FEDERATED GNMA TRUST

485BPOS 1 fgnmaform.htm FEDERATED GNMA TRUST



                                                       1933 Act File No. 2-75670
                                                      1940 Act File No. 811-3375

                       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.   38  ....................................        X
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                              FEDERATED GNMA 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
                            Federated Investors Tower
                       Pittsburgh, Pennsylvania 15222-3779
                     (Name and Address of Agent for Service)
                (Notice 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 G. Maloney, Esquire
                   Dickstein Shapiro Morin & Oshinsky, LLP
                               2101 L Street, N.W.
                             Washington, D.C. 20037

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated GNMA Trust

PROSPECTUS

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March 31, 2005

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INSTITUTIONAL SHARES

A mutual fund seeking current income by investing primarily in instruments issued or guaranteed by the Government National Mortgage Association.

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

CONTENTS

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? 7

What are the Specific Risks of Investing in the Fund? 12

What Do Shares Cost? 14

How is the Fund Sold? 16

How to Purchase Shares 17

How to Redeem Shares 18

Account and Share Information 20

Who Manages the Fund? 23

Legal Proceedings 24

Financial Information 25

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is current income. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its objective by investing primarily in fixed income securities issued or guaranteed by the Government National Mortgage Association (GNMA), including mortgage-backed securities. The Fund may invest up to 20% of its assets in other direct or indirect obligations of the U.S. government. The Fund limits its investments to those that would enable it to qualify as a permissible investment for national banks and federal savings associations.

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 Risk. Prices of the fixed-income securities in which the Fund invests generally fall when interest rates rise.

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

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Credit Risk. There is a possibility that issuers of securities in which the Fund may invest may default in the payment of interest or principal on the securities when due, which would cause the Fund to lose money.

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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.

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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Within the period shown in the bar chart, the Fund's Institutional Shares highest quarterly return was 4.99% (quarter ended June 30, 1995). Its lowest quarterly return was ( 1. 16)% (quarter ended June 30, 1999).

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Average Annual Total Return Table

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Return Before Taxes is shown. 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 GNMA Index (LBGNMA), a broad-based market index, and the Lipper GNMA Funds Average (LGNMAFA), an average of funds with similar investment objectives. Total returns for the index and average shown do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. The index and average are unmanaged, and it is not possible to invest directly in an index or average.

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(For the Periods Ended December 31, 2004)

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	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R> 3. 69%</R>	<R> 6. 41%</R>	<R>6. 88%</R>
Return After Taxes on Distributions¹	<R> 2. 07%</R>	<R> 4. 25%</R>	<R> 4. 43%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R> 2. 38%</R>	<R> 4. 15%</R>	<R> 4. 36%</R>
LBGNMA	<R> 4. 37%</R>	<R> 7. 01%</R>	<R> 7. 55%</R>
LGNMAFA	<R> 3. 20%</R>	<R> 6. 24%</R>	<R>6. 68%</R>

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1 After-tax returns are calculated using a standard set of assumptions. The states 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 redemptions, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect 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.

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What are the Fund's Fees and Expenses?

FEDERATED GNMA TRUST

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		0.40%
Distribution (12b-1) Fee		None
Shareholder Services Fee³		0.25%
Other Expenses		0.16%
Total Annual Fund Operating Expenses		0.81%

1 The percentages shown are based on expenses for the entire fiscal year ended January 31, 2005. 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 and the shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended January 31, 2005.
Total Waiver of Fund Expenses		0.18%
Total Actual Annual Fund Operating Expenses (after waivers)		0.63%
2 The adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.38% for the fiscal year ended January 31, 2005.
3 A portion of the shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The shareholder services fee paid by the Fund's Institutional Shares (after the voluntary waiver) was 0.09% for the fiscal year ended January 31, 2005.

EXAMPLE

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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 before waiver 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:

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1 Year	$	<R> 83</R>
3 Years	$	<R> 259</R>
5 Years	$	<R> 450</R>
10 Years	$	<R>1,002</R>

What are the Fund's Investment Strategies?

The Fund invests in a portfolio of U.S. government securities, consisting primarily of mortgage-backed securities, issued by GNMA. A description of the various types of securities in which the Fund invests, and their risks, immediately follows this strategy section.

The Fund's investment adviser (Adviser) allocates the Fund's portfolio holdings between GNMA backed securities and other U.S. government securities, such as U.S. Treasury securities. Mortgage-backed securities generally offer high relative yields versus comparable U.S. Treasury securities to compensate for prepayment risk. Prepayment risk is the unscheduled partial or complete payment of the principal outstanding on a mortgage loan by the homeowner. One important reason for prepayments is changes in market interest rates from the time of mortgage origination. The Adviser actively manages the Fund's portfolio, seeking the higher relative returns of mortgage-backed securities while attempting to limit the prepayment risk.

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The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage-backed securities with characteristics that make prepayments less likely. The Adviser attempts to assess the relative returns and risks of GNMA mortgage - backed securities by analyzing how the timing, amount and division of cash flows from the pool of mortgages underlying the security might change in response to changing economic and market conditions.

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The Adviser selects securities with longer or shorter durations based on its interest rate outlook. The Adviser generally shortens the portfolio's average duration when it expects interest rates to rise, and extends duration when it expects interest rates to fall. Duration measures the price sensitivity of a portfolio of fixed-income securities to changes in interest rates. The Adviser formulates its interest rate outlook and otherwise attempts to anticipate changes in economic and market conditions by analyzing a variety of factors such as:

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current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve's interest rates and inflation; and
changes in the supply of or demand for U.S. government securities.

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

The Adviser may use collateralized mortgage obligations (CMOs) with relatively predictable cash flows (such as sequential pay, planned amortization class and targeted amortization class), to reduce prepayment risk. The Fund will invest only in CMOs that are collateralized by GNMA obligations. In addition, the Adviser may use combinations of CMOs and other GNMA mortgage-backed securities, to attempt to provide a higher yielding investment with lower sensitivity to fluctuations in interest rates.

The Adviser may attempt to take advantage of current and potential yield differentials existing from time to time between various mortgage-backed securities in order to increase the Fund's return. The Fund may also engage in dollar roll transactions for their potential to enhance income.

Because the Fund refers to GNMA investments in its name, it will notify shareholders at least 60 days in advance of any change in its investment policies that would enable the Fund to normally invest less than 80% of its assets in GNMA investments.

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 give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.

PORTFOLIO TURNOVER

Dollar roll transactions and prepayments of mortgage-backed securities will cause the Fund to have an increased portfolio turnover rate. Portfolio turnover increases the Fund's trading costs and may have an adverse impact on the Fund's performance.

What are the Principal Securities in Which the Fund Invests?

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FIXED-INCOME SECURITIES

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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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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.

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The following describes the principal types of fixed-income securities in which the Fund may invest:

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Treasury Securities

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

GNMA Securities

GNMA securities are fixed-income securities that are issued or guaranteed by GNMA. The United States supports GNMA securities with its full faith and credit.

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

Mortgage-Backed Securities

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

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Mortgage-backed securities come in a variety of forms. The simplest forms of mortgage-backed securities are pass -through certificates. Holders of pass-through certificates receive a pro rata share of all net income and principal payments from the underlying mortgages. As a result, the holders assume all interest rate and prepayment risks of the underlying mortgages. Other mortgage-backed securities may have more complicated financial structures.

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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, currencies, commodities, financial indices or other assets. Some derivative contracts (such as futures, forwards, and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.

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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. The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty.

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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, 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:

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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 a commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts. The Fund can buy or sell financial futures.

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Options

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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. 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.

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Call Options

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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:

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Buy call options on financial futures in anticipation of an increase in the value of the underlying asset or instrument; and

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Write call options on portfolio securities 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.

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Put Options

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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:

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Buy put options on financial futures in anticipation of a decrease in the value of the underlying asset; and

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Write put options on portfolio securities 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.

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The Fund may also buy or write options, as needed, to close out existing option positions.

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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, and are known by a variety of names including caps, floors, and collars. Common swap agreements that the Fund may use include:

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INTEREST RATE SWAPS

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

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TOTAL RATE OF RETURN SWAPS

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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.

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Collateralized Mortgage Obligations (CMOs)

CMOs, including interests in real estate mortgage investment conduits (REMICs), allocate payments and prepayments from an underlying pass-through certificate among holders of different classes of mortgage-backed securities. This creates different prepayment and interest rate risks for each CMO class. The degree of increased or decreased prepayment risks depends upon the structure of the CMOs. However, the actual returns on any type of mortgage-backed security depend upon the performance of the underlying pool of mortgages, which no one can predict and will vary among pools.

Sequential CMOs

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

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PACs, TACs, and Companion Classes

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

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.

To Be Announced Securities (TBAs)

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

Dollar Rolls

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

Repurchase Agreements

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

Asset Coverage

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

What are the Specific Risks of Investing in the Fund?

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.

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PREPAYMENT RISKS

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Unlike traditional fixed-income securities, which may pay a fixed rate of interest until maturity, when the entire principal amount is due, payments on mortgage - backed securities include both interest and a partial payment of principal. This partial payment of principal may be composed of a scheduled principal payment as well as an unscheduled payment from the voluntary prepayment, refinancing, or foreclosure of the underlying loans. These unscheduled prepayments of principal can adversely affect the price and yield of mortgage-backed securities. For example, during periods of declining interest rates, repayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds at the lower interest rates then available. In addition, like other interest-bearing securities , the values of mortgage-backed securities generally fall when interest rates rise.

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Since rising interest rates generally result in decreased prepayments of mortgage -backed securities, this could cause mortgage securities to have greater average lives than expected and their value may decline more than other fixed-income securities. Conversely, when interest rates fall, their potential for capital appreciation is limited due to the existence of the prepayment feature.

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Generally, mortgage-backed securities compensate for greater prepayment risk by paying a higher yield. The additional interest paid for risk is measured by the difference between the yield of a mortgage-backed security and the yield of a U.S. Treasury security with a comparable weighted average life (the spread). An increase in the spread will cause the price of the security to decline. Spreads generally increase in response to adverse economic or market conditions.

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

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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 .

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NAV is determined as of the end of regular trading on the NYSE (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."

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The Fund generally values fixed-income securities according to prices 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. For mortgage-backed securities, prices furnished by the independent pricing service are based on the aggregate investment value of the projected cash flows to be generated by the security. For other fixed-income securities, prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities.

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If prices are not available from an independent pricing service, securities 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 security as provided by an investment dealer or other financial institution that deals in the security.

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Where a last sale price or market quotation for a portfolio security is not readily available, and no independent pricing service furnishes a price, the value of the security used in computing NAV is its fair value as determined in good faith under procedures approved by the Fund's Board. The Fund may use the fair value of a security to calculate its NAV when, for example: (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed; (2) trading in a portfolio security is suspended and not resumed prior to the normal market close; (3) a portfolio security is not traded in significant volume for a substantial period; or (4) the Fund's Adviser determines that the quotation or price for a portfolio security provided by a dealer or independent pricing service is inaccurate.

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Fair valuation procedures are also used where a significant event affecting the value of a portfolio security is determined to have occurred between the time as of which the price of the portfolio security is determined and the NYSE closing time as of which the Fund's NAV is computed. An event is considered significant if there is both an affirmative expectation that the security's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Significant events include significant general securities market movements occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE. For domestic fixed income securities, such events may occur where the cut-off time for the market information used by the independent pricing service is earlier than the end of regular trading on the NYSE. In such cases, use of fair valuation can reduce an investor's ability to seek to profit by estimating the Fund's NAV in advance of the time as of which NAV is calculated.

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In some cases, events affecting the issuer of a portfolio security may be considered significant events. Announcements concerning earnings, acquisitions, new products, management changes, litigation developments, a strike or natural disaster affecting the company's operations or regulatory changes or market developments affecting the issuer's industry occurring between the time as of which the price of the portfolio security is determined and the close of trading on the NYSE are examples of potentially significant events. There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund's NAV. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security's present value. Fair valuations generally remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued by an independent pricing service, or based on market quotations.

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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 institutions acting in an agency or fiduciary capacity or to individuals, directly or through investment professionals.

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SERVICE FEES

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The Fund may pay fees (Service Fees) to financial institutions 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 financial institutions directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial institutions.

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

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The Distributor may pay out of its own resources amounts (including items of material value) to certain financial institutions that support the sale of Shares or provide services to Fund shareholders. The amounts of these payments could be significant, and may create an incentive for the financial institution or its employees or associated persons to recommend or sell Shares of the Fund to you. In some cases, such payments may be made by or funded from the resources of companies affiliated with the Distributor (including the Adviser). These payments are not reflected in the fees and expenses listed in the fee table section of the Fund's prospectus because they are not paid by the Fund.

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These payments are negotiated and may be based on such factors as the number or value of Shares that the financial institution sells or may sell; the value of client assets invested; or the type and nature of services or support furnished by the financial institution. These payments may be in addition to payments made by the Fund to the financial institution under a Rule 12b-1 Plan and/or Service Fees arrangement. You can ask your financial institution for information about any payments it receives from the Distributor or the Fund and any services provided.

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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

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

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

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

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

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

Send requests by mail to:

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

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:

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

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Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

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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 Medallion signature guarantee is designed to protect your account from fraud. Obtain a Medallion 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.

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

If you purchase Shares just before 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.

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. Fund distributions of dividends and capital gains are taxable to you whether paid in cash or reinvested in the Fund. Dividends are taxable as ordinary income; capital gains are taxable at different rates depending upon the length of time the Fund holds its assets.

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

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FREQUENT TRADING POLICIES

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Frequent or short-term trading into and out of the Fund can have adverse consequences for the Fund and shareholders who use the Fund as a long-term investment vehicle. Such trading in significant amounts can disrupt the Fund's investment strategies (e.g., by requiring it to sell investments at inopportune times or maintain excessive short-term or cash positions to support redemptions), increase brokerage and administrative costs and affect the timing and amount of taxable gains distributed by the Fund. Investors engaged in such trading may also seek to profit by anticipating changes in the Fund's NAV in advance of the time as of which NAV is calculated.

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The Fund's Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund's Shares. The Fund monitors trading in Fund Shares in an effort to identify disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of 12 months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund's management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund's portfolio and its performance.

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The Fund's objective is that its restrictions on short-term trading should apply to all shareholders, regardless of the number or type of accounts in which Shares are held. However, the Fund anticipates that limitations on its ability to identify trading activity to specific shareholders, including where shares are held through intermediaries in multiple or omnibus accounts, will mean that these restrictions may not be able to be applied uniformly in all cases.

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PORTFOLIO HOLDINGS INFORMATION

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Information concerning the Fund's portfolio holdings is available in the "Products" section of Federated's website at FederatedInvestors.com . A complete listing of the Fund's portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include identification of the Fund's top ten issuer exposures and percentage breakdowns of the portfolio by type of security.

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To access this information from the "Products" section of the website, click on "Portfolio Holdings" and select the appropriate link opposite the name of the Fund, or select the name of the Fund from the menus on the "Products" section, and from the Fund's page click on the "Portfolio Holdings" or "Composition" link. A user is required to register on the website the first time the user accesses this information.

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You may also access from the "Products" section of the website portfolio information as of the end of the Fund's fiscal quarters. The Fund's annual and semiannual reports, which contain complete listings of the Fund's portfolio holdings as of the end of the Fund's second and fourth fiscal quarters, may be accessed by selecting the name of the Fund, clicking on "Prospectuses and Regulatory Reports" and selecting the link to the appropriate PDF. Complete listings of the Fund's portfolio holdings as of the end of the Fund's first and third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the "Products" section and then selecting the appropriate link opposite the name of the Fund. Fiscal quarter information is made available on the website within 70 days after the end of the fiscal quarter. This information is also available in reports filed with the SEC at the SEC's website at www.sec.gov.

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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 133 equity, fixed-income, and money market mutual funds as well as a variety of customized separately managed accounts, which totaled approximately $ 179 billion in assets as of December 31, 2004. Federated was established in 1955 and is one of the largest investment managers in the United States with approximately 1, 385 employees. Federated provides investment products to more than 5, 700 investment professionals and institutions.

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PORTFOLIO MANAGEMENT INFORMATION

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Todd A. Abraham

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Todd A. Abraham has been the Fund's primary Portfolio Manager since March 1999. He is Vice President of the Fund. Mr. Abraham has been a Portfolio Manager since 1995 and a Vice President of the Fund's Adviser since 1997. Mr. Abraham joined Federated in 1993 as an Investment Analyst and served as Assistant Vice President from 1995 to 1997. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992 to 1993. Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in Finance from Loyola College.

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Susan M. Nason

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Susan M. Nason has been designated as a back-up portfolio manager for the Fund, and as such does not have primary responsibility for the day-to-day management of the Fund's portfolio. Ms. Nason joined Federated in 1987 and has been a Senior Portfolio Manager and Senior Vice President of the Fund's Adviser since 1997. Ms. Nason served as a Portfolio Manager and Vice President of the Adviser from 1993 to 1997. Ms. Nason is a Chartered Financial Analyst and received her M.S.I.A. concentrating in Finance from Carnegie Mellon University.

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The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund.

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ADVISORY FEES

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

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 at 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 .

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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.

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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

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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.

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This information has been audited by Deloitte & Touche 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 January 31	2005		2004		2003		2002		2001
Net Asset Value, Beginning of Period	$11.31		$11.56		$11.34		$11.28		$10.61
Income From Investment Operations:
Net investment income	0.51	¹	0.51		0.62		0.68		0.72
Net realized and unrealized gain (loss) on investments	(0.08	)	(0.25	)	0.22		0.06		0.67
TOTAL FROM INVESTMENT OPERATIONS	0.43		0.26		0.84		0.74		1.39
Less Distributions:
Distributions from net investment income	(0.51	)	(0.51	)	(0.62	)	(0.68	)	(0.72	)
Net Asset Value, End of Period	$11.23		$11.31		$11.56		$11.34		$11.28
Total Return²	3.90	%³	2.28	%	7.60	%	6.76	%	13.53	%

Ratios to Average Net Assets:
Expenses	0.63	%	0.63	%	0.63	%	0.62	%	0.64	%
Net investment income	4.52	%	4.46	%	5.42	%	6.03	%	6.60	%
Expense waiver/reimbursement⁴	0.18	%	0.16	%	0.16	%	0.16	%	0.16	%
Supplemental Data:
Net assets, end of period (000 omitted)	$642,482		$758,178		$898,881		$793,286		$761,629
Portfolio turnover	71	%	70	%	55	%	46	%	54	%

1 Based on average shares outstanding.

2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.

3 During the period, the Fund was reimbursed by the Adviser, which had an impact of less than 0.01% on the total return. See Notes to Financial Statements (Note 5).

4 This voluntary 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 January 31, 2005, which can be obtained free of charge.

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A Statement of Additional Information (SAI) dated March 31, 2005, 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. The SAI contains a description of the Fund's policies and procedures with respect to the disclosure of its portfolio securities. 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 website at 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 website at 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.

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Investment Company Act File No. 811-3375

Federated
World-Class Investment Manager

Federated GNMA Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
FederatedInvestors.com
Contact us at 1-800-341-7400 or
FederatedInvestors.com/contact

Federated Securities Corp., Distributor

Cusip 314184102

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8022901A-IS (3/ 05)

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Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.

Federated
World-Class Investment Manager

Federated Investors 50 Years of Growth & Innovation

Federated GNMA Trust

PROSPECTUS

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March 31, 2005

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INSTITUTIONAL SERVICE SHARES

A mutual fund seeking current income by investing primarily in instruments issued or guaranteed by the Government National Mortgage Association.

Not FDIC Insured * May Lose Value * No Bank Guarantee

CONTENTS

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? 7

What are the Specific Risks of Investing in the Fund? 12

What Do Shares Cost? 13

How is the Fund Sold? 15

How to Purchase Shares 16

How to Redeem Shares 18

Account and Share Information 20

Who Manages the Fund? 23

Legal Proceedings 24

Financial Information 25

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 primarily in fixed-income securities issued or guaranteed by the Government National Mortgage Association (GNMA), including mortgage-backed securities. The Fund may invest up to 20% of its assets in other direct or indirect obligations of the U.S. government. The Fund limits its investments to those that would enable it to qualify as a permissible investment for national banks and federal savings associations.

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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 Risk . Prices of the fixed-income securities in which the Fund invests generally fall when interest rates rise.

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

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Credit Risk . There is a possibility that issuers of securities in which the Fund may invest may default in the payment of interest or principal on the securities when due, which would cause the Fund to lose money.

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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.

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.

Within the period shown in the bar chart, the Fund's Institutional Service Shares highest quarterly return was 4.94% (quarter ended June 30, 1995). Its lowest quarterly return was (1.20)% (quarter ended June 30, 1999).

Average Annual Total Return Table

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(For the periods ended December 31, 2004)

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	1 Year	5 Years	10 Years
Fund:
Return Before Taxes	<R> 3. 53%</R>	<R> 6. 24%</R>	<R>6. 70%</R>
Return After Taxes on Distributions¹	<R> 1. 96%</R>	<R> 4. 15%</R>	<R> 4. 32%</R>
Return After Taxes on Distributions and Sale of Fund Shares¹	<R> 2. 27%</R>	<R> 4. 05%</R>	<R> 4. 25%</R>
LBGNMA	<R> 4. 37%</R>	<R> 7. 01%</R>	<R> 7. 55%</R>
LGNMAFA	<R> 3. 20%</R>	<R> 6. 24%</R>	<R>6. 68%</R>

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What are the Fund's Fees and Expenses?

FEDERATED GNMA TRUST

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²		0.40%
Distribution (12b-1) Fee³		0.25%
Shareholder Services Fee		0.25%
Other Expenses		0.16%
Total Annual Fund Operating Expenses		1.06%

1 The percentages shown are based on expenses for the entire fiscal year ended January 31, 2005. 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 and the distributor waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended January 31, 2005.
Total Waivers of Fund Expenses		0.27%
Total Actual Annual Fund Operating Expenses (after waivers)		0.79%
2 The adviser voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time. The management fee paid by the Fund (after the voluntary waiver) was 0.38% for the fiscal year ended January 31, 2005.
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 January 31, 2005.

EXAMPLE

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

The Example assumes that you invest $10,000 in the Fund's Institutional Service Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's Institutional Service Shares operating expenses are before waivers as shown in the table and remain the same.

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Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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1 Year		<R>$ 108</R>
3 Years		<R>$ 337</R>
5 Years		<R>$ 585</R>
10 Years		<R>$ 1,294</R>

What are the Fund's Investment Strategies?

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The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage-backed securities with characteristics that make prepayments less likely. The Adviser attempts to assess the relative returns and risks of GNMA mortgage-backed securities by analyzing how the timing, amount and division of cash flows from the pool of mortgages underlying the security might change in response to changing economic and market conditions.

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current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve's monetary policy; and
changes in the supply of or demand for U.S. government securities.

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

TEMPORARY DEFENSIVE INVESTMENTS

PORTFOLIO TURNOVER

What are the Principal Securities in Which the Fund Invests?

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FIXED-INCOME SECURITIES

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The following describes the principal types of fixed-income securities in which the Fund may invest:

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Treasury Securities

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

GNMA Securities

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GNMA securities are fixed-income securities that are issued or guaranteed by GNMA. The United States supports GNMA securities with its full faith and credit.

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Mortgage-Backed Securities

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Mortgage-backed securities come in a variety of forms. The simplest forms of mortgage backed securities are pass -through certificates . Holders of pass-through certificates receive a pro rata share of all net income and principal payments from the underlying mortgages. As a result, the holders assume all interest rate and prepayment risks of the underlying mortgages. Other mortgage-backed securities may have more complicated financial structures.

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DERIVATIVE CONTRACTS

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

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Futures Contracts

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Options

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Call Options

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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:

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Buy call options on financial futures in anticipation of an increase in the value of the underlying asset or instrument; and

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Write call options on portfolio securities 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.

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Put Options

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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:

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Buy put options on financial futures in anticipation of a decrease in the value of the underlying asset; and

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Write put options on portfolio securities 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.

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The Fund may also buy or write options, as needed, to close out existing option positions.

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Swaps

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INTEREST RATE SWAPS

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TOTAL RATE OF RETURN SWAPS

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Collateralized Mortgage Obligations (CMOs)

Sequential CMOs

PACs, TACs and Companion Classes

SPECIAL TRANSACTIONS

Delayed Delivery Transactions

To Be Announced Securities (TBAs)

Dollar Rolls

Repurchase Agreements

Asset Coverage

What are the Specific Risks of Investing in the Fund?

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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PREPAYMENT RISKS

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Unlike traditional fixed-income securities, which may pay a fixed rate of interest until maturity, when the entire principal amount is due, payments on mortgage - backed securities include both interest and a partial payment of principal. This partial payment of principal may be composed of a scheduled principal payment as well as an unscheduled payment from the voluntary prepayment, refinancing or foreclosure of the underlying loans. These unscheduled payments of principal can adversely affect the price and yield of mortgage-backed securities. For example, during periods of declining interest rates, prepayments can be expected to accelerate, and the Fund would be required to reinvest the proceeds at the lower interest rates then available. In addition, like other interest-bearing securities, the values of mortgage-backed securities generally fall when interest rates rise.

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

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What Do Shares Cost?

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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."

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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 institutions and individuals, or to individuals, directly or through investment professionals.

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When the Distributor receives marketing fees, it may pay some or all of them to investment professionals. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

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RULE 12B-1 PLAN

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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, administration 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.

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SERVICE FEES

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ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

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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:

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

By Check

Make your check payable to The Federated Funds , note your account number on the check, and 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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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.

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

By Mail

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

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

Send requests by mail to:

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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:

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

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Signatures must be guaranteed by a financial institution which is a participant in a Medallion signature guarantee program if:

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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

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

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FREQUENT TRADING POLICIES

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The Fund's Board has approved policies and procedures intended to discourage excessive frequent or short-term trading of the Fund's Shares. The Fund monitors trading in Fund Shares in an effort to identify disruptive trading activity. The Fund monitors trades into and out of the Fund within a period of 30 days or less. The size of Share transactions subject to monitoring varies. However, where it is determined that a shareholder has exceeded the detection amounts twice within a period of 12 months, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. The Fund may also monitor trades into and out of the Fund over periods longer than 30 days, and if potentially disruptive trading activity is detected, the shareholder will be precluded from making further purchases or exchanges of Fund Shares. Whether or not the specific monitoring limits are exceeded, the Fund's management or the Adviser may determine from the amount, frequency or pattern of purchases and redemptions [or exchanges] that a shareholder is engaged in excessive trading that is or could be detrimental to the Fund and other shareholders and may preclude the shareholder from making further purchases or exchanges of Fund Shares. No matter how the Fund defines its limits on frequent trading of Fund Shares, other purchases and sales of Fund Shares may have adverse effects on the management of the Fund's portfolio and its performance.

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PORTFOLIO HOLDINGS INFORMATION

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Who Manages the Fund?

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PORTFOLIO MANAGEMENT INFORMATION

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Todd A. Abraham

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Susan M. Nason

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The Fund's SAI provides additional information about the Portfolio Manager's compensation, management of other accounts, and ownership of securities in the Fund.

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ADVISORY FEES

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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Financial Information

FINANCIAL HIGHLIGHTS

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This information has been audited by Deloitte & Touche 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 January 31	2005		2004		2003		2002		2001
Net Asset Value, Beginning of Period	$11.31		$11.56		$11.34		$11.28		$10.61
Income From Investment Operations:
Net investment income	0.49	¹	0.50		0.59		0.65		0.70
Net realized and unrealized gain (loss) on investments	(0.08	)	(0.26	)	0.23		0.07		0.67
TOTAL FROM INVESTMENT OPERATIONS	0.41		0.24		0.82		0.72		1.37
Less Distributions:
Distributions from net investment income	(0.49	)	(0.49	)	(0.60	)	(0.66	)	(0.70	)
Net Asset Value, End of Period	$11.23		$11.31		$11.56		$11.34		$11.28
Total Return²	3.73	%³	2.11	%	7.43	%	6.59	%	13.35	%

Ratios to Average Net Assets:
Expenses	0.79	%	0.79	%	0.79	%	0.78	%	0.80	%
Net investment income	4.37	%	4.30	%	5.26	%	5.86	%	6.43	%
Expense waiver/reimbursement⁴	0.27	%	0.25	%	0.25	%	0.25	%	0.25	%
Supplemental Data:
Net assets, end of period (000 omitted)	$60,175		$65,709		$101,057		$72,815		$58,873
Portfolio turnover	71	%	70	%	55	%	46	%	54	%

1 Based on average shares outstanding.

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

Total returns for periods of less than one year are not annualized.

3 During the period, the Fund was reimbursed by the Adviser, which had an impact of 0.09% on the total return. See Notes to Financial Statements (Note 5).

4 This voluntary 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 January 31, 2005, which can be obtained free of charge.

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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 website at FederatedInvestors.com.

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Investment Company Act File No. 811-3375

Federated
World-Class Investment Manager

Federated GNMA Trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
FederatedInvestors.com
Contact us at 1-800-341-7400 or
FederatedInvestors.com/contact

Federated Securities Corp., Distributor

Cusip 314184201

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8022901A-SS (3/05)

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Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.

FEDERATED GNMA TRUST

STATEMENT OF ADDITIONAL INFORMATION

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MARCH 31, 2005

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INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Institutional Shares and
Institutional Service Shares of Federated GNMA Trust (Fund), dated March 31,
2005.

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.

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CONTENTS

How is the Fund Organized?...............2
Securities in Which the Fund Invests.....2
What Do Shares Cost?.....................7
How is the Fund Sold?....................7
Subaccounting Services...................8
Redemption in Kind.......................8
Massachusetts Partnership Law............8
Account and Share Information............9
Tax Information..........................9
Who Manages and Provides Services
to the Fund?...........................9
How Does the Fund Measure Performance?..19
Who is Federated Investors, Inc.?.......21
Financial Information...................21
Addresses...............................21
Appendix................................23

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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 December 10,
1981. 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. The Fund's investment
adviser is Federated Investment Management Company (Adviser).

SECURITIES IN WHICH THE FUND INVESTS

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

Fixed Income Securities

Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time.

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

The following describes the types of fixed income securities in which the Fund
may invest:

Treasury Securities

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

GNMA Securities

GNMA securities are fixed income securities that are issued or guaranteed by
GNMA. The United States supports GNMA securities with its full faith and credit.

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

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Mortgage-Backed Securities

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

Mortgage-backed securities come in a variety of forms. The simplest forms of
mortgage-backed securities are pass-through certificates. Holders of
pass-through certificates receive a pro rata share of all net income and
principal payments from the underlying mortgages. As a result, the holders
assume all interest rate and prepayment risks of the underlying mortgages. Other
mortgage-backed securities may have more complicated financial structures.

DERIVATIVE CONTRACTS

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

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

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

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

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

Futures Contracts

Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. 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.

Options

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.

Call Options

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:

o Buy call options on financial futures in anticipation of an increase in the
value of the underlying asset or instrument; and

o Write call options on portfolio securities 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.

Put Options

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:

o Buy put options on financial futures in anticipation of a decrease in the
value of the underlying asset; and

o Write put options on portfolio securities 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.

Swaps

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

INTEREST RATE SWAPS

As described in the prospectus, the Fund enters into interest rate swaps. One
example of an interest rate swap is a $10 million London Interbank Offer Rate
(LIBOR) swap would require one party to pay the equivalent of the LIBOR 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.

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Collateralized Mortgage Obligations (CMOs)

CMOs, including interests in real estate mortgage investment conduits (REMICs),
allocate payments and prepayments from an underlying pass-through certificate
among holders of different classes of mortgage-backed securities. This creates
different prepayment and interest rate risks for each CMO class. The degree of
increased or decreased prepayment risks depends upon the structure of the CMOs.
However, the actual returns on any type of mortgage-backed security depend upon
the performance of the underlying pool of mortgages, which no one can predict
and will vary among pools.

SEQUENTIAL CMOS

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

PACS, TACS AND COMPANION CLASSES

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

SPECIAL TRANSACTIONS

Inter-Fund Borrowing and Lending Arrangements

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.

Repurchase Agreements

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

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

Repurchase agreements are subject to credit risks. The Fund limits repurchase
agreements to dealers and banks to those rated in the highest rating category by
Standard and Poor's.

Reverse Repurchase Agreements

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

Delayed Delivery Transactions

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

TO BE ANNOUNCED SECURITIES (TBAS)

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

Dollar Rolls

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

Securities Lending

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

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

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

Securities lending activities are subject to interest rate risks and credit
risks.

Asset Coverage

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

INVESTMENT RISKS

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.

Interest Rate Risks

|X| 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.

|X| 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.

Prepayment Risks

|X| Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments
on mortgage-backed securities include both interest and a partial payment
of principal. This partial payment of principal may be comprised of a
scheduled principal payment as well as an unscheduled payment from the
voluntary prepayment, refinancing, or foreclosure of the underlying loans.
These unscheduled payments of principal can adversely affect the price and
yield of mortgage-backed securities. For example, during periods of
declining interest rates, prepayments can be expected to accelerate, and
the Fund would be required to reinvest the proceeds at the lower interest
rates then available. In addition, like other interest-bearing securities,
the values of mortgage-backed securities generally fall when interest rates
rise.

|X| Since rising interest rates generally result in decreased prepayments of
mortgage-backed securities, this could cause mortgage securities to have
greater average lives than expected and their value may decline more than
other fixed income securities. Conversely, when interest rates fall, their
potential for capital appreciation is limited due to the existence of the
prepayment feature.

|X| Generally, mortgage-backed securities compensate for greater prepayment
risk by paying a higher yield. The additional interest paid for risk is
measured by the difference between the yield of a mortgage-backed security
and the yield of a U.S. Treasury security and with a comparable weighted
average life (the spread). An increase in the spread will cause the price
of the security to decline. Spreads generally increase in response to
adverse economic or market conditions.

Credit Risks

|X| 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.

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

FUNDAMENTAL INVESTMENT OBJECTIVE

The Fund's investment objective is current income. The Fund will invest
primarily in mortgage-backed securities issued fully or guaranteed as to
principal and interest by GNMA. In addition, to the extent that the Fund will
invest in other mortgaged backed securities, as described below, these will be
collateralized by GNMA obligations. The investment objective may not be changed
by the Fund's Trustees 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 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 securities of that issuer, or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

Borrowing Money and Issuing Senior Securities

The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the Investment Company Act of 1940 ("1940
Act").

Investing in Real Estate

The Fund may not purchase or sell real estate, provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal, or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
The Fund may exercise its rights under agreements relating to such securities,
including the right to enforce security interests and to hold real estate
acquired by reason of such enforcement until that real estate can be liquidated
in an orderly manner.

Investing in Commodities

The Fund may not purchase or sell physical commodities, provided that the Fund
may purchase securities of companies that deal in commodities.

Underwriting

The Fund may not underwrite the securities of other issuers, except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio securities, under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.

Lending

The Fund will not make loans, provided that this restriction does not prevent
the Fund from purchasing debt obligations, entering into repurchase agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.

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
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.

Purchases on Margin

The Fund will not purchase securities on margin, provided that the Fund may
obtain short-term credits necessary for the clearance of purchases and sales of
securities.

Pledging Assets

The Fund will not mortgage, pledge or hypothecate any of its assets, provided
that this shall not apply to the transfer of securities in connection with any
permissible borrowing or to collateral arrangements in connection with
permissible activities.

<R>

Investing in Securities of Other Investment Companies

The Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.
Therefore, any such investment by the Fund may be subject to duplicate expenses.
However, the Adviser believes that the benefits and efficiencies of this
approach should outweigh the potential additional expenses. The Fund may also
invest in such securities directly.

Illiquid Securities

The Fund will not purchase securities for which there is no readily available
market, or enter into repurchase agreements or purchase time deposits that the
fund cannot dispose of within seven days, if immediately after and as a result,
the value of such securities would exceed, in the aggregate, 15% of the Fund's
net assets.

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." and "bank
instruments."

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.

</R>

PORTFOLIO TURNOVER

The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. During the fiscal years ended January 31, 2004
and 2003, the portfolio turnover rates were 70% and 55%, respectively.

DETERMINING MARKET VALUE OF SECURITIES

<R>

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

|X| for mortgage-backed securities, based on the aggregate investment value of
the projected cash flows to be generated by the security, as furnished by
an independent pricing service;

|X| for other 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

|X| for all other securities at fair value as determined in good faith by 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.

<R>

RULE 12b-1 PLAN (INSTITUTIONAL SERVICE SHARES)

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 Plan is also designed to cover the cost of administrative services
performed in conjunction with the sale of Shares, including, but not limited to,
shareholder services, recordkeeping services and educational services, as well
as the costs of implementing and operating the Plan. 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.

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 (INSTITUTIONAL SHARES AND INSTITUTIONAL SERVICE SHARES

The fund may pay fees (Service Fees) to financial institutions 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.

RETIREMENT PLAN SERVICE FEES (CLASS K SHARES)

In addition to the Retirement Plan Program Servicing Payments described below,
the Fund, directly, or indirectly through its Transfer Agent or another service
provider may compensate retirement plan providers for additional services
rendered by the retirement plan in connection with investments in the Fund

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

The Distributor may pay out of its own resources amounts (including items of
material value) to certain financial institutions. In some cases, such payments
may be made by, or funded from the resources of, companies affiliated with the
Distributor (including the Adviser). While NASD regulations limit the sales
charges that you may bear, there are no limits with regard to the amounts that
the Distributor may pay out of its own resources. In addition to the payments
which are generally described herein and in the prospectus, the financial
institution also may receive payments under the Rule 12b-1 Plan and/or Service
Fees.

You can ask your financial institution for information about any payments it
receives from the Distributor or the Federated funds and any services provided.

The following examples illustrate the types of instances in which the
Distributor may make additional payments to financial institutions.

Supplemental Payments

The Distributor may make supplemental payments to certain financial institutions
that are holders or dealers of record for accounts in one or more of the
Federated funds. These payments may be based on such factors as the number or
value of Shares the financial institution sells or may sell; the value of client
assets invested; or the type and nature of services or support furnished by the
financial institution.

Processing Support Payments

The Distributor may make payments to financial institutions that sell Federated
fund shares to help offset their costs associated with client account
maintenance support, statement processing and transaction processing. The types
of payments that the Distributor may make under this category include payment of
ticket charges on a per transaction basis; payment of networking fees; and
payment for ancillary services such as setting up funds on the financial
institution's mutual fund trading system.

Retirement Plan Program Servicing Payments

The Distributor may make payments to certain financial institutions who sell
Federated fund shares through retirement plan programs. A financial institution
may perform retirement plan program services itself or may arrange with a third
party to perform retirement plan program services. In addition to participant
recordkeeping, reporting, or transaction processing, retirement plan program
services may include services rendered to a plan in connection with
fund/investment selection and monitoring; employee enrollment and education;
plan balance rollover or separation, or other similar services.

Other Benefits to Financial Institutions

From time to time, the Distributor, at its expense, may provide additional
compensation to financial institutions that sell or arrange for the sale of
Shares. Such compensation may include financial assistance to financial
institutions that enable the Distributor to participate in or present at
conferences or seminars, sales or training programs for invited employees,
client and investor events and other financial institution-sponsored events.

The Distributor also may hold or sponsor, at its expense, sales events,
conferences and programs for employees or associated persons of financial
institutions and may pay the travel and lodging expenses of attendees. The
Distributor also may provide, at its expense, meals and entertainment in
conjunction with meetings with financial institutions. Other compensation may be
offered to the extent not prohibited by applicable laws, regulations or the
rules of any self-regulatory agency, such as the NASD.

</R>

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 Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of
the Trust.

In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust 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.

<R>

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

</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.

<R>

As of March 2, 2005, the following shareholders owned of record, beneficially,
or both, 5% or more of outstanding Institutional Shares: Charles Schwab &
CO. Inc, San Francisco, CA, owned approximately 9,161,786 Shares (16.10%);
HUBCO, Birmingham, AL, owned approximately 3,779,502 Shares (6.64%) and South
Valley Bank & Trust, Medford, OR, owned approximately 3,504,745 Shares
(6.16%) .

As of March 2, 2005, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Institutional Service
Shares: US Bank National Associations Trustee, Milwaukee, WI, owned
approximately 417,110 Shares (7.87%) and Paychex Securities Corporation, W.
Henrietta, NY owned approximately 419,640 Shares (7.91%).

</R>

TAX INFORMATION

FEDERAL INCOME TAX

The Fund intends to meet requirements of Subchapter M of the Internal Revenue
Code (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?

<R>

BOARD OF TRUSTEES

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. As of December 31, 2004, the Federated Fund Complex
consisted of 44 investment companies (comprising 133 portfolios). Unless
otherwise noted, each Officer is elected annually. Unless otherwise noted, each
Board member oversees all portfolios in the Federated Fund Complex and serves
for an indefinite term.

As of March 2, 2005, the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Shares.

INTERESTED TRUSTEES BACKGROUND AND COMPENSATION

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

Principal Occupations: Principal $0 $0
J. Christopher Executive Officer and President
Donahue* of the Federated Fund Complex;
Birth Date: April Director or Trustee of some of
11, 1949 the Funds in the Federated Fund
PRESIDENT AND Complex; President, Chief
TRUSTEE Executive Officer and Director,
Began serving: Federated Investors, Inc.;
August 2000 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 $1,500.13 $148,500
Lawrence D. Ellis, or Trustee of the Federated Fund
M.D.* Complex; Professor of Medicine,
Birth Date: October University of Pittsburgh;
11, 1932 Medical Director, University of
3471 Fifth Avenue Pittsburgh Medical Center
Suite 1111 Downtown; Hematologist,
Pittsburgh, PA Oncologist and Internist,
TRUSTEE University of Pittsburgh Medical
Began serving: Center.
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
Birth Date Aggregate Total
Address Principal Occupation(s) for Past Compensation Compensation
Positions Held with Five Years, Other Directorships From Fund From Fund and
Fund Held and Previous Position(s) (past Federated Fund
Date Service Began fiscal year) Complex
(past calendar
year)
Principal Occupation: Director $1,650.14 $163,350
Thomas G. Bigley or Trustee of the Federated Fund
Birth Date: Complex.
February 3, 1934
15 Old Timber Trail Other Directorships Held:
Pittsburgh, PA Director, Member of Executive
TRUSTEE Committee, Children's Hospital
Began serving: of Pittsburgh; Director,
November 1994 University of Pittsburgh.

Previous Position: Senior
Partner, Ernst & Young LLP.

Principal Occupations: Director $1,650.14 $163,350
John T. Conroy, Jr. or Trustee of the Federated Fund
Birth Date: June Complex; Chairman of the Board,
23, 1937 Investment Properties
Investment Corporation; Partner or Trustee
Properties in private real estate ventures
Corporation in Southwest Florida.
3838 North Tamiami
Trail Previous Positions: President,
Suite 402 Investment Properties
Naples, FL Corporation; Senior Vice
TRUSTEE President, John R. Wood and
Began serving: Associates, Inc., Realtors;
August 1991 President, Naples Property
Management, Inc. and Northgate
Village Development Corporation.

Principal Occupation: Director $1,650.14 $163,350
Nicholas P. or Trustee of the Federated Fund
Constantakis Complex.
Birth Date:
September 3, 1939 Other Directorships Held:
175 Woodshire Drive Director and Member of the Audit
Pittsburgh, PA Committee, Michael Baker
TRUSTEE Corporation (engineering and
Began serving: energy services worldwide).
February 1998
Previous Position: Partner,
Anderson Worldwide SC.

Principal Occupation: Director $1,500.13 $148,500
John F. Cunningham or Trustee of the Federated Fund
Birth Date: March Complex.
5, 1943
353 El Brillo Way Other Directorships Held:
Palm Beach, FL Chairman, President and Chief
TRUSTEE Executive Officer, Cunningham
Began serving: & Co., Inc. (strategic
January 1999 business consulting); Trustee
Associate, Boston College.

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 $1,500.13 $148,500
Peter E. Madden or Trustee of the Federated Fund
Birth Date: March Complex.
16, 1942
One Royal Palm Way Other Directorships Held: Board
100 Royal Palm Way of Overseers, Babson College.
Palm Beach, FL
TRUSTEE Previous Positions:
Began serving: Representative, Commonwealth of
August 1991 Massachusetts General 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 $1,650.14 $163,350
Charles F. or Trustee of the Federated Fund
Mansfield, Jr. Complex; Management Consultant;
Birth Date: April Executive Vice President, DVC
10, 1945 Group, Inc. (marketing,
80 South Road communications and technology)
Westhampton Beach, (prior to 9/1/00).
NY
TRUSTEE Previous Positions: Chief
Began serving: Executive Officer, PBTC
January 1999 International Bank; 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 $1,800.15 $178,200
John E. Murray, or Trustee of the Federated Fund
Jr., J.D., S.J.D. Complex; Chancellor and Law
Birth Date: Professor, Duquesne University;
December 20, 1932 Partner, Murray, Hogue &
Chancellor, Lannis.
Duquesne University
Pittsburgh, PA Other Directorships Held:
TRUSTEE Director, Michael Baker Corp.
Began serving: (engineering, construction,
February 1995 operations and technical
services).

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 $1,500.13 $148,500
Marjorie P. Smuts or Trustee of the Federated Fund
Birth Date: June Complex; Public
21, 1935 Relations/Marketing
4905 Bayard Street Consultant/Conference
Pittsburgh, PA Coordinator.
TRUSTEE
Began serving: Previous Positions: National
February 1984 Spokesperson, Aluminum Company
of America; television producer;
President, Marj Palmer Assoc.;
Owner, Scandia Bord.

Principal Occupations: Director $1,500.13 $148,500
John S. Walsh or Trustee of the Federated Fund
Birth Date: Complex; President and Director,
November 28, 1957 Heat Wagon, Inc. (manufacturer
2604 William Drive of construction temporary
Valparaiso, IN heaters); President and
TRUSTEE Director, Manufacturers
Began serving: Products, Inc. (distributor of
January 1999 portable construction heaters);
President, Portable Heater
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
John W. McGonigle and Secretary of the Federated Fund Complex;
Birth Date: October 26, 1938 Executive Vice President, Secretary and Director,
EXECUTIVE VICE PRESIDENT AND Federated Investors, Inc.
SECRETARY
Began serving: December 1981 Previous Positions: Trustee, Federated Investment
Management Company and Federated Investment
Counseling; Director, Federated Global Investment
Management Corp., Federated Services Company and
Federated Securities Corp.

Principal Occupations: Principal Financial
Richard J. Thomas Officer and Treasurer of the Federated Fund
Birth Date: June 17, 1954 Complex; Senior Vice President, Federated
TREASURER Administrative Services.
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
Richard B. Fisher President of some of the Funds in the Federated
Birth Date: May 17, 1923 Fund Complex; Vice Chairman, Federated Investors,
VICE PRESIDENT Inc.; Chairman, Federated Securities Corp.
Began serving: December 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.

---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Principal Occupations: Robert J. Ostrowski has
Robert J. Ostrowski been the Fund's Portfolio Manager since May 2004.
Birth Date: April 26, 1963 Mr. Ostrowski joined Federated in 1987 as an
CHIEF INVESTMENT OFFICER Investment Analyst and became a Portfolio Manager
Began serving: May 2004 in 1990. He was named Chief Investment Officer of
taxable fixed income products in 2004 and also
serves as a Senior Portfolio Manager. He has been
a Senior Vice President of the Fund's Adviser
since 1997. Mr. Ostrowski is a Chartered
Financial Analyst. He received his M.S. in
Industrial Administration from Carnegie Mellon
University.
-----------------------------------------------------

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

Todd A. Abraham has been the Fund's Portfolio
Todd A. Abraham Manager since March 1999. Mr. Abraham has been a
Birth Date: February 10, 1966 Portfolio Manager since 1995 and a Vice President
VICE PRESIDENT of the Fund's Adviser since 1997. Mr. Abraham
Began serving: November 1999 joined Federated in 1993 as an Investment Analyst
and served as Assistant Vice President from 1995
to 1997. Mr. Abraham served as a Portfolio
Analyst at Ryland Mortgage Co. from 1992-1993.
Mr. Abraham is a Chartered Financial Analyst and
received his M.B.A. in Finance from Loyola
College.

** Officers do not receive any compensation from the Fund(s).
------------------------------------------------------------------------------

COMMITTEES OF THE BOARD
Meetings
Board Committee Held
Committee Members Committee Functions During
Last
Fiscal
Year
Executive In between meetings of the full Board, Six
John F. Donahue the Executive Committee generally may
John E. Murray, exercise all the powers of the full Board
Jr., J.D., S.J.D. in the management and 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 Nine
Thomas G. Bigley to oversee the accounting and financial
John T. Conroy, reporting process of the Fund, the Fund`s
Jr. internal control over financial
Nicholas P. reporting, and the quality, integrity and
Constantakis independent audit of the Fund`s financial
Charles F. statements. The Committee also oversees
Mansfield, Jr. or 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
registered public accounting firm, acts
as a liaison between the independent
registered public accounting firm and the
Board and reviews the Fund`s internal
audit function.

Nominating One
Thomas G. Bigley The Nominating Committee, whose members
John T. Conroy, consist of all Independent Trustees,
Jr. selects and nominates persons for
Nicholas P. election to the Fund`s Board when
Constantakis vacancies occur. The Committee will
John F. consider candidates recommended by
Cunningham shareholders, Independent Trustees,
Peter E. Madden officers or employees of any of the
Charles F. Fund`s agents or service providers and
Mansfield, Jr. counsel to the Fund. Any shareholder who
John E. Murray, desires to have an individual considered
Jr. for nomination by the Committee must
Marjorie P. Smuts submit a recommendation in writing to the
John S. Walsh 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.

BOARD OWNERSHIP OF SHARES IN THE FUND AND IN THE FEDERATED FAMILY OF
INVESTMENT COMPANIES AS OF DECEMBER 31, 2004
---------------------------------------------------------------------------------------
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 $1-10,000 Over $100,000
J. Christopher Donahue None Over $100,000
Lawrence D. Ellis, M.D. Over $100,000 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
</R>
---------------------------------------------------------------------------------------

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.

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.

</R>

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>

Portfolio Manager Information

The following information about the Fund's Portfolio Manager is provided as of
the end of the Fund's most recently completed fiscal year.

Total Number of Other
Other Accounts Managed by Accounts Managed/
Todd Abraham Total Assets*
Registered Investment Companies 9 funds / $3,964.23
million
Other Pooled Investment Vehicles 0
Other Accounts 0

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

*None of the Accounts has an advisory fee that is based on the performance of
the account.

Dollar value range of shares owned in the Fund: none.

Todd Abraham is paid a fixed base salary and a variable annual incentive. Base
salary is determined within a market competitive position-specific salary range,
based on the portfolio manager's experience and performance. The annual
incentive amount is determined based on multiple performance criteria using a
Balanced Scorecard methodology, and may be paid entirely in cash, or in a
combination of cash and restricted stock of Federated Investors, Inc.
(Federated). There are four weighted performance categories in the Balanced
Scorecard. Investment Product Performance is the predominant factor. Of lesser
importance are: Leadership/Teamwork/Communication, Customer Satisfaction, and
Financial Success. The total Balanced Scorecard "score" is applied against an
annual incentive opportunity that is competitive in the market for this
portfolio manager role to determine the annual incentive payment.

Investment Product Performance ("IPP") is measured on a rolling 1, 3, and 5
calendar year pre-tax total return basis vs. the Fund's benchmark (i.e. Lehman
Brothers Fixed Rate Mortgage-Backed Securities Index), and on a rolling 3 and 5
calendar year pre-tax total return basis vs. the Fund's designated peer group of
comparable funds (e.g., funds in the same category as established by Lipper).
These performance periods are adjusted if the portfolio manager has been
managing the fund for less than five years; funds with less than one year of
performance history are excluded. As noted above, Todd Abraham is also the
portfolio manager for other accounts in addition to the Fund. Such other
accounts may have different benchmarks. The performance of certain of these
accounts is excluded when calculating IPP; IPP is calculated with an equal
weighting of each included account managed by the portfolio manager. In
addition, Mr. Abraham is a member of an Investment Team that establishes
guidelines on various performance drivers (e.g., currency, duration, sector) for
Taxable Fixed Income funds. A portion of the IPP score is determined by
Federated senior management's assessment of the team's contribution.

Leadership/Teamwork/Communication is assessed by the Chief Investment Officer in
charge of the portfolio manager's group, with input from the portfolio manager's
co-workers.

Customer Satisfaction is assessed through two components: Sales and Marketing
Support and Net Sales. Federated's senior management assesses the quality,
amount and effectiveness of sales and marketing support, with input from sales
management. Net sales are assumed to indirectly reflect customer satisfaction,
so net fund flows may be assessed relative to industry trends for the fund
category.

Financial success is assessed to tie the portfolio manager's bonus, in part, to
Federated's overall financial health. Half of the financial success category is
measured based on growth of the portfolio manager's funds (assets under
management and revenues), and supporting the appropriate number of funds to
improve efficiency and enhance strong fund performance. Half of the financial
success category is based on the growth in assets under management and revenues
attributable to the portfolio manager's Department, to encourage teamwork. The
financial success score is lowered if Federated's overall financial targets are
not achieved.

In addition, Mr. Abraham was awarded a grant of restricted Federated stock.
Awards of restricted stock are discretionary and are made in variable amounts
based on the subjective judgment of Federated's senior management.

As a general matter, certain conflicts of interest may arise in connection with
a portfolio manager's management of a fund's investments, on the one hand, and
the investments of other accounts for which the portfolio manager is
responsible, on the other. For example, it is possible that the various accounts
managed could have different investment strategies that, at times, might
conflict with one another to the possible detriment of the fund. Alternatively,
to the extent that the same investment opportunities might be desirable for more
than one account, possible conflicts could arise in determining how to allocate
them. Other potential conflicts might include conflicts created by specific
portfolio manager compensation arrangements, and conflicts relating to selection
of brokers or dealers to execute fund portfolio trades and/or specific uses of
commissions from Fund portfolio trades (for example, research, or "soft
dollars"). The Adviser has structured the portfolio managers' compensation in a
manner, and the Fund has adopted policies and procedures, reasonably designed to
safeguard the Fund from being negatively affected as a result of any such
potential conflicts.

Susan Nason is the back-up portfolio manager for the Fund and is not responsible
for day-to-day management of the Fund.

</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.

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

<R>

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, as well as Shares of the Fund, 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.

</R>

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.

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.

<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 website. Go to
FederatedInvestors.com; select "Products;" select the Fund; then use the link to
"Prospectuses and Regulatory Reports" to access the link to Form N-PX.

PORTFOLIO HOLDINGS INFORMATION

Information concerning the Fund's portfolio holdings is available in the
"Products" section of Federated's website at FederatedInvestors.com. A complete
listing of the Fund's portfolio holdings as of the end of each calendar quarter
is posted on the website 30 days (or the next business day) after the end of the
quarter and remains posted until replaced by the information for the succeeding
quarter. Summary portfolio composition information as of the close of each month
is posted on the website 15 days (or the next business day) after month-end and
remains until replaced by the information for the succeeding month. The summary
portfolio composition information may include identification of the Fund's top
ten issuer exposures and percentage breakdowns of the portfolio by type of
security.

To access this information from the "Products" section of the website, click on
"Portfolio Holdings" and select the appropriate link opposite the name of the
Fund, or select the name of the Fund from the menus on the "Products" section,
and from the Fund's page click on the "Portfolio Holdings" or "Composition"
link. A user is required to register on the website the first time the user
accesses this information.

You may also access from the "Products" section of the website portfolio
information as of the end of the Funds' fiscal quarters. The Fund's annual and
semiannual reports, which contain complete listings of the Fund's portfolio
holdings as of the end of the Fund's second and fourth fiscal quarters, may be
accessed by selecting the name of the Fund, clicking on "Prospectuses and
Regulatory Reports" and selecting the link to the appropriate PDF. Complete
listings of the Fund's portfolio holdings as of the end of the Fund's first and
third fiscal quarters may be accessed by selecting "Portfolio Holdings" from the
"Products" section and then selecting the appropriate link opposite the name of
the Fund. Fiscal quarter information is made available on the website within 70
days after the end of the fiscal quarter. This information is also available in
reports filed with the SEC at the SEC's website at www.sec.gov.

The disclosure policy of the Fund and the Adviser prohibits the disclosure of
portfolio holdings information to any investor or intermediary before the same
information is made available to other investors. Employees of the Adviser or
its affiliates who have access to nonpublic information concerning the Fund's
portfolio holdings are prohibited from trading securities on the basis of this
information. Such persons must report all personal securities trades and obtain
pre-clearance for all personal securities trades other than mutual fund shares.

Firms that provide administrative, custody, financial, accounting, legal or
other services to the Fund may receive nonpublic information about Fund
portfolio holdings for purposes relating to their services. The Fund may also
provide portfolio holdings information to publications that rate, rank or
otherwise categorize investment companies. Traders or portfolio managers may
provide "interest" lists to facilitate portfolio trading if the list reflects
only that subset of the portfolio for which the trader or portfolio manager is
seeking market interest. A list of service providers, publications and other
third parties who may receive nonpublic portfolio holdings information appears
in the Appendix to this SAI.

The furnishing of nonpublic portfolio holdings information to any third party
(other than authorized governmental or regulatory personnel) requires the prior
approval of the President of the Adviser and of the Chief Compliance Officer of
the Fund[s]. The President of the Adviser and the Chief Compliance Officer will
approve the furnishing of nonpublic portfolio holdings information to a third
party only if they consider the furnishing of such information to be in the best
interests of the Fund and its shareholders. In that regard, and to address
possible conflicts between the interests of Fund shareholders and those of the
Adviser and its affiliates, the following procedures apply. No consideration may
be received by the Fund, the Adviser, any affiliate of the Adviser or any of
their employees in connection with the disclosure of portfolio holdings
information. Before information is furnished, the third party must sign a
written agreement that it will safeguard the confidentiality of the information,
will use it only for the purposes for which it is furnished and will not use it
in connection with the trading of any security. Persons approved to receive
nonpublic portfolio holdings information will receive it as often as necessary
for the purpose for which it is provided. Such information may be furnished as
frequently as daily and often with no time lag between the date of the
information and the date it is furnished. The Board receives and reviews
annually a list of the persons who receive nonpublic portfolio holdings
information and the purposes for which it is furnished.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to review by the Fund's
Board.

</R>

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

ADMINISTRATOR

Federated 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 Fee Net Assets of the Federated 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.

CUSTODIAN

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

<R>

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, the Fund's registered transfer agent,
maintains all necessary shareholder records.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The independent registered public accounting firm for the Fund, Deloitte &
Touche LLP, conducts its audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States), 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.

FEES PAID BY THE FUND FOR SERVICES

2005 2004 2003
For the Year Ended
January 31
Advisory Fee Earned $3,009,107 $3,703,550 $3,862,149
Advisory Fee Waiver $128,633 -- --
Administrative Fee $573,235 $698,394 $726,084
12b-1 Fee:
Institutional Service -- -- --
Shares
Shareholder Services Fee:
Institutional Shares $620,095 -- --
Institutional Service $158,207 -- --
Shares

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

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

</R>

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

<R>

Total returns are given for the one-year, five-year and ten-year periods ended
January 31, 2005.

Yield is given for the 30-day period ended January 31, 2005.

30-Day 1 Year 5 Years 10 Years
Period
Institutional
Shares:
Total Return
Before Taxes N/A 3.90% 6.74% 6.75%
After Taxes on N/A 2.27% 4.60% 4.31%
Distributions
After Taxes on 2.51% 4.45% 4.25%
Distributions and N/A
Sale of Shares
Yield 4.59% N/A N/A N/A

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

30-Day Period 1 Year 5 Years 10 Years
Institutional
Service Shares:
Total Return
Before Taxes N/A 3.73% 6.57% 6.56%
After Taxes on N/A 2.16% 4.50% 4.20%
Distributions
After Taxes on N/A 2.40% 4.35% 4.14%
Distributions and
Sale of Shares
Yield 4.43%
</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

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

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

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on
how such developments could impact the 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. ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time to time,
the Fund will quote its Lipper ranking in the "GNMA Funds" category in
advertising and sales literature.

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.

Lehman Brothers GNMA Index

Lehman Brothers GNMA Index is a total, comprehensive GNMA index comprised of
30-year GNMA pass throughs, 15-year GNMA pass throughs, and GNMA GPMs.

WHO IS FEDERATED INVESTORS, INC.?

<R>

Federated and its subsidiaries are dedicated to providing you with world-class
investment management. From offices in Pittsburgh, New York City and Frankfurt,
Federated is a firm with independent research, product breadth and industry
standing.

Federated seeks to achieve superior and sustainable investment performance for a
broad array of global clients through a disciplined investment process and an
information advantage created by proprietary fundamental research. Federated is
distinctive in our disciplined process that integrates proprietary research with
trading and portfolio management.

FEDERATED FUNDS OVERVIEW

Equities

As of December 31, 2004, Federated managed 34 equity funds totaling
approximately $26.0 billion in assets across growth, value, equity income,
international, index and sector allocation styles.

Taxable Fixed Income

As of December 31, 2004, Federated managed 31 taxable bond funds including:
high-yield, multi-sector, mortgage-backed, U.S. government, U.S. corporate and
international, with assets approximating $17.7 billion.

Tax Free Fixed Income

As of December 31, 2004, Federated managed 15 municipal bond funds with
approximately $3.4 billion in assets and 22 municipal money market funds with
approximately $24.4 billion in total assets.

Money Market Funds

As of December 31, 2004, Federated managed $110.6 billion in assets across 53
money market funds, including 19 government, 11 prime, 22 municipal and 1
euro-denominated with assets approximating $43.9 billion, $42.1 billion, $24.4
billion and $58.9 million.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: Stephen F. Auth, CFA for Global Equity;
Robert J. Ostrowski, CFA for Taxable Fixed Income; Mary Jo Ochson, CFA for Tax
Free Fixed Income; and Deborah A. Cunningham, CFA for Money Market Funds.

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended January 31, 2005
are incorporated herein by reference to the Annual Report to Shareholders of
Federated GNMA Trust dated January 31, 2005.

</R>

ADDRESSES

FEDERATED GNMA 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>

Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116

<R>

APPENDIX

The following is a list of persons other than the Adviser and its affiliates
that may receive nonpublic portfolio holdings information concerning the Fund:

CUSTODIAN
State Street Bank and Trust Company

SECURITIES LENDING AGENT
HSBC

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP

LEGAL COUNSEL
ReedSmith LLP; Dickstein, Shapiro Morin & Oshinsky LLP

SERVICE PROVIDERS
Bloomberg; Factset; Institutional Shareholder Services, Inc.; Wilshire
Associates, Inc.

SECURITY PRICING SERVICES
FT Interactive Data; Reuters

RATINGS AGENCIES
S&P

PERFORMANCE REPORTING/PUBLICATIONS
Fidelity-Strategic Advisors; Lipper; Morningstar; NASDAQ; Value Line;
Wiesenberger/Thompson Financial

OTHER
ICI

</R>

PART C. OTHER INFORMATION

Item 22. Exhibits:
--------
(a) Restatement and Amendment No.5 to the Declaration of
Trust of the Registrant;(21)
(b) Copy of the Amendment No.5 and Restatement of By-Laws
of the Registrant;(8)
(i) Copy of Amendment No. 6 to the By-Laws of the
Registrant; (19)
(ii) Copy of Amendment No. 7 to the By-Laws of the
Registrant; (19)
(iii) Copy of Amendment No. 8 to the By-Laws of the
Registrant; (19)
(iv) Copy of Amendment No. 9 to the By-Laws of the Registrant; (19)
(v) Copy of Amendment No. 10 to the By-Laws of the Registrant (23)
(vi) Copy of Amendment #11 to the By-Laws of the Registrant (+)
(vii) Copy of Amendment #12 to the By-Laws of the Registrant (+)
(c) Copy of Specimen Certificate for Shares of Beneficial
Interest for Institutional Shares of the Registrant; (17)
(i) Copy of Specimen Certificate for Shares of
Beneficial Interest for Institutional Service
Shares of the Registrant; (17)
(d) Conformed copy of Investment Advisory Contract of the
Registrant; (17)
(i) Conformed Copy of Amendment to Investment Advisory Contract between Federated
GNMA Trust and Federated Investment Management
Company; (22)
(e) Conformed copy of Distributor's Contract of the
Registrant including Exhibits A & B; (17)
(i) Conformed Copy of Amendment to Distributor's
Contract between Federated GNMA Trust and
Federated Securities Corp. (22)
(ii) 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 33-3850 and 811-6269);
(iii) Conformed Copy of Amendment to Distributor's
Contract between Federated Funds and Federated
Securities Corp. (24)
(f) Not applicable;
(g) Conformed copy of the Custodian Agreement
of the Registrant; (15)
(i) Conformed copy of Custodian Fee Schedule of the Registrant; (18)
(h) Conformed copy of Amended and Restated Agreement for Fund Accounting Services,
Administrative Services, Shareholder Transfer Agency
Services and Custody Services Procurement; (19)
(ii) The Registrant hereby incorporates the conformed
copy of the Second Amended and Restated Services
Agreement from Item (h)(v) of the Investment
Series Funds, Inc. Registration Statement on
Form N-1A, filed with the Commission on January
23, 2002. (File Nos. 33-48847 and 811-07021)
(iii) Conformed copy of Shareholder Services
Sub-Contract between Fidelity and Federated
Shareholder Services, on behalf of the
Registrant; (16)
(iii) The responses described in Item 23(e)(ii) are hereby incorporated by reference.
(iv) The Registrant hereby incorporates by reference the conformed copy of the
Agreement for Administrative Services from Item
23 (h) (vix) of Federated Index Trust
Registration Statement on Form N-1A, filed with
the Commission on December 30, 2003. (File Nos.
33-33852 and 811-6061).
(v) The Registrant hereby incorporates the conformed copy of Amendment No. 2 to the
Amended & Restated Agreement for Fund
Accounting Services, Administrative Services,
Transfer Agency Services and Custody Services
Procurement from Item 23 (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, 2004. (File Nos.
2-75769 and 811-3387);
(vi) The Registrant hereby incorporates the conformed copy of Amendment No. 3 to the
Amended & Restated Agreement for Fund
Accounting Services, Administrative Services,
Transfer Agency Services and Custody Services
Procurement from Item 23 (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, 2004. (File Nos.
2-75769 and 811-3387);
(vii) The Registrant hereby incorporates by reference the conformed copy of the
Agreement for Administrative Services, with
Exhibit 1 and Amendments 1 and 2 attached,
between Federated Administrative Services and
the Registrant from Item 23(h)(iv)of the
Federated Total Return Series, Inc. Registration
Statement on Form N-1A, filed with the
Commission on November 29, 2004. (File Nos.
33-50773 and 811-7115);
(viii)Exhibit A To the Financial Administration and Accounting Services
Agreement (revised as of 12/1/04 (+)
(i) Conformed copy of the Opinion and Consent of Counsel
as to legality of shares being registered; (15)
(j) Conformed copy of Consent of Independent Auditors; (+)
(k) Not applicable;
(l) Conformed copy of Initial Capital Understanding; (2)
(m) Conformed copy of Distribution Plan of the Registrant; (17)
(i) Exhibit A to the Distribution Plan (23)
(ii) The responses described in Item 23(e)(iv) are hereby incorporated by reference.
(n) Copy of the specimen Multiple Class Plan of the Registrant(23)
(o) Conformed copy of Power of Attorney of the Registrant; (20)
(i) Conformed copy of Power of Attorney of Chief
Investment Officer of the Registrant; (20)
(p) The Registrant hereby incorporates the conformed copy
of the Code of Ethics for Access Persons from Item
23(p) of the Money Market Obligations Trust
Registration Statement on Form N-1A filed with the
Commission February 26, 2004 (File Nos. 33-31602 and
811-5950).
(i) The Registrant hereby incorporates the conformed
copy of the Federated Investors, Inc. Code of Ethics
for Access Persons, effective 1/1/2005, from Item
23(p) of the Federated Total Return Series, Inc.
Registration Statement on Form N-1A, filed with the
Commission on November 29, 2004. (File Nos. 33-50773
and 811-7115);

+ 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 February 11, 1982. (File Nos.
2-75670 and 811-3375)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12 on Form N-1A filed March 22, 1988. (File Nos. 2-75670
and 811-3375)
15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 27 on Form N-1A filed March 30, 1995. (File Nos. 2-75670
and 811-3375)
16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 29 on Form N-1A filed March 25, 1996. (File Nos. 2-75670
and 811-3375)
17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed March 31, 1997. (File Nos. 2-75670
and 811-3375)
18. Response is incorporated by reference to Registrant's Post-Effective Amendment
No. 32 on Form N-1A filed April 1, 1998. (File Nos. 2-75670 and
811-3375)
19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 33 on Form N-1A filed January 28, 1999. (File Nos. 2-75670
and 811-3375)
21. Response is incorporated by reference to Registrant's Post-Effective Amendment
No. 38 on Form N-1A filed February 25, 2002. (File Nos. 2-75670 and
811-3375)
22. Response is incorporated by reference to Registrant's Post-Effective Amendment
No. 39 on Form N-1A filed March 25, 2002. (File Nos. 2-75670 and
811-3375)
23. Response is incorporated by reference to Registrant's Post-Effective Amendment
No. 40 on Form N-1A filed March 27, 2003. (File Nos. 2-75670 and
811-3375)
24. Response is incorporated by reference to Registrant's Post-Effective Amendment
No. 41 on Form N-1A filed March 26, 2004. (File Nos. 2-75670 and
811-3375)

Item 23. Persons Controlled by or Under Common Control with the Fund:
-----------------------------------------------------------

None.

Item 24. Indemnification: (12)
---------------

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

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:
J. Scott Albrecht
Joseph M. Balestrino
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
Donald T. Ellenberger
Susan R. Hill
Robert M. Kowit
Jeffrey A. Kozemchak
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Richard Tito

Vice Presidents:
Todd A. Abraham
Randall S. Bauer
Nancy J.Belz
G. Andrew Bonnewell
Lee R. Cunningham, II
B. Anthony Delserone,Jr
Eamonn G. Folan
Richard J. Gallo
John T. Gentry
Patricia L. Heagy
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
Kathyrn P. Glass
James Grant
Chungwai Hsia
Tracey L. Lusk
Ann Manley
Karl Mocharko
Gene Neavin
Bob Nolte
Liam O'Connell
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 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:

(a) 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

Vice President, Assistant
Secretary and Director: Peter J. Germain

Treasurer and Director: Denis McAuley III

(1) (2) (3)
Positions and Offices Positions and Offices
With Distributor Name With Registrant
--------------------- ----------------- ----------------------
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
Anne H. Kruczek
Amy Michaliszyn
Keith Nixon
Solon A. Person, IV
Ronald M. Petnuch
Colin B. Starks
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
Mark Conner
Kevin J. Crenny
G. Michael Cullen
Beth C. Dell
Robert J. Deuberry
Ron Dorman
William C. Doyle
Donald C. Edwards
Lee England
Timothy Franklin
Joseph D. Gibbons
G. Tad Gullickson
Scott Gundersen
Dayna C. Haferkamp
Raymond J. Hanley
Vincent L. Harper, Jr.
Bruce E. Hastings
Teresa M. Johnson
Christopher L. Johnston
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
Mark Patsy
Thomas A. Peter III
Robert F. Phillips
Chris Randal
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
Jeffrey A. Stewart
Mark strubel
Kevin Stutz
William C. Tustin
Michael Vahl
G. Walter Whalen
Stephen White
Jeff Wick
Patrick M. Wiethorn
Lewis Williams
Edward J. Wojnarowski
Michael P. Wolff
Paul Woodford

(1) (2) (3)
Positions and Offices Positions and Offices
With Distributor Name With Registrant
--------------------- ----------------- ----------------------
Assistant Vice Presidents: Lisa A. Toma
Robert W. Bauman
Charles L. Davis, Jr.
Brian F. Palusa
William Rose

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

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

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

State Street Bank and Trust P.O. Box 8600
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 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 GNMA 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, duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on
the 30th day of March, 2005.

FEDERATED GNMA TRUST
BY: /s/ Daniel M. Miller
Daniel M. Miller, Assistant Secretary

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

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

By: /s/ Daniel M. Miller Attorney In Fact March 30, 2005
Daniel M. Miller 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)

William D. Dawson, III* Chief Investment Officer

Thomas G.Bigley* Trustee

John T. Conroy, Jr*. Trustee

Nicholas P. Constantakis* Trustee

John F. Cunningham* 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 World-Class Investment Manager

Federated GNMA Trust

PROSPECTUS

INSTITUTIONAL SHARES

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, 2004)

What are the Fund's Fees and Expenses?

FEDERATED GNMA TRUST

FEES AND EXPENSES

EXAMPLE

What are the Fund's Investment Strategies?

TEMPORARY DEFENSIVE INVESTMENTS

PORTFOLIO TURNOVER

What are the Principal Securities in Which the Fund Invests?

FIXED-INCOME SECURITIES

Treasury Securities

GNMA Securities

Mortgage-Backed Securities

DERIVATIVE CONTRACTS

Futures Contracts

Options

Call Options

Put Options

Swaps

INTEREST RATE SWAPS

TOTAL RATE OF RETURN SWAPS

Collateralized Mortgage Obligations (CMOs)

Sequential CMOs

PACs, TACs, and Companion Classes

SPECIAL TRANSACTIONS

Delayed Delivery Transactions

To Be Announced Securities (TBAs)

Dollar Rolls

Repurchase Agreements

Asset Coverage

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

PREPAYMENT RISKS

CREDIT RISKS

What Do Shares Cost?

How is the Fund Sold?

SERVICE FEES

ADDITIONAL PAYMENTS TO FINANCIAL INSTITUTIONS

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

FREQUENT TRADING POLICIES

PORTFOLIO HOLDINGS INFORMATION

Who Manages the Fund?

PORTFOLIO MANAGEMENT INFORMATION

Todd A. Abraham

Susan M. Nason

ADVISORY FEES

Legal Proceedings

Financial Information

Federated
World-Class Investment Manager

Federated
World-Class Investment Manager

Federated
World-Class Investment Manager