
to the multiple class structure of the Fund, which promotes the sale of Shares
by providing a range of options to investors. 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.

SERVICE FEES
The Fund may pay fees not to exceed 0.25% of average daily net assets (Service
Fees) to investment professionals or to Federated Shareholder Services Company
(FSSC), a subsidiary of Federated, for providing services to shareholders and
maintaining shareholder accounts. Under certain agreements, rather than paying
investment professionals directly, the Fund may pay Service Fees to FSSC and
FSSC will use the fees to compensate investment professionals.

SUPPLEMENTAL PAYMENTS
Investment professionals may be paid fees, in significant amounts, out of the
assets of the Distributor. These fees do not come out of Fund assets. The
Distributor may be reimbursed by the Adviser or its affiliates.

These supplemental payments may be based upon such factors as the number or
value of Shares the investment professional sells or may sell; the value of
client assets invested; and/or the type and nature of services, sales support or
marketing support furnished by the investment professional. In addition to these
supplemental payments, an investment professional may also receive payments
under the Rule 12b-1 Plan and/or Service Fees.

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 1940 Act,
the Fund is obligated to pay Share redemptions to any one shareholder in cash
only up to the lesser of $250,000 or 1% of the net assets represented by such
Share class during any 90-day period.

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

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

MASSACHUSETTS PARTNERSHIP LAW

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

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

ACCOUNT AND SHARE INFORMATION

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

<R>Trustees may be removed by the Board or by shareholders at a special
meeting. A special meeting of shareholders will be called by the Board upon the
written request of shareholders who own at least 10% of the Fund's outstanding
Shares.

As of August 3, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Shares: Charles Schwab &
Co., Inc. owned approximately 13,067,321 Shares (42.31%).

As of August x, 2004, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Service Shares: EAMCO - Riggs
Funds C/O Riggs Bank N.A. owned approximately 2,465,800 Shares
(56.23%).</R>

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 be subject to federal
corporate income tax. The Fund is entitled to a loss carry-forward, which may
reduce the taxable income or gain that the Fund would realize, and to which the
shareholder would be subject, in the future.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD Of TRUSTEES
<R>The Board is responsible for managing the Fund's business affairs and
for exercising all the Fund's powers except those reserved for the shareholders.
The following tables give information about each Board member and the senior
officers of the Fund. Where required, the tables separately list Board members
who are "interested persons" of the Fund (i.e., "Interested" Board members) and
those who are not (i.e., "Independent" Board members). Unless otherwise noted,
the address of each person listed is Federated Investors Tower, 1001 Liberty
Avenue, Pittsburgh, PA. The Federated Fund Complex consists of 44 investment
companies (comprising 136 portfolios). Unless otherwise noted, each Officer is
elected annually. Unless otherwise noted, each Board member oversees all
portfolios in the Federated Fund Complex; serves for an indefinite term; and
also serves as a Board member of the following investment company complexes:
Banknorth Funds-four portfolios; Golden Oak(R) Family of Funds-seven portfolios
and WesMark Funds-five portfolios.

As of August 3, 2004, the Fund's Board and Officers as a group owned
approximately less than 1% of the Fund's outstanding Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

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

Name Total Compensation
Birth Date Aggregate From Fund and
Address Principal Occupation(s) for Past Five Compensation Federated Fund
Positions Held with Fund Years, Other Directorships Held and From Fund Complex
Date Service Began Previous Position(s) (past fiscal (past calendar
year) year)
Principal Occupations: Chairman and $0 $0
John F. Donahue* Director or Trustee of the Federated
Birth Date: July 28, Fund Complex; Chairman and Director,
1924 Federated Investors, Inc.
CHAIRMAN AND TRUSTEE
Began serving: May 1981 Previous Positions: Trustee, Federated
Investment Management Company and
Chairman and Director, Federated
Investment Counseling.

Principal Occupations: Principal $0 $0
J. Christopher Donahue* Executive Officer and President of the Birth Date: April
11, Federated Fund Complex; Director or 1949 Trustee of some of the Funds in the
PRESIDENT AND TRUSTEE Federated Fund Complex; President, Began serving: October
Chief Executive Officer and Director, 1999 Federated Investors, Inc.; Chairman
and Trustee, Federated Investment
Management Company; Trustee, Federated
Investment Counseling; Chairman and
Director, Federated Global Investment
Management Corp.; Chairman, Federated
Equity Management Company of
Pennsylvania, Passport Research, Ltd.
and Passport Research II, Ltd.;
Trustee, Federated Shareholder
Services Company; Director, Federated
Services Company.

Previous Positions: President,
Federated Investment Counseling;
President and Chief Executive Officer,
Federated Investment Management
Company, Federated Global Investment
Management Corp. and Passport
Research, Ltd.

Principal Occupations: Director or $1,220.94 $148,500
Lawrence D. Ellis, M.D.* Trustee of the Federated Fund Complex;
Birth Date: October 11, Professor of Medicine, University of
1932 Pittsburgh; Medical Director,
3471 Fifth Avenue University of Pittsburgh Medical
Suite 1111 Center Downtown; Hematologist,
Pittsburgh, PA Oncologist and Internist, University
TRUSTEE of Pittsburgh Medical Center.
Began serving: August
1987 Other Directorships Held: Member,
National Board of Trustees, Leukemia
Society of America.

Previous Positions: Trustee,
University of Pittsburgh; Director,
University of Pittsburgh Medical
Center.

---------------------------------------------------------------------------------------------------------------
* Family relationships and reasons for "interested" status: John F. Donahue is
the father of J. Christopher Donahue; both are "interested" due to the positions
they hold with Federated and its subsidiaries. Lawrence D. Ellis, M.D. is
"interested" because his son-in-law is employed by the Fund's principal
underwriter, Federated Securities Corp.

INDEPENDENT TRUSTEES BACKGROUND AND COMPENSATION

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

Name Total Compensation
Birth Date Aggregate From Fund and
Address Principal Occupation(s) for Past Five Compensation Federated Fund
Positions Held with Fund Years, Other Directorships Held and From Fund Complex
Date Service Began Previous Position(s) (past fiscal (past calendar
year) year)
Principal Occupation: Director or $1,343.01 $163,350
Thomas G. Bigley Trustee of the Federated Fund Complex.
Birth Date: February 3,
1934 Other Directorships Held: Director,
15 Old Timber Trail Member of Executive Committee,
Pittsburgh, PA Children's Hospital of Pittsburgh;
TRUSTEE Director, University of Pittsburgh.
Began serving: November
1994 Previous Position: Senior Partner,
Ernst & Young LLP.

Principal Occupations: Director or $1,343.01 $163,350
John T. Conroy, Jr. Trustee of the Federated Fund Complex;
Birth Date: June 23, Chairman of the Board, Investment
1937 Properties Corporation; Partner or
Grubb & Trustee in private real estate
Ellis/Investment ventures in Southwest Florida.
Properties Corporation
3838 North Tamiami Previous Positions: President,
Trail Investment Properties Corporation;
Suite 402 Senior Vice President, John R. Wood
Naples, FL and Associates, Inc., Realtors;
TRUSTEE President, Naples Property Management,
Began serving: November Inc. and Northgate Village Development
1991 Corporation.

Principal Occupation: Director or $1,343.01 $163,350
Nicholas P. Constantakis Trustee of the Federated Fund Complex.
Birth Date: September
3, 1939 Other Directorships Held: Director and
175 Woodshire Drive Member of the Audit Committee, Michael
Pittsburgh, PA Baker Corporation (engineering and
TRUSTEE energy services worldwide).
Began serving: October
1999 Previous Position: Partner, Anderson
Worldwide SC.

Principal Occupation: Director or $1,220.94 $148,500
John F. Cunningham Trustee of the Federated Fund Complex.
Birth Date: March 5,
1943 Other Directorships Held: Chairman,
353 El Brillo Way President and Chief Executive Officer,
Palm Beach, FL Cunningham & Co., Inc. (strategic
TRUSTEE business consulting); Trustee
Began serving: April Associate, Boston College.
1999
Previous Positions: Director, Redgate
Communications and EMC Corporation
(computer storage systems); Chairman
of the Board and Chief Executive
Officer, Computer Consoles, Inc.;
President and Chief Operating Officer,
Wang Laboratories; Director, First
National Bank of Boston; Director,
Apollo Computer, Inc.

Principal Occupation: Director or $1,220.94 $148,500
Peter E. Madden Trustee of the Federated Fund Complex;
Birth Date: March 16, Management Consultant.
1942
One Royal Palm Way Other Directorships Held: Board of
100 Royal Palm Way Overseers, Babson College.
Palm Beach, FL
TRUSTEE Previous Positions: Representative,
Began serving: November Commonwealth of Massachusetts General
1991 Court; President, State Street Bank
and Trust Company and State Street Corporation
(retired); Director, VISA USA and VISA International;
Chairman and Director, Massachusetts Bankers
Association; Director, Depository Trust Corporation;
Director, The Boston Stock Exchange.

Principal Occupations: Director or $1,343.01 $163,350
Charles F. Mansfield, Trustee of the Federated Fund Complex;
Jr. Management Consultant; Executive Vice Birth Date: April 10, President, DVC
Group, Inc. (marketing, 1945 communications and technology) (prior
80 South Road to 9/1/00).
Westhampton Beach, NY
TRUSTEE Previous Positions: Chief Executive
Began serving: April Officer, PBTC International Bank;
1999 Partner, Arthur Young & Company
(now Ernst & Young LLP); Chief Financial Officer
of Retail Banking Sector, Chase Manhattan Bank;
Senior Vice President, HSBC Bank USA (formerly,
Marine Midland Bank); Vice President, Citibank;
Assistant Professor of Banking and Finance, Frank G.
Zarb School of Business, Hofstra University.

Principal Occupations: Director or $1,465.13 $178,200
John E. Murray, Jr., Trustee of the Federated Fund Complex;
J.D., S.J.D. Chancellor and Law Professor, Duquesne
Birth Date: December University; Partner, Murray, Hogue
20, 1932 & Lannis.
Chancellor, Duquesne
University Other Directorships Held: Director,
Pittsburgh, PA Michael Baker Corp. (engineering,
TRUSTEE construction, operations and technical
Began serving: February services).
1995
Previous Positions: President,
Duquesne University; Dean and
Professor of Law, University of
Pittsburgh School of Law; Dean and
Professor of Law, Villanova University
School of Law.

Principal Occupations: Director or $1,220.94 $148,500
Marjorie P. Smuts Trustee of the Federated Fund Complex;
Birth Date: June 21, Public Relations/Marketing
1935 Consultant/Conference Coordinator.
4905 Bayard Street
Pittsburgh, PA Previous Positions: National
TRUSTEE Spokesperson, Aluminum Company of
Began serving: February America; television producer;
1995 President, Marj Palmer Assoc.; Owner,
Scandia Bord.

Principal Occupations: Director or $1,220.94 $148,500
John S. Walsh Trustee of the Federated Fund Complex;
Birth Date: November President and Director, Heat Wagon,
28, 1957 Inc. (manufacturer of construction
2604 William Drive temporary heaters); President and
Valparaiso, IN Director, Manufacturers Products, Inc.
TRUSTEE (distributor of portable construction
Began serving: April heaters); President, Portable Heater
1999 Parts, a division of Manufacturers
Products, Inc.

Previous Position: Vice President,
Walsh & Kelly, Inc.

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

OFFICERS**

Name
Birth Date
Address
Positions Held with Fund
----------------------------------- Principal Occupation(s) and Previous Position(s)
Date Service Began
Principal Occupations: Executive Vice President and Secretary of
John W. McGonigle the Federated Fund Complex; Executive Vice President, Secretary
Birth Date: October 26, 1938 and Director, Federated Investors, Inc.
EXECUTIVE VICE PRESIDENT AND
SECRETARY Previous Positions: Trustee, Federated Investment Management
Began serving: May 1981 Company and Federated Investment Counseling; Director, Federated
Global Investment Management Corp., Federated Services Company and
Federated Securities Corp.

Principal Occupations: Principal Financial Officer and Treasurer
Richard J. Thomas of the Federated Fund Complex; Senior Vice President, Federated
Birth Date: June 17, 1954 Administrative Services.
TREASURER
Began serving: November 1998 Previous Positions: Vice President, Federated Administrative
Services; held various management positions within Funds Financial
Services Division of Federated Investors, Inc.

Principal Occupations: Vice Chairman or Vice President of some of
Richard B. Fisher the Funds in the Federated Fund Complex; Vice Chairman, Federated
Birth Date: May 17, 1923 Investors, Inc.; Chairman, Federated Securities Corp.
VICE PRESIDENT
Began serving: May 1981 Previous Positions: President and Director or Trustee of some of
the Funds in the Federated Fund Complex; Executive Vice President,
Federated Investors, Inc. and Director and Chief Executive
Officer, Federated Securities Corp.

Mary Jo Ochson -------------------------------------------------------------------
Birth Date: September 12, 1953 Principal Occupations: Mary Jo Ochson was named Chief Investment
CHIEF INVESTMENT OFFICER Officer of tax-exempt fixed income products in 2004. Ms. Ochson
Began serving: May 2004 joined Federated in 1982 and has been a Senior Portfolio Manager
and a Senior Vice President of the Fund's Adviser since 1996. Ms.
Ochson is a Chartered Financial Analyst and received her M.B.A. in
Finance from the University of Pittsburgh.
Jeff A. Kozemchak has been the Fund's Portfolio Manager since June
Jeff A. Kozemchak 1996. He is Vice President of the Fund. Mr. Kozemchak joined
Birth Date: January 15, 1960 Federated in 1987 and has been a Senior Portfolio Manager since
VICE PRESIDENT 1996 and a Senior Vice President of the Fund's Adviser since 1999.
Began serving: November 1998 He was a Portfolio Manager until 1996 and a Vice President of the
Fund's Adviser from 1993 to 1998. Mr. Kozemchak is a Chartered
Financial Analyst and received his M.S. in Industrial
Administration from Carnegie Mellon University in 1987.

</R>
---------------------------------------------------------------------------------------------------------------
** Officers do not receive any compensation from the Fund.
Thomas R. Donahue, Chief Financial Officer, Vice President, Treasurer and
Assistant Secretary of Federated and an officer of its various advisory and
underwriting subsidiaries, has served as a Term Member on the Board of Directors
of Duquesne University, Pittsburgh, Pennsylvania, since May 12, 2000. Mr. John
E. Murray, Jr., an Independent Trustee of the Fund, served as President of
Duquesne from 1988 until his retirement from that position in 2001, and became
Chancellor of Duquesne on August 15, 2001. It should be noted that Mr. Donahue
abstains on any matter that comes before Duquesne's Board that affects Mr.
Murray personally.

<R>COMMITTEES of the board
Meetings
Board Committee Held
Committee Members Committee Functions During Last
Fiscal Year
Executive In between meetings of the full Board, the One
John F. Donahue Executive Committee generally may exercise all the
John E. Murray, Jr., powers of the full Board in the management and
J.D., S.J.D. direction of the business and conduct of the
affairs of the Trust in such manner as the
Executive Committee shall deem to be in the
best interests of the Trust. However, the
Executive Committee cannot elect or remove
Board members, increase or decrease the
number of Trustees, elect or remove any
Officer, declare dividends, issue shares or
recommend to shareholders any action
requiring shareholder approval.

Audit The purposes of the Audit Committee are to oversee Two
Thomas G. Bigley the accounting and financial reporting process of
John T. Conroy, Jr. the Fund, the Fund`s internal control over
Nicholas P. financial reporting, and the quality, integrity
Constantakis and independent audit of the Fund`s financial
Charles F. statements. The Committee also oversees or
Mansfield, Jr. assists the Board with the oversight of compliance
with legal requirements relating to those
matters, approves the engagement and reviews
the qualifications, independence and
performance of the Fund`s independent
auditors, acts as a liaison between the
independent auditors and the Board and
reviews the Fund`s internal audit function.

-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Nominating None
Thomas G. Bigley The Nominating Committee, whose members consist of
John T. Conroy, Jr. all Independent Trustees, selects and nominates
Nicholas P. persons for election to the Fund`s Board when
Constantakis vacancies occur. The Committee will consider
John F. Cunningham candidates recommended by shareholders,
Peter E. Madden Independent Trustees, officers or employees of any
Charles F. of the Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who desires
John E. Murray, Jr. to have an individual considered for nomination by
Marjorie P. Smuts the Committee must submit a recommendation in
John S. Walsh writing to the Secretary of the Fund, at the Fund
's address appearing on the back cover of
this Statement of Additional Information.
The recommendation should include the name
and address of both the shareholder and the
candidate and detailed information
concerning the candidate's qualifications
and experience. In identifying and
evaluating candidates for consideration, the
Committee shall consider such factors as it
deems appropriate. Those factors will
ordinarily include: integrity, intelligence,
collegiality, judgment, diversity, skill,
business and other experience, qualification
as an "Independent Trustee," the existence
of material relationships which may create
the appearance of a lack of independence,
financial or accounting knowledge and
experience, and dedication and willingness
to devote the time and attention necessary
to fulfill Board responsibilities.
---------------------------------------------------

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

</R>

Board ownership of shares in the fund and in the federated family of Investment
companies AS OF DECEMBER 31, 2003
Aggregate
Dollar Range of
Dollar Range of Shares Owned in
Interested Shares Owned Federated Family of
Board Member Name in Fund Investment Companies
John F. Donahue Over $100,000 Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. None Over $100,000

Independent
Board Member Name
Thomas G. Bigley None Over $100,000
John T. Conroy, Jr. None Over $100,000
Nicholas P. Constantakis None Over $100,000
John F. Cunningham None Over $100,000
Peter E. Madden None Over $100,000
Charles F. Mansfield, Jr. None $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D. None Over $100,000
Marjorie P. Smuts None Over $100,000
John S. Walsh None Over $100,000

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

The Adviser is a wholly owned subsidiary of Federated.

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

The Adviser must waive the portion of its advisory fee that increases the Fund's
aggregate annual operating expenses above 0.45% of its average daily net assets.
The Fund's operating expenses include the advisory fee but exclude interest,
taxes, brokerage commissions, expenses of registering the Fund and its shares
under federal and state laws, expenses of withholding taxes, distribution and
shareholder service fees and extraordinary expenses.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory contract. The Board's decision to approve the contract reflects the
exercise of its business judgment on whether to continue the existing
arrangements. During its review of the contract, the Board considers many
factors, among the most material of which are: the Fund's investment objectives
and long term performance; the Adviser's management philosophy, personnel and
processes; the preferences and expectations of Fund shareholders and their
relative sophistication; the continuing state of competition in the mutual fund
industry; comparable fees in the mutual fund industry; the range and quality of
services provided to the Fund and its shareholders by the Federated organization
in addition to investment advisory services; and the Fund's relationship to the
Federated funds.

In assessing the Adviser's performance of its obligations, the Board also
considers whether there has occurred a circumstance or event that would
constitute a reason for it to not renew an advisory contract. In this regard,
the Board is mindful of the potential disruptions of the Fund's operations and
various risks, uncertainties and other effects that could occur as a result of a
decision to terminate or not renew an advisory contract. In particular, the
Board recognizes that most shareholders have invested in the Fund on the
strength of the Adviser's industry standing and reputation and in the
expectation that the Adviser will have a continuing role in providing advisory
services to the Fund.

The Board also considers the compensation and benefits received by the Adviser.
This includes fees received for services provided to the Fund by other entities
in the Federated organization and research services received by the Adviser from
brokers that execute fund trades, as well as advisory fees. In this regard, the
Board is aware that various courts have interpreted provisions of the 1940 Act
and have indicated in their decisions that the following factors may be relevant
to an Adviser's compensation: the nature and quality of the services provided by
the Adviser, including the performance of the Fund; the Adviser's cost of
providing the services; the extent to which the Adviser may realize "economies
of scale" as the Fund grows larger; any indirect benefits that may accrue to the
Adviser and its affiliates as a result of the Adviser's relationship with the
Fund; performance and expenses of comparable funds; and the extent to which the
independent Board members are fully informed about all facts bearing on the
Adviser's service and fee. The Fund's Board is aware of these factors and takes
them into account in its review of the Fund's advisory contract.

The Board considers and weighs these circumstances in light of its substantial
accumulated experience in governing the Fund and working with Federated on
matters relating to the Federated funds, and is assisted in its deliberations by
the advice of independent legal counsel. In this regard, the Board requests and
receives a significant amount of information about the Fund and the Federated
organization. Federated provides much of this information at each regular
meeting of the Board, and furnishes additional reports in connection with the
particular meeting at which the Board's formal review of the advisory contracts
occurs. In between regularly scheduled meetings, the Board may receive
information on particular matters as the need arises. Thus, the Board's
evaluation of an advisory contract is informed by reports covering such matters
as: the Adviser's investment philosophy, personnel, and processes; the Fund's
short- and long-term performance (in absolute terms as well as in relationship
to its particular investment program and certain competitor or "peer group"
funds), and comments on the reasons for performance; the Fund's expenses
(including the advisory fee itself and the overall expense structure of the
Fund, both in absolute terms and relative to similar and/or competing funds,
with due regard for contractual or voluntary expense limitations); the use and
allocation of brokerage commissions derived from trading the Fund's portfolio
securities; the nature and extent of the advisory and other services provided to
the Fund by the Adviser and its affiliates; compliance and audit reports
concerning the Federated funds and the Federated companies that service them;
and relevant developments in the mutual fund industry and how the Federated
funds and/or Federated are responding to them.

<R>The Board also receives financial information about Federated,
including reports on the compensation and benefits Federated derives from its
relationships with the Federated funds. These reports cover not only the fees
under the advisory contracts, but also fees received by Federated's subsidiaries
for providing other services to the Federated funds under separate contracts
(e.g., for serving as the Federated funds' administrator). The reports also
discuss any indirect benefit Federated may derive from its receipt of research
services from brokers who execute Federated fund trades.

The Board bases its decision to approve an advisory contract on the totality of
the circumstances and relevant factors, and with a view to past and future
long-term considerations. Not all of the factors and considerations identified
above are relevant to every Federated fund, nor does the Board consider any one
of them to be determinative. Because the totality of circumstances includes
considering the relationship of each Federated fund, the Board does not approach
consideration of every Federated fund's advisory contract as if that were the
only Federated fund.</R>

<R>Services Agreement
Federated Advisory Services Company, an affiliate of the Adviser, provides
certain support services to the Adviser. The fee for these services is paid by
the Adviser and not by the Fund.</R>

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.

Code of Ethics Restrictions on Personal Trading

As required by SEC rules, the Fund, its Adviser, and its Distributor have
adopted codes of ethics. These codes govern securities trading activities of
investment personnel, Fund Trustees, and certain other employees. Although they
do permit these people to trade in securities, including those that the Fund
could buy, they also contain significant safeguards designed to protect the Fund
and its shareholders from abuses in this area, such as requirements to obtain
prior approval for, and to report, particular transactions.

Voting Proxies on Fund Portfolio Securities
The Board has delegated to the Adviser authority to vote proxies on the
securities held in the Fund's portfolio. The Board has also approved the
Adviser's policies and procedures for voting the proxies, which are described
below.

Proxy Voting Policies
The Adviser's general policy is to cast proxy votes in favor of proposals that
the Adviser anticipates will enhance the long-term value of the securities being
voted. Generally, this will mean voting for proposals that the Adviser believes
will: improve the management of a company; increase the rights or preferences of
the voted securities; and/or increase the chance that a premium offer would be
made for the company or for the voted securities.

The following examples illustrate how these general policies may apply to
proposals submitted by a company's board of directors. However, whether the
Adviser supports or opposes a proposal will always depend on the specific
circumstances described in the proxy statement and other available information.

On matters of corporate governance, generally the Adviser will vote for
proposals to: require independent tabulation of proxies and/or confidential
voting by shareholders; reorganize in another jurisdiction (unless it would
reduce the rights or preferences of the securities being voted); and repeal a
shareholder rights plan (also known as a "poison pill"). The Adviser will
generally vote against the adoption of such a plan (unless the plan is designed
to facilitate, rather than prevent, unsolicited offers for the company).

On matters of capital structure, generally the Adviser will vote: against
proposals to authorize or issue shares that are senior in priority or voting
rights to the securities being voted; for proposals to grant preemptive rights
to the securities being voted; and against proposals to eliminate such
preemptive rights.

On matters relating to management compensation, generally the Adviser will vote:
for stock incentive plans that align the recipients' interests with the
interests of shareholders without creating undue dilution; and against proposals
that would permit the amendment or replacement of outstanding stock incentives
with new stock incentives having more favorable terms.

On matters relating to corporate transactions, the Adviser will vote proxies
relating to proposed mergers, capital reorganizations, and similar transactions
in accordance with the general policy, based upon its analysis of the proposed
transaction. The Adviser will vote proxies in contested elections of directors
in accordance with the general policy, based upon its analysis of the opposing
slates and their respective proposed business strategies. Some transactions may
also involve proposed changes to the company's corporate governance, capital
structure or management compensation. The Adviser will vote on such changes
based on its evaluation of the proposed transaction or contested election. In
these circumstances, the Adviser may vote in a manner contrary to the general
practice for similar proposals made outside the context of such a proposed
transaction or change in the board. For example, if the Adviser decides to vote
against a proposed transaction, it may vote for anti-takeover measures
reasonably designed to prevent the transaction, even though the Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders without
the favorable recommendation of a company's board. The Adviser believes that a
company's board should manage its business and policies, and that shareholders
who seek specific changes should strive to convince the board of their merits or
seek direct representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting. For example, if a foreign market
requires shareholders casting proxies to retain the voted shares until the
meeting date (thereby rendering the shares "illiquid" for some period of time),
the Adviser will not vote proxies for such shares.

Proxy Voting Procedures
The Adviser has established a Proxy Voting Committee (Proxy Committee), to
exercise all voting discretion granted to the Adviser by the Board in accordance
with the proxy voting policies. The Adviser has hired Investor Responsibility
Research Center (IRRC) to obtain, vote, and record proxies in accordance with
the Proxy Committee's directions. The Proxy Committee directs IRRC by means of
Proxy Voting Guidelines, and IRRC may vote any proxy as directed in the Proxy
Voting Guidelines without further direction from the Proxy Committee (and may
make any determinations required to implement the Proxy Voting Guidelines).
However, if the Proxy Voting Guidelines require case-by-case direction for a
proposal, IRRC will provide the Proxy Committee with all information that it has
obtained regarding the proposal and the Proxy Committee will provide specific
direction to IRRC. The Adviser's proxy voting procedures generally permit the
Proxy Committee to amend the Proxy Voting Guidelines, or override the directions
provided in such Guidelines, whenever necessary to comply with the proxy voting
policies.

<R>Proxy Voting Report
A report on "Form N-PX" of how the Fund voted any proxies during the most recent
12-month period ended June 30 is available through Federated's Internet site. Go
to www.federatedinvestors.com; select "Products;" select the Fund; then use the
link to "Prospectuses and Regulatory Reports" to access the link to Form
N-PX.</R>

Conflicts of Interest
The Adviser has adopted procedures to address situations where a matter on which
a proxy is sought may present a potential conflict between the interests of the
Fund (and its shareholders) and those of the Adviser or Distributor. This may
occur where a significant business relationship exists between the Adviser (or
its affiliates) and a company involved with a proxy vote. A company that is a
proponent, opponent, or the subject of a proxy vote, and which to the knowledge
of the Proxy Committee has this type of significant business relationship, is
referred to as an "Interested Company."

The Adviser has implemented the following procedures in order to avoid concerns
that the conflicting interests of the Adviser have influenced proxy votes. Any
employee of the Adviser who is contacted by an Interested Company regarding
proxies to be voted by the Adviser must refer the Interested Company to a member
of the Proxy Committee, and must inform the Interested Company that the Proxy
Committee has exclusive authority to determine how the Adviser will vote. Any
Proxy Committee member contacted by an Interested Company must report it to the
full Proxy Committee and provide a written summary of the communication. Under
no circumstances will the Proxy Committee or any member of the Proxy Committee
make a commitment to an Interested Company regarding the voting of proxies or
disclose to an Interested Company how the Proxy Committee has directed such
proxies to be voted. If the Proxy Voting Guidelines already provide specific
direction on the proposal in question, the Proxy Committee shall not alter or
amend such directions. If the Proxy Voting Guidelines require the Proxy
Committee to provide further direction, the Proxy Committee shall do so in
accordance with the proxy voting policies, without regard for the interests of
the Adviser with respect to the Interested Company. If the Proxy Committee
provides any direction as to the voting of proxies relating to a proposal
affecting an Interested Company, it must disclose to the Fund's Board
information regarding: the significant business relationship; any material
communication with the Interested Company; the matter(s) voted on; and how, and
why, the Adviser voted as it did.
If the Fund holds shares of another investment company for which the Adviser (or
an affiliate) acts as an investment adviser, the Proxy Committee will vote the
Fund's proxies in the same proportion as the votes cast by shareholders who are
not clients of the Adviser at any shareholders' meeting called by such
investment company, unless otherwise directed by the Board.

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

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

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

Average Aggregate Daily
Maximum Administrative Net Assets of the Federated
Fee Funds
0.150 of 1% on the first $5 billion
0.125 of 1% on the next $5 billion
0.100 of 1% on the next $10 billion
0.075 of 1% on assets over $20 billion
The administrative fee received during any fiscal year shall be at least
$150,000 per portfolio and $40,000 per each additional class of Shares. FAS may
voluntarily waive a portion of its fee and may reimburse the Fund for expenses.
---------------------------------------------------------------------------------------------------------------

FAS 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.

</R>

CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
<R>State Street Bank and Trust Company, the Fund's registered transfer
agent, maintains all necessary shareholder records.</R>

<R>INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered public accounting firm for the Fund, Ernst &
Young LLP, conducts its audits in accordance with auditing standards generally
accepted in the United States of America, which require it to plan and perform
its audits to provide reasonable assurance about whether the Fund's financial
statements and financial highlights are free of material misstatement.
</R>

<R>FEES PAID BY THE FUND FOR SERVICES

-------------------------------- 2004 2003 --------------------
For the Year Ended June 30 2002
Advisory Fee Earned $1,556,642 $1,302,479 $871,572
Advisory Fee Reduction $378,890 $343,574 $260,224
Administrative Fee $295,119 $244,866 $163,792
12b-1 Fee:
Institutional Service Shares $-- -- --
Shareholder Services Fee:
Institutional Shares $-- -- --
Institutional Service Shares $120,069 -- --
</R>
---------------------------------------------------------------------------------------------------------------

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.

If the Fund's expenses are capped at a particular level, the cap does not
include reimbursement to the Fund of any expenses incurred by shareholders who
use the transfer agent's subaccounting facilities.

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating performance applicable to all mutual funds. The SEC also permits
this standard performance information to be accompanied by non-standard
performance information.

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

Share performance fluctuates on a daily basis largely because net earnings
and/or the value of portfolio holdings 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 are given for the one-year, five-year and ten year periods ended
June 30, 2004.

Yield and Tax-Equivalent Yield are given for the 30-day period ended June 30,
2004.

<R>

30-Day Period 1 Year 5 Years 10 Years
Institutional Shares:
Total Return
Before Taxes N/A 0.53% 3.79% 4.09%
After Taxes on N/A 0.53% 3.79% 4.09%
Distributions
After Taxes on
Distributions and N/A 1.24% 3.77% 4.08%
Sale of Shares
Yield 2.06% N/A N/A N/A
Tax-Equivalent Yield 3.17% N/A N/A N/A
----------------------------------------------------------------------------------------------------------

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

30-Day Period 1 Year 5 Years 10 Years
Institutional Service
Shares:
Total Return
Before Taxes N/A 0.28% 3.53% 3.83%
After Taxes on N/A 0.28% 3.53% 3.83%
Distributions
After Taxes on
Distributions and N/A 0.99% 3.51% 3.82%
Sale of Shares
Yield 1.81% N/A N/A N/A
Tax-Equivalent Yield 2.79% N/A N/A N/A
----------------------------------------------------------------------------------------------------------

</R>
---------------------------------------------------------------------------------------------------------------

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 $10,000 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 $10,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions. Total returns after taxes are calculated in a
similar manner, but reflect additional standard assumptions required by the SEC.

YIELD AND Tax-Equivalent YIELD
The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day period; by (ii) the maximum offering
price per Share on the last day of the period. This number is then annualized
using semi-annual compounding. This means that the amount of income generated
during the 30-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The tax-equivalent yield of Shares is
calculated similarly to the yield, but is adjusted to reflect the taxable yield
that Shares would have had to earn to equal the actual yield, assuming the
maximum combined federal and state tax rate. The yield and tax-equivalent yield
do 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.

TAX EQUIVALENCY TABLE
Set forth below is a sample of a tax-equivalency table that may be used in
advertising and sales literature. This table is for illustrative purposes only
and is not representative of past or future performance of the Fund. The
interest earned by the municipal securities owned by the Fund generally remains
free from federal regular income tax and is often free from state and local
taxes as well. However, some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.

Taxable Yield Equivalent for 2004 Multistate Municipal Fund
Tax Bracket:
Federal 10.00% 15.00% 25.00% 28.00% 33.00% 35.00%
Joint Return: $0- $14,001- $56,801- $114,651- $174,701- Over
$14,000 $56,800 $114,650 $174,700 $311,950 $311,950
Single Return: $0- $7,001- $28,401- $68,801- $143,501- Over
$7,000 $28,400 $68,800 $143,500 $311,950 $311,950
Tax-Exempt Yield Taxable Yield Equivalent
0.50% 0.56% 0.59% 0.67% 0.69% 0.75% 0.77%
1.00% 1.11% 1.18% 1.33% 1.39% 1.49% 1.54%
1.50% 1.67% 1.76% 2.00% 2.08% 2.24% 2.31%
2.00% 2.22% 2.35% 2.67% 2.78% 2.99% 3.08%
2.50% 2.78% 2.94% 3.33% 3.47% 3.73% 3.85%
3.00% 3.33% 3.53% 4.00% 4.17% 4.48% 4.62%
3.50% 3.89% 4.12% 4.67% 4.86% 5.22% 5.38%
4.00% 4.44% 4.71% 5.33% 5.56% 5.97% 6.15%
4.50% 5.00% 5.29% 6.00% 6.25% 6.72% 6.92%
5.00% 5.56% 5.88% 6.67% 6.94% 7.46% 7.69%
5.50% 6.11% 6.47% 7.33% 7.64% 8.21% 8.46%
6.00% 6.67% 7.06% 8.00% 8.33% 8.96% 9.23%
6.50% 7.22% 7.65% 8.67% 9.03% 9.70% 10.00%
7.00% 7.78% 8.24% 9.33% 9.72% 10.45% 10.77%
7.50% 8.33% 8.82% 10.00% 10.42% 11.19% 11.54%
8.00% 8.89% 9.41% 10.67% 11.11% 11.94% 12.31%
8.50% 9.44% 10.00% 11.33% 11.81% 12.69% 13.08%
9.00% 10.00% 10.59% 12.00% 12.50% 13.43% 13.85%
9.50% 10.56% 11.18% 12.67% 13.19% 14.18% 14.62%
10.00% 11.11% 11.76% 13.33% 13.89% 14.93% 15.38%
10.50% 11.67% 12.35% 14.00% 14.58% 15.67% 16.15%
11.00% 12.22% 12.94% 14.67% 15.28% 16.42% 16.92%
Note: The maximum marginal tax rate for each bracket was used in calculating the taxable yield equivalent.
---------------------------------------------------------------------------------------------------------------

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 Fund; and

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

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

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

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

Lipper Inc.
Lipper Inc. assumes the reinvestment of all capital gains distributions and
income dividends and ranks funds in various fund categories by making
comparative calculations using total return. Total return takes into account any
change in offering price over a specific period of time. From time to time, the
Fund will quote its Lipper ranking in the "intermediate municipal bond funds"
category in advertising and sales literature.

The Lehman Brothers 1-Year Municipal Index
The Lehman Brothers 1-Year Municipal Index is an unmanaged index of municipal
bonds issued after January 1, 1991, with a minimum credit rating of at least
Baa, which have been issued as part of a deal of at least $50 million, have a
maturity value of at least $3 million and mature in at least one, but not more
than two years. As of January 1996, the index also includes zero coupon bonds
and bonds subject to the alternative minimum tax.

The Lehman Brothers 3-Year Municipal Index
The Lehman Brothers 3-Year Municipal Index is an unmanaged index of municipal
bonds issued after January 1, 1991, with a minimum credit rating of at least
Baa, which have been issued as part of a deal of at least $50 million, have a
maturity value of at least $3 million, and a maturity range of 1-5 years. As of
January 1996, the index also includes zero coupon bonds and bonds subject to the
alternative minimum tax.

Morningstar, 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, 2003, Federated managed 14 bond
funds with approximately $3.8 billion in assets and 22 money market funds with
approximately $23.0 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 32 years' experience. As of
December 31, 2003, Federated managed 36 equity funds totaling approximately
$25.6 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

Corporate Bond Funds
In the corporate bond sector, as of December 31, 2003, Federated managed 11
money market funds and 4 bond funds with assets approximating $61.7 billion and
$3.4 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 30 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.

Government Funds
In the government sector, as of December 31, 2003, Federated managed 7 mortgage
backed, 3 multi-sector government funds, 4 government/agency and 19 government
money market mutual funds, with assets approximating $4.9 billion, $0.9 billion,
$2.9 billion and $56.2 billion, respectively. Federated trades approximately
$90.4 billion in U.S. government and mortgage backed securities daily and places
approximately $35 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 $50 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,
2003, Federated managed $136.2 billion in assets across 52 money market funds,
including 19 government, 10 prime, 22 municipal and 1 euro-denominated with
assets approximating $56.2 billion, $59.4 billion, $20.6 billion and $173.9
million, respectively.

<R>The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: Global Equity - Stephen F. Auth is
responsible for overseeing the management of Federated's domestic and
international equity products; Global Fixed Income - Mary Jo Ochson and Robert
J. Ostrowski are responsible for overseeing the management of Federated's
domestic and international fixed income and high yield products; and Money
Markets - Deborah A. Cunningham is responsible for overseeing the management of
Federated's money market fund products. </R>

Mutual Fund Market
Forty-nine percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $6.2 trillion to the approximately 8,300 funds available,
according to the Investment Company Institute.

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

Institutional Clients
<R>Federated meets the needs of approximately 3,035 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.</R>

Bank Marketing
<R>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.
</R>

Broker/Dealers and Bank Broker/Dealer Subsidiaries
<R>Federated funds are available to consumers through major brokerage
firms nationwide--Federated has over 2,000 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. </R>

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended June 30, 2004
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Short - Term Municipal Trust dated June 30, 2004.

INVESTMENT RATINGS

Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA--Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB--Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B--Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favourable business and economic environment.

CCC, CC, C--High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favourable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.

Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries, high rates of return on
funds employed, conservative capitalization structure with moderate reliance on
debt and ample asset protection, broad margins in earning coverage of fixed
financial charges and high internal cash generation, and well-established access
to a range of financial markets and assured sources of alternate liquidity.

Prime-2--Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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-- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2-- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

Fitch Ratings Commercial Paper Rating Definitions
F-1--Indicates the strongest capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. Under their
national rating scale, this rating is assigned to the "best" credit risk
relative to all others in the same country and is normally assigned to all
financial commitments issued or guaranteed by the sovereign state. Where the
credit risk is particularly strong, a "+" is added to the assigned rating.

F-2-- Indicates a satisfactory capacity for timely payment of financial
commitments relative to other issuers or issues in the same country. However,
the margin of safety is not as great as in the case of the higher ratings.

ADDRESSES

federated short - Term Municipal trust

Institutional Shares
Institutional Service Shares

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

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

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

<R>Custodian, Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600

Independent Registered Public Accounting Firm</R>
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

PART C. OTHER INFORMATION

Item 22. Exhibits:

(a) (i) Conformed copy of Restatement and Amendment No. 5 of the
Declaration of Trust of the Registrant; (18)
(ii) Conformed copy of Amendment No. 6 to the
Amended and Restated Declaration of Trust of
the Registrant; (19)
(b) (i) Copy of the By-Laws of the Registrant; (13)
(ii) Copy of Amendment No. 5 to the By-Laws of the Registrant; (16)
(iii) Copy of Amendment No. 6 to the By-Laws of the Registrant; (16)
(iv) Copy of Amendment No. 7 to the By-Laws of the Registrant; (16)
(v) Copy of Amendment No. 8 to the By-Laws of the Registrant; (16)
(vi) Copy of Amendment No. 9 to the By-Laws of the Registrant; (21)
(vii) Copy of Amendment No. 10 to the By-Laws of the Registrant; (+)
(c) Copy of Specimen Certificate for Shares of
Beneficial Interest of the Registrant; (13)
(d) (i) Conformed copy of the Investment
Advisory Contract of the Registrant; (9)
(ii) Conformed copy of Amendment No. 1 to Investment Advisory Contract
of the Registrant; (19)
(iii) Conformed copy of Amendment to Investment
Advisory Contract of the Registrant; (19)
(e) (i) Conformed copy of the Distributor's
Contract of the Registrant; (11)
(ii) Conformed copy of the Amendment to
Distributor's Contract of the Registrant;
(19)
(iii) Amendment to Distributor's Contracts between
the Federated Funds and Federated Securities
Corp. (+)
(iv) The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds
Sales and Service Agreement; Mutual Funds
Service Agreement; and Plan Trustee/Mutual
Funds Service Agreement from Item 24 (b) (6)
of the Cash Trust Series II Registration
Statement on Form N-1A, filed with the
Commission on July 24, 1995. (File Numbers
33-38550 and 811-6269);
(f) Not applicable;
(g) (i) Conformed copy of the Custodian Agreement of the
Registrant; (11) (ii) Conformed copy of Amendment to the
Custodian Agreement of the
Registrant; (20)
(iii) Conformed copy of Domestic Custody Fee Schedule;
(16) (h) (i) Conformed copy of Amended and Restated Agreement for
Fund Accounting
Services, Administrative Services, Transfer Agency Services and Custody
Services Procurement; (17)
(ii) Conformed copy of Amendment for Fund Accounting
Services, Administrative Services, Shareholder
Transfer Agency Services and Custody Services
Procurement; (21)
(iii) The Registrant hereby incorporates the conformed
copy of the Amendment No. 2 to the Amended and
Restated Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services
and Custody Services Procurement from Item (h)(v)
of the Federated U.S. Government Securities: 2-5
Years Registration Statement on Form N-1A, filed
with the Commission on March 30, 1994. (File Nos.
2-75769 and 811-3387);
(iv) The Registrant hereby incorporates the conformed copy of the
Amendment No. 3 to the Amended and Restated Agreement for Fund
Accounting Services, Administrative Services, Transfer Agency
Services and Custody Services Procurement from Item (h)(v) of the
Federated U.S. Government Securities: 2-5 Years Registration
Statement on Form N-1A, filed with the Commission on March 30,
1994. (File Nos. 2-75769 and 811-3387);
(v) The responses described in Item 23 (e)(iii) are hereby
incorporated by reference;
(vi) The Registrant hereby incorporates by reference the
conformed copy of the Agreement for Administrative
Services from Item 23 (h)(vix) of the Federated
Index Trust Registration Statement on Form N-1A,
filed with the Commission on December 30, 2003.
(File Nos. 33- 33852 and 811-6061);
(vii) The Registrant hereby incorporates the conformed
copy of the Second Amended and Restated Services
Agreement, with attached Schedule 1 revised
6/30/04, from Item (h)(vii) of the Cash Trust
Series, Inc. Registration Statement on Form N-1A,
filed with the Commission on July 29, 2004. (File
Nos. 33-29838 and 811-5843);
(viii) The Registrant hereby incorporates the conformed
copy of the Financial Administration and Accounting
Services Agreement, with attached Exhibit A revised
6/30/04, from Item (h)(viii) of the Cash Trust
Series, Inc. Registration Statement on Form N-1A,
filed with the Commission on July 29, 2004. (File
Nos. 33-29838 and 811-5843)
(i) Conformed copy of Opinion and Consent of
Counsel as to the legality of shares being
registered; (2)
(j) Conformed copy of the Consent of Independent Registered
Public Accountants; (+)
(k) Not applicable;
(l) Copy of Initial Capital Understanding; (13) (m) (i) Conformed
Copy of Rule 12b-1 Plan of the Registrant; (11)
(ii) The responses described in Item 23(e)(iii)
are hereby incorporated by reference;
(iii) Copy of Distribution Plan of the Registrant; (+)

(n) The Registrant hereby incorporates the
conformed copy of the Multiple Class Plan
from Item (n) of the Federated GNMA Trust
Registration
Statement on Form N-1A, filed with the Commission on March 29,
2004. (File Nos. 2-75670 and 811-3375).
(o) (i) Conformed copy of power of Attorney of Registrant;
(19) (ii) Conformed copy of power of Attorney of Chief
Investment Officer;
(19)
(p) The Registrant hereby incorporates the
conformed copy of the Code of Ethics for
Access Persons from Item 23(p) of the
Federated High Yield Trust, Registration
Statement on Form N-1A filed with the
Commission on April 28, 2003. (File Nos.
2-91091 and 811-4018).

+ All exhibits have been filed electronically.

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed August 4, 1981. (File Nos. 2-72277
and 811-3181)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed August 24, 1989. (File Nos. 2-72277
and 811-3181)
10. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 17 on Form N-1A filed August 22, 1990. (File Nos. 2-72277
and 811-3181).
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed August 26, 1994. (File Nos. 2-72277
and 811-3181)
13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 29 on Form N-1A filed April 25, 1996. (File Nos. 2-72277
and 811-3181)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 34 on Form N-1A filed June 30, 1998. (File Nos. 2-72277
and 811-3181)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 35 on Form N-1A filed August 26, 1998. (File Nos. 2-72277
and 811-3181)
18. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 36 on Form N-1A filed July 1, 1999. (File Nos. 2-72277 and
811-3181)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 39 on Form N-1A filed August 28, 2001. (File Nos. 2-72277
and 811-3181)
20. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 40 on Form N-1A filed August 23, 2002. (File Nos. 2-72277
and 811-3181)
21. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 41 on Form N-1A filed August 29, 2003.

Item 23. Persons Controlled by or Under Common Control with Registrant:
--------------------------------------------------------------
None

Item 24. Indemnification: (10)

Item 25. Business and Other Connections of Investment Adviser:
----------------------------------------------------

For a description of the other business of the investment adviser, see the section
entitled "Who Manages the Fund?" in Part A. The affiliations with the Registrant of two
of the Trustees and two of the Officers of the investment adviser are included in Part
B of this Registration Statement under "Who Manages and Provides Services to the
Fund?" The remaining Trustees of the investment adviser and, in parentheses, their
principal occupations are: Thomas R. Donahue, (Chief Financial Officer, Federated
Investors, Inc.), 1001 Liberty Avenue, Pittsburgh, PA, 15222-3779 and Mark D. Olson (a
principal of the firm, Mark D. Olson & Company, L.L.C. and Partner, Wilson,
Halbrook & Bayard, P.A.), 800 Delaware Avenue, P.O. Box 2305, Wilmington, DE
19899-2305.

The remaining Officers of the investment adviser are:

President/ Chief Executive Officer
and Trustee: Keith M. Schappert

Vice Chairman: William D. Dawson, III

Senior Vice Presidents: Joseph M. Balestrino
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Robert M. Kowit
Jeffrey A. Kozemchak
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Richard Tito

Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Randall S. Bauer
Nancy J.Belz
G. Andrew Bonnewell
Lee R. Cunningham, II
B. Anthony
Delserone,Jr.Donald T.
Ellenberger Eamonn G.
Folan John T. Gentry
Patricia L. Heagy
Susan R. Hill Nikola
A. Ivanov William R.
Jamison Nathan H. Kehm
John C. Kerber J.
Andrew Kirschler
Marian R. Marinack
Kevin McCloskey
Natalie F. Metz Thomas
J. Mitchell Joseph M.
Natoli Mary Kay Pavuk
Jeffrey A. Petro Ihab
L. Salib Roberto
Sanchez-Dahl, Sr. John
Sidawi Michael W.
Sirianni, Jr.
Christopher Smith
Timothy G. Trebilcock
Paolo H. Valle Stephen
J. Wagner Paige M.
Wilhelm George B.
Wright

Assistant Vice Presidents: Lori Andrews
Hanan Callas
Jerome Conner
James R. Crea, Jr.
Karol M. Crummie
Richard Cumberledge
Richard J. Gallo
Kathyrn P. Glass
James Grant
Tracey L. Lusk
Ann Manley
Karl Mocharko
Bob Nolte
Rae Ann Rice
Brian Ruffner
Kyle D. Stewart
Mary Ellen Tesla
Nichlas S. Tripodes
Mark Weiss

Secretary: G. Andrew Bonnewell

Treasurer: Thomas R. Donahue

Assistant Secretary: Jay S. Neuman

Assistant Treasurer: Denis McAuley, III

The business address of each of the Officers of the investment
adviser is Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779. These individuals are also
officers of a majority of the investment advisers to the
investment companies in the Federated Fund Complex described in
Part B of this Registration Statement.

Item 26. Principal Underwriters:

.......Federated Securities Corp. the Distributor for
shares of the Registrant, acts as principal underwriter for the
following open-end investment ........ companies, including the Registrant:

Cash Trust Series, Inc.; Cash Trust Series II; Federated Adjustable Rate
Securities Fund; Federated American Leaders Fund, Inc.; Federated Core
Trust; Federated Core Trust II, L.P.; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fixed Income Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated High Income Bond Fund, Inc.; Federated High Yield Municipal
Income Fund; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series; Federated International
Series, Inc.; Federated Investment Series Funds, Inc.; Federated Limited
Duration Government Fund, Inc.; Federated Managed Allocation Portfolios;
Federated Municipal High Yield Advantage Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Securities Income Trust;
Federated Premier Intermediate Municipal Income Fund; Federated Premier
Municipal Income Fund; Federated Short-Term Municipal Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Total Return
Government Bond Fund; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3
Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated
World Investment Series, Inc.; Intermediate Municipal Trust; Edward Jones
Money Market Fund; Money Market Obligations Trust; Regions Morgan Keegan
Select Funds and SouthTrust Funds.

(b)

(1) (2) (3) Positions and Offices Positions and Offices
With Distributor Name With Registrant
--------------------- ----------------- ----------------------

Chairman: Richard B. Fisher Vice President

President-Institutional
Sales and Director: John B. Fisher

Executive Vice
Vice President, Assistant
Secretary and Director: Thomas R. Donahue

President-Broker/Dealer
And Director: James F. Getz

Senior Vice Presidents: Mark W. Bloss
Richard W. Boyd
Laura M. Deger
Peter W. Eisenbrandt
Theodore Fadool, Jr.
Christopher Fives
James S. Hamilton
James M. Heaton
H. Joseph Kennedy
Amy Michaliszyn
Keith Nixon
Solon A. Person, IV
Ronald M. Petnuch
Thomas E. Territ
Robert F. Tousignant
Paul Uhlman

Vice Presidents: Irving Anderson
Dan Berry
John B. Bohnet
Edward R. Bozek
Jane E. Broeren-Lambesis
Brian Burke
Craig Burness
David J. Callahan
Mark Carroll
Dan Casey
Scott Charlton
Steven R. Cohen
Mary J. Combs
James Conely
R. Edmond Connell, Jr.
Kevin J. Crenny
Daniel T. Culbertson
G. Michael Cullen
Beth C. Dell
Robert J. Deuberry
Ron Dorman
William C. Doyle
Donald C. Edwards
Lee England
Timothy Franklin
Peter J. Germain
Jamie Getz
Joseph D. Gibbons
J. Todd Glickson
G. Tad Gullickson
Scott Gundersen
Dayna C. Haferkamp
Raymond J. Hanley
Vincent L. Harper, Jr.
Bruce E. Hastings
Teresa M. Johnson
Christopher L. Johnston
William Kastrol
Stephen Kittel
Michael W. Koenig
Ed Koontz
Theodore J. Kravits, Jr.
Christopher A. Layton
Michael H. Liss
Michael R. Manning
Martin J. McCaffrey
Mary A. McCaffrey
Richard C. Mihm
Chris Milliken
Vincent T. Morrow
Alec H. Neilly
Rebecca Nelson
James E. Ostrowski
Thomas A. Peter III
Raleigh Peters
Robert F. Phillips
Josh Rasmussen
Richard A. Recker
Christopher Renwick
Diane M. Robinson
Brian S. Ronayne
Timothy A. Rosewicz
Thomas S. Schinabeck
Edward J. Segura
Peter Siconolfi
Edward L. Smith
John A. Staley
Colin B. Starks
Jeffrey A. Stewart
Kevin Stutz
William C. Tustin
G. Walter Whalen
Stephen White
Patrick M. Wiethorn
Edward J. Wojnarowski
Michael P. Wolff

Assistant Vice Presidents: Lisa A. Toma
Robert W. Bauman
Charles L. Davis, Jr.
Brian F. Palusa
William Rose

Treasurer: Denis McAuley, III

Secretary: Stephen A. Keen

Assistant Secretary: Thomas R. Donahue
Peter J. Germain

The business address of each of the Officers of Federated Securities Corp. is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779.

Item 27. Location of Accounts and Records:
--------------------------------

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

Registrant Reed Smith LLP
Investment Management
Group (IMG)
Federated Investors Tower
12th Floor
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(Notices should be sent to the Agent for Service at above address)

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

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

Federated Services Company Federated Investors Tower
("Administrator") 1001 Liberty Avenue
Pittsburgh, PA 15222-3779

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

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

Item 28. Management Services: Not applicable.
-------------------

Item 29. Undertakings:

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

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED SHORT-TERM MUNICIPAL
TRUST, certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
30th day of August, 2004.

FEDERATED SHORT-TERM MUNICIPAL TRUST

BY: /s/ George F. Magera
George F. Magera, Assistant Secretary
August 30, 2004

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

NAME TITLE DATE
---- ----- ----

By: /s/ George F. Magera Attorney In Fact August 30, 2004
George F. Magera For the Persons
ASSISTANT SECRETARY Listed Below

John F. Donahue* Chairman and Trustee

J. Christopher Donahue* President and
Trustee (Principal Executive Officer)

Richard J. Thomas* Treasurer
(Principal Financial Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

Nicholas P. Constantakis* Trustee

John F. Cunningham* Trustee

Lawrence D. Ellis, M.D.* Trustee

Peter E. Madden* Trustee

Charles F. Mansfield, Jr.* Trustee

John E. Murray, Jr.* Trustee

Marjorie P. Smuts* Trustee

John S. Walsh* Trustee

* By Power of Attorney

Federated Short-Term Municipal Trust

PROSPECTUS

INSTITUTIONAL SHARES

CONTENTS

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

Average Annual Total Return Table

(For the periods ended December 31, 2003)

What are the Fund's Fees and Expenses?

FEDERATED SHORT-TERM MUNICIPAL TRUST

FEES AND EXPENSES

EXAMPLE

What are the Fund's Investment Strategies?

HEDGING

TEMPORARY DEFENSIVE INVESTMENTS

What are the Principal Securities in Which the Fund Invests?

TAX-EXEMPT SECURITIES

General Obligation Bonds

Special Revenue Bonds

Municipal Mortgage-Backed Securities

PACs

Private Activity Bonds

Variable Rate Demand Instruments

Municipal Notes

CREDIT ENHANCEMENT

DERIVATIVE CONTRACTS

Futures Contracts

Options

Swaps

Investment Ratings for Investment Grade Securities

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

CREDIT RISKS

CALL RISKS

PREPAYMENT RISKS

SECTOR RISKS

LIQUIDITY RISKS

TAX RISKS

LEVERAGE RISKS

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

How is the Fund Sold?

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Wire

By Check

BY AUTOMATED CLEARING HOUSE (ACH)

How to Redeem Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

By Mail

Signature Guarantees

PAYMENT METHODS FOR REDEMPTIONS

Redemption in Kind

LIMITATIONS ON REDEMPTION PROCEEDS

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

Who Manages the Fund?

THE FUND'S PORTFOLIO MANAGERS ARE:

Jeff A. Kozemchak

Mary Jo Ochson

ADVISORY FEES

Legal Proceedings

Financial Information

FINANCIAL HIGHLIGHTS

Financial Highlights

Federated Short-Term Municipal Trust

PROSPECTUS

INSTITUTIONAL SERVICE SHARES