FEDERATED GNMA TRUST, N-30D, 1997-04-01

FEDERATED GNMA TRUST
N-30D, 1997-04-01

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FEDERATED GNMA TRUST

INSTITUTIONAL SHARES

Prospectus

The Institutional Shares of Federated GNMA Trust (the "Trust") offered by
this prospectus represent interests in a diversified portfolio of securities
investing primarily in instruments issued or guaranteed by the Government
National Mortgage Association, to achieve current income. The Trust is an
open-end, diversified management investment company (a mutual fund).
Institutional Shares are sold at net asset value.

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

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

The Trust has also filed a Statement of Additional Information for
Institutional Shares and Institutional Service Shares dated March 31, 1997
with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Trust, contact the
Trust at the address listed in the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this
document, and other information regarding the Trust is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated March 31, 1997

Table of Contents
<TABLE>
<S> <C>
SUMMARY OF TRUST EXPENSES 1
FINANCIAL HIGHLIGHTS --
INSTITUTIONAL SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Investment Limitations 6
TRUST INFORMATION 6
Management of the Trust 6
DISTRIBUTION OF INSTITUTIONAL SHARES 8
ADMINISTRATION OF THE TRUST 8
NET ASSET VALUE 9
INVESTING IN INSTITUTIONAL SHARES 9
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 10
Exchanging Securities for Trust Shares 10
Certificates and Confirmations 10
Dividends 10
Capital Gains 10
REDEEMING INSTITUTIONAL SHARES 10
Telephone Redemption 11
Redeeming Shares By Mail 11
Accounts with Low Balances 12
SHAREHOLDER INFORMATION 12
Voting Rights 12
TAX INFORMATION 12
Federal Income Tax 12
State and Local Taxes 12
PERFORMANCE INFORMATION 13
OTHER CLASSES OF SHARES 13
FINANCIAL HIGHLIGHTS --
INSTITUTIONAL SERVICE SHARES 14
FINANCIAL STATEMENTS 15
INDEPENDENT AUDITORS' REPORT 24
ADDRESSES Inside Back Cover
</TABLE>

SUMMARY OF TRUST EXPENSES
<TABLE>
<CAPTION>

INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee 0.40%
12b-1 Fee None
Total Other Expenses 0.20%
Shareholder Services Fee (after waiver)(1) 0.05%
Total Operating Expenses(2) 0.60%
</TABLE>

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

(2) The total operating expenses would have been 0.80% absent the voluntary
waivers of a portion of the shareholder services fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Institutional Shares of
the Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Trust Information" and
"Investing in Institutional Shares." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $6 $19 $33 $75
</TABLE>

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

FEDERATED GNMA TRUST
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $11.34 $10.61 $11.64 $11.80 $11.64 $11.29 $10.97 $10.70 $11.08 $11.46
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.74 0.78 0.82 0.85 0.93 0.98 1.00 1.00 1.01 1.04
Net realized and
unrealized gain
(loss)
on investments (0.21) 0.73 (1.03) (0.16) 0.16 0.35 0.32 0.27 (0.38) (0.38)
Total from
investment
operations 0.53 1.51 (0.21) 0.69 1.09 1.33 1.32 1.27 0.63 0.66
LESS DISTRIBUTIONS
Distributions
from
net investment
income (0.74) (0.77) (0.82) (0.85) (0.93) (0.98) (1.00) (1.00) (1.01) (1.04)
Distributions in
excess of net
investment
income(a) -- (0.01) -- -- -- -- -- -- -- --
Total
distributions (0.74) (0.78) (0.82) (0.85) (0.93) (0.98) (1.00) (1.00) (1.01) (1.04)
NET ASSET VALUE,
END OF PERIOD $11.13 $11.34 $10.61 $11.64 $11.80 $11.64 $11.29 $10.97 $10.70 $11.08
TOTAL RETURN(B) 4.97% 14.61% (1.71%) 6.02% 9.78% 12.25% 12.65% 12.33% 5.99% 6.29%
RATIOS TO
AVERAGE
NET ASSETS
Expenses 0.60% 0.60% 0.56% 0.51% 0.51% 0.51% 0.52% 0.52% 0.53% 0.52%
Net investment
income 6.74% 7.02% 7.51% 7.22% 7.98% 8.54% 9.08% 9.19% 9.33% 9.51%
Expense waiver/
reimbursement(c) 0.20% 0.20% -- -- -- -- -- -- -- --
SUPPLEMENTAL DATA
Net assets, end
of period (000
omitted) $1,199,733 $1,352,894 $1,442,074 $1,910,500 $1,770,169 $1,333,930 $1,268,706 $1,312,780 $1,710,890 $2,111,559
Portfolio
turnover 63% 43% 136% 117% 33% 57% 48% 27% 40% 45%
</TABLE>

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

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

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

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated December 10, 1981. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in
any one portfolio may be offered in separate classes. As of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes
of shares of the Trust, known as Institutional Shares and Institutional
Service Shares. This prospectus relates only to Institutional Shares of the
Trust. Institutional Shares ("Shares") are sold primarily to accounts for
which financial institutions act in a fiduciary or agency capacity, and
other accounts where a financial institution maintains master accounts with
an aggregate investment of at least $400 million in certain mutual funds
which are advised or distributed by affiliates of Federated Investors.
Shares are also made available to financial intermediaries, public, and
private organizations. An investment in the Trust serves as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio of primarily mortgage-backed securities. A minimum initial
investment of $25,000 over a 90-day period is required.

Shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Trust.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Trust is current income. The investment
objective may not be changed without the approval of shareholders. The Trust
pursues this investment objective by investing primarily in instruments
issued or guaranteed by the Government National Mortgage Association
("GNMA"). While there is no assurance that the Trust will achieve its
investment objective, it endeavors to do so by following the investment
policies described in this prospectus.

INVESTMENT POLICIES

As a matter of investment policy which may be changed without shareholder
approval, the Trust will limit its investments to those that are permitted
for purchase by federal savings associations pursuant to applicable rules,
regulations, or interpretations of the Office of Thrift Supervision. Should
additional permitted investments be allowed as a result of future changes in
applicable regulations or federal laws, the Trust reserves the right,
without shareholder approval, to make such investments consistent with the
Trust's investment objective, policies, and limitations. Further, should
existing statutes or regulations change so as to cause any securities held
by the Trust to become ineligible for purchase by federal savings
associations, the Trust will dispose of those securities at times
advantageous to the Trust.
As operated within the above limitation, the Trust may also serve as an
appropriate vehicle for a national bank as an investment for its own
account.

Unless otherwise designated, the investment policies described below may not
be changed without shareholder approval.

ACCEPTABLE INVESTMENTS. The Trust will invest primarily in mortgage-backed
securities. Under normal circumstances, at least 65% of the Trust's
portfolio will be invested in instruments issued or fully guaranteed as to
principal and interest by GNMA. In addition, to the extent that the Trust
will invest in other mortgage-backed securities, as described below, these
will be collateralized by GNMA obligations.

The Trust's permissible investments are as follows:

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

* collateralized mortgage obligations;

* real estate mortgage investment conduits;

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

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

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

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Trust will be
collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by GNMA.

All CMOs purchased by the Trust are issued by an agency of the United States
and are rated in the highest rating category by a nationally recognized
statistical rating organization.

The following example illustrates how mortgage cash flows are prioritized in
the case of CMOs -- most of the CMOs in which the Trust invests use the same
basic structure:

(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final class (Z bond) typically receives
any excess income from the underlying investments after payments are made to
the other classes and receives no principal or interest payments until the
shorter maturity classes have been retired, but then receives all remaining
principal and interest payments.

(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.

(3) The classes of securities are retired sequentially. All principal
payments are directed first to the shortest-maturity class (or A bond).
When those securities are completely retired, all principal payments are
then directed to the next-shortest-maturity security (or B bond). This
process continues until all of the classes have been paid off.

Because the cash flow is distributed sequentially instead of pro-rata, as
with pass-through securities, the cash flows and average lives of CMOs are
more predictable, and there is a period of time during which the investors
in the longer-maturity classes receive no principal paydowns. One or more of
the classes may be adjustable rate. The interest portion of these payments
is distributed by the Trust as income, and the capital portion is
reinvested.

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

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

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

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

TEMPORARY INVESTMENTS. For defensive purposes only, the Trust may invest
temporarily in cash and money market instruments during times of unusual
market conditions and to maintain liquidity. Money market instruments may
include:

* obligations of the U.S. government or its agencies or instrumentalities;
and

* repurchase agreements.

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

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

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

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Trust may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which the Trust purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete these
transactions may cause the Trust to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may
vary from the purchase prices.

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

INVESTMENT LIMITATIONS

The Trust will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Trust sells a portfolio instrument for
a percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Trust
may borrow money and engage in reverse repurchase agreements up to one-third
of the value of its total assets and pledge up to 10% of the value of those
assets to secure such borrowings.

As a matter of investment practice, which can be changed without shareholder
approval, the Trust will not invest more than 15% of its net assets in
securities which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, and certain restricted
securities not determined by the Trustees to be liquid.

TRUST INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.

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

ADVISORY FEES. The Trust's adviser receives an annual investment advisory
fee equal to 0.40% of the Trust's average daily net assets. This does not
include reimbursement to the Trust of any expenses incurred by shareholders
who use the transfer agent's subaccounting facilities.

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

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

Kathleen M. Foody-Malus has been the Trust's portfolio manager since July
1993. Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice
President of the Trust's investment adviser since 1993. Ms. Foody-Malus
served as an Assistant Vice President of the investment adviser from 1990
until 1992, and from 1986 until 1989 she acted as an investment analyst. Ms.
Foody-Malus received her M.B.A. in Accounting/Finance from the University of
Pittsburgh.

Edward J. Tiedge has been the Trust's portfolio manager since October 1995.
Mr. Tiedge joined Federated Investors in 1993 as an Investment Analyst and
has been an Assistant Vice President of the Trust's investment adviser since
1995. Mr. Tiedge served as Director of Investments at Duquesne Light Company
from 1990 to 1993. Mr. Tiedge is a Chartered Financial Analyst and received
his M.S. in Industrial Administration from Carnegie Mellon University.

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

DISTRIBUTION OF INSTITUTIONAL SHARES

Federated Securities Corp. is the principal distributor for Institutional
Shares. It is a Pennsylvania corporation organized on November 14, 1969, and
is the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

ADMINISTRATION OF THE TRUST

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Trust. Federated Services Company provides these at an annual
rate, which relates to the average aggregate daily net assets of all funds
advised by subsidiaries of Federated Investors ("Federated Funds"), as
specified below:
<TABLE>
<CAPTION>

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

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

SHAREHOLDER SERVICES. The Trust has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Trust may make payments up to 0.25% of the
average daily net asset value of the Institutional Shares, computed at an
annual rate, to obtain certain personal services for shareholders and to
maintain shareholder accounts. From time to time and for such periods as
deemed appropriate, the amount stated above may be reduced voluntarily.
Under the Shareholder Services Agreement, Federated Shareholder Services
will either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon shares owned by their clients or customers. The
schedule of such fees and the basis upon which such fees will be paid will
be determined from time to time by the Trust and Federated Shareholder
Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments
made pursuant to the Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or shareholder
services. The support may include sponsoring sales, educational and training
seminars for their employees, providing sales literature, and engineering
computer software programs that emphasize the attributes of the Trust. Such
assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made
by the distributor may be reimbursed by the Trust's investment adviser or
its affiliates.

NET ASSET VALUE

The Trust's net asset value per Share fluctuates. The net asset value for
Shares is determined by adding the interest of the Shares in the market
value of all securities and other assets of the Trust, subtracting the
interest of the Shares in the liabilities of the Trust and those
attributable to Shares, and dividing the remainder by the total number of
Shares outstanding. The net asset value for Shares may exceed that of
Institutional Service Shares due to the variance in daily net income
realized by each class. Such variance will reflect only accrued net income
to which the shareholders of a particular class are entitled.

INVESTING IN INSTITUTIONAL SHARES

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.

To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the
telephone. The Trust reserves the right to reject any purchase request.

PURCHASING SHARES BY WIRE. Shares may be purchased by Federal Reserve wire
by calling the Trust before 4:00 p.m. (Eastern time) to place an order. The
order is considered received immediately. Payment by federal funds must be
received before 3:00 p.m. (Eastern time) on the next business day following
the order. Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: Federated GNMA Trust --
Institutional Shares; Trust Number (this number can be found on the account
statement or by contacting the Trust); Group Number or Order Number; Nominee
or Institution Name; and ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire
purchases should be directed to your shareholder services representative at
the telephone number listed on your account statement.

PURCHASING SHARES BY MAIL. To purchase Shares by mail, send a check made
payable to Federated GNMA Trust --Institutional Shares to Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received after payment by check is
converted by State Street Bank into federal funds. This is normally the next
business day after State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $25,000 plus any non-affiliated
bank or broker's fee, if applicable. However, 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 will be calculated by
combining all accounts it maintains with the Trust. Individual accounts
established through a financial intermediary may be subject to a
smaller minimum investment.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who
purchase Shares through a financial intermediary may be charged a service
fee by that financial intermediary.

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

EXCHANGING SECURITIES FOR TRUST SHARES

Investors may exchange certain U.S. government securities or a combination
of securities and cash for Shares. The securities and any cash must have a
market value of at least $25,000. The Trust reserves the right to determine
the acceptability of securities to be exchanged. Securities accepted by the
Trust are valued in the same manner as the Trust values its assets.
Investors wishing to exchange securities should first contact Federated
Securities Corp.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Trust, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested by contacting the Trust.

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

DIVIDENDS

Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. If an order for Shares is placed on
the preceding business day, Shares purchased by wire begin earning dividends
on the business day wire payment is received by the transfer agent. If the
order for Shares and payment by wire are received on the same day, Shares
begin earning dividends on the next business day. Shares purchased by check
begin earning dividends on the business day after the check is converted,
upon instruction of the transfer agent, into federal funds. Dividends are
automatically reinvested on payment dates in additional Shares unless cash
payments are requested by contacting the Trust.

CAPITAL GAINS

Capital gains realized by the Trust, if any, are distributed at least once
every 12 months.

REDEEMING INSTITUTIONAL SHARES

The Trust redeems Shares at their net asset value next determined after the
Trust receives the redemption request. Investors who redeem shares through a
financial intermediary may be charged a service fee by that financial
intermediary. Redemptions will be made on days on which the Trust computes
its net asset value. Redemption requests must be received in proper form and
can be made by telephone request or by written request.

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Trust before 4:00
p.m. (Eastern time). The proceeds will normally be wire transferred the
following business day, but in no event more than seven days, to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. Proceeds from redemption requests received on
holidays when wire transfers are restricted will be wired the following
business day. Questions about telephone redemptions on days when wire
transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If
at any time, the Trust shall determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.

An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.

Telephone redemption instructions may be recorded. If reasonable procedures
are not followed by the Trust, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.

In the event of drastic economic or market changes, a shareholder may
experience difficulty in redeeming by telephone. If such a case should
occur, another method of redemption, such as "Redeeming Shares By Mail,"
should be considered.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.

The written request should state: the Trust name and the Class designation;
the account name as registered with the Trust; the account number; and the
number of shares to be redeemed or the dollar amount requested. All owners
of the account must sign the request exactly as the shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Trust or a redemption payable other than
to the shareholder of record must have their signatures guaranteed by a
commercial or savings bank, trust company or savings and loan association
whose deposits are insured by an organization which is administered by the
Federal Deposit Insurance Corporation; a member firm of a domestic stock
exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Trust does not accept signatures
guaranteed by a notary public.

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

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Trust
may redeem shares in any account and pay the proceeds to the shareholder if
the account balance falls below a required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000
because of changes in the Trust's net asset value.

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

SHAREHOLDER INFORMATION

VOTING RIGHTS

Each Share of the Trust gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of all
classes of each portfolio in the Trust 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.

As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's operation and for the election of Trustees under
certain circumstances.

Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of the shareholders for this purpose shall be
called by the Trustees upon the written request of shareholders owning at
least 10% of the Trust's outstanding shares entitled to vote.

TAX INFORMATION

FEDERAL INCOME TAX

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

Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions received. This applies whether
dividends and distributions are received in cash or as additional shares.

STATE AND LOCAL TAXES

In the opinion of Houston, Donnelly, and Meck, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.

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

PERFORMANCE INFORMATION

From time to time, the Trust advertises its total return and yield for
Shares.

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

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

Shares are sold without any sales load or other similar non-recurring
charges. Total return and yield will be calculated separately for
Institutional Shares and Institutional Service Shares.

From time to time, advertisements for the Trust may refer to ratings,
rankings, and other information in certain financial publications and/or
compare the Trust's performance to certain indices.

OTHER CLASSES OF SHARES

Institutional Service Shares are sold primarily to retail and private
banking customers of financial institutions. Institutional Service Shares
are sold at net asset value. Investments in Institutional Service Shares are
subject to a minimum initial investment of $25,000.

Institutional Service Shares are distributed pursuant to a 12b-1 Plan
adopted by the Trust whereby the distributor is paid a fee of 0.25% of the
Institutional Service Shares' average daily net assets.

Financial institutions and brokers providing sales and/or administrative
services may receive different compensation depending upon which class of
shares of the Trust is sold.

The amount of dividends payable to Institutional Shares will exceed that of
Institutional Service Shares by the difference between class expenses and
distribution and shareholder service expenses borne by shares of each
respective class.

The stated advisory fee is the same for both classes of shares.

FEDERATED GNMA TRUST
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.34 $10.61 $11.64 $11.80 $11.71
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.74 0.78 0.79 0.82 0.61
Net realized and unrealized gain (loss)
on investments (0.23) 0.71 (1.03) (0.16) 0.09
Total from investment operations 0.51 1.49 (0.24) 0.66 0.70
LESS DISTRIBUTIONS
Distributions from net investment income (0.72) (0.76) (0.79) (0.82) (0.61)
NET ASSET VALUE, END OF PERIOD $11.13 $11.34 $10.61 $11.64 $11.80
TOTAL RETURN(B) 4.76% 14.39% (1.92%) 5.76% 5.62%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.80% 0.80% 0.77% 0.76% 0.76%*
Net investment income 6.54% 6.82% 7.32% 6.97% 7.57%*
Expense waiver/reimbursement(c) 0.25% 0.25% 0.14% -- --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $73,857 $123,614 $120,427 $137,235 $50,166
Portfolio turnover 63% 43% 136% 117% 33%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from June 18, 1992 (date of initial
public investment) to January 31, 1993.

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

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

FEDERATED GNMA TRUST
PORTFOLIO OF INVESTMENTS

JANUARY 31, 1997
<TABLE>
<CAPTION>

PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
LONG-TERM GOVERNMENT OBLIGATIONS -- 89.9%
(A)GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--89.9%
$ 4,939 6.00%, 12/15/2023 - 4/15/2024 $ 4,613
112,466,126 6.50%, 10/15/2023 - 5/15/2024 107,897,752
244,569,326 7.00%, 5/15/2023 - 10/15/2024 240,972,943
274,957,573 7.50%, 5/15/2022 - 5/15/2026 277,135,591
184,711,535 8.00%, 3/15/2017 - 8/15/2026 190,049,932
63,953,285 8.50%, 4/15/2017 - 2/15/2022 66,983,909
85,769,122 9.00%, 6/15/2016 - 12/15/2026 91,690,615
62,130,693 9.50%, 5/15/2016 - 10/15/2026 67,454,552
14,493,268 10.00%, 1/15/2018 - 1/15/2026 15,986,064
16,200,000 (b)10.00%, 12/15/2027 17,850,456
6,744,852 10.50%, 1/15/2016 - 8/15/2019 7,482,603
13,777,854 11.00%, 12/15/2009 - 10/15/2019 15,492,247
11,270,250 11.50%, 4/15/2010 - 4/15/2016 12,816,157
18,427,939 12.00%, 7/15/2011 - 12/15/2015 21,225,256
8,095,889 12.50%, 1/15/2010 - 10/15/2015 9,405,733
1,006,104 13.00%, 12/15/2010 - 3/15/2015 1,175,250
1,536,651 13.50%, 5/15/2010 - 8/15/2014 1,801,210
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(IDENTIFIED COST $1,127,423,107) 1,145,424,883
</TABLE>

FEDERATED GNMA TRUST
<TABLE>
<CAPTION>

PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. TREASURY NOTES--8.3%
$ 105,000,000 6.250%-7.00%, 9/30/2001-7/15/2006
(IDENTIFIED COST $106,243,877) $ 105,267,220
(C)REPURCHASE AGREEMENTS--2.7%
18,330,000 BT Securities Corp., 5.58%, dated 1/31/1997, due 2/3/1997 18,330,000
16,000,000 (d)Goldman Sachs Group, 5.32%, dated 1/21/1997, due 2/24/1997 16,000,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 34,330,000
TOTAL INVESTMENTS (IDENTIFIED COST $1,267,996,984)(e) $1,285,022,103
</TABLE>

(a) Because of monthly principal payments, the average lives of the
Government National Mortgage Association Modified Pass-Through Securities
(based upon Federal Housing Authority/Veterans Administration historical
experience) are less than the stated maturities.

(b) Indicates securities subject to dollar roll transactions with a total
market value of $17,850,456.

(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements are through
participation in a joint account with other Federated Funds.

(d) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase
agreement within seven days if creditworthiness of the issuer is
downgraded.

(e) The cost of investments for federal tax purposes amounts to
$1,267,996,984. The net unrealized appreciation of investments on a
federal tax basis amounts to $17,025,119 which is comprised of $27,651,974
appreciation and $10,626,855 depreciation at January 31, 1997.

Note: The categories of investments are shown as a percentage of net assets
($1,273,590,472) at January 31, 1997.

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

FEDERATED GNMA TRUST
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax
cost $1,262,996,984) $ 1,285,022,103
Income receivable 10,094,013
Receivable for investments sold 42,256,150
Receivable for shares sold 3,631,298
Total assets 1,341,003,564
LIABILITIES:
Payable for investments purchased $ 42,154,181
Payable for shares redeemed 1,202,199
Income distribution payable 5,036,848
Payable to Bank 852,804
Payable for dollar roll transactions 17,841,832
Accrued expenses 325,228
Total liabilities 67,413,092
NET ASSETS for 114,430,342 shares outstanding $ 1,273,590,472
NET ASSETS CONSIST OF:
Paid in capital $ 1,383,977,987
Net unrealized appreciation of investments 17,025,119
Accumulated net realized loss on investments (127,420,175)
Undistributed net investment income 7,541
Total Net Assets $ 1,273,590,472
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$1,199,733,545 / 107,794,429 shares outstanding $11.13
INSTITUTIONAL SERVICE SHARES:
$73,856,927 / 6,635,913 shares outstanding $11.13
</TABLE>

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

FEDERATED GNMA TRUST
STATEMENT OF OPERATIONS

YEAR ENDED JANUARY 31, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $7,790,773) $ 100,048,132
EXPENSES:
Investment advisory fee $ 5,451,836
Administrative personnel and services fee 1,030,132
Custodian fees 302,537
Transfer and dividend disbursing agent fees and expenses 332,360
Directors'/Trustees' fees 24,381
Auditing fees 19,998
Legal fees 4,102
Portfolio accounting fees 160,203
Distribution services fee -- Institutional Service Shares 272,453
Shareholder services fee -- Institutional Shares 3,134,846
Shareholder services fee -- Institutional Service Shares 272,453
Share registration costs 33,495
Printing and postage 27,051
Insurance premiums 13,545
Taxes 82,126
Miscellaneous 12,647
Total expenses 11,174,165
Waivers --
Waiver of distribution services fee -- Institutional Service Shares $ (264,824)
Waiver of shareholder services fee -- Institutional Shares (2,507,877)
Waiver of shareholder services fee -- Institutional Service Shares (7,629)
Total waivers (2,780,330)
Net expenses 8,393,835
Net investment income 91,654,297
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,951,050
Net change in unrealized appreciation of investments (31,535,440)
Net realized and unrealized loss on investments (28,582,977)
Change in net assets resulting from operations $ 63,069,907
</TABLE>

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

FEDERATED GNMA TRUST
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 91,654,297 $ 107,873,068
Net realized gain (loss) on investments ($2,951,050 net gain
and $21,821,623 net loss, respectively, as computed for federal
income tax purposes) 2,951,050 14,663,260
Net change in unrealized appreciation (depreciation) (31,535,440) 88,242,539
Change in net assets resulting from operations 63,069,907 210,778,867
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income
Institutional Shares (84,428,204) (99,770,141)
Institutional Service Shares (7,098,006) (8,102,927)
Distributions in excess of net investment income
Institutional Shares -- (120,546)
Change in net assets resulting from distributions to shareholders (91,526,210) (107,993,614)
SHARE TRANSACTIONS --
Proceeds from sale of shares 214,663,961 257,208,894
Net asset value of shares issued to shareholders in payment
of distributions declared 25,204,908 30,445,454
Cost of shares redeemed (414,329,714) (476,432,552)
Change in net assets resulting from share transactions (174,460,845) (188,778,204)
Change in net assets (202,917,148) (85,992,951)
NET ASSETS:
Beginning of period 1,476,507,620 1,562,500,571
End of period (including undistributed net investment income
of $7,541 and $0, respectively) $ 1,273,590,472 $ 1,476,507,620
</TABLE>

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

FEDERATED GNMA TRUST
NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 1997

1. ORGANIZATION

Federated GMNA Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Trust offers two classes of shares:
Institutional Shares and Institutional Service Shares. The Trust's objective
is to obtain current income by investing in instruments issued or guaranteed
by the Government National Mortgage Association.

2. SIGNIFICANT ACCOUNTING POLICIES

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

INVESTMENT VALUATIONS -- U.S. government securities are generally valued at
the mean of the latest bid and asked price as furnished by an independent
pricing service. Short-term securities are valued at the prices provided by
an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.

REPURCHASE AGREEMENTS -- It is the policy of the Trust to require the
custodian bank to take possession, to have legally segregated in the Federal
Reserve Book Entry System, or to have segregated within the custodian bank's
vault, all securities held as collateral under repurchase agreement
transactions. Additionally, procedures have been established by the Trust to
monitor, on a daily basis, the market value of each repurchase agreement's
collateral to ensure that the value of collateral at least equals the
repurchase price to be paid under the repurchase agreement transaction.

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

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the "Code").
Distributions to shareholders are recorded on the ex-dividend date.

Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
expiring capital loss carryforwards. The following reclassifications have
been made to the financial statements.

INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS

($15,077,123) $15,077,123

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

FEDERAL TAXES -- It is the Trust's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.

At January 31, 1997, the Trust, for federal tax purposes, had a capital loss
carryforward of $127,420,177, which will reduce the Trust's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Trust of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:

EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 14,893,518
1999 $ 13,784,245
2001 $ 5,182,436
2003 $ 71,738,355
2004 $ 21,821,623

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Trust may engage in
when-issued or delayed delivery transactions. The Trust records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

DOLLAR ROLL TRANSACTIONS -- The Trust enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA in which the Trust sells
mortgage securities to financial institutions and simultaneously agrees to
accept substantially similar (same type, coupon and maturity) securities at
a later date at an agreed upon price. Dollar roll transactions are
short-term financing arrangements which will not exceed twelve months. The
Trust will use the proceeds generated from the transactions to invest in
short-term investments, which may enhance the Trust's current yield and
total return.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares.

Transactions in shares were as follows:
<TABLE>
<CAPTION>

YEAR ENDED JANUARY 31,
1997 1996
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 18,461,312 $ 204,235,676 21,399,885 $ 236,718,872
Shares issued to shareholders in payment
of distributions declared 2,016,195 22,248,293 2,212,467 24,540,300
Shares redeemed (31,975,172) (353,373,236) (40,178,059) (445,126,223)
Net change resulting from Institutional
Share transactions (11,497,665) $ (126,889,267) (16,565,707) $ (183,867,051)
<CAPTION>
YEAR ENDED JANUARY 31,
1997 1996
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 943,333 $ 10,428,285 1,850,765 $ 20,490,022
Shares issued to shareholders in payment
of distributions declared 267,944 2,956,615 532,433 5,905,154
Shares redeemed (5,475,198) (60,956,478) (2,828,872) (31,306,329)
Net change resulting from Institutional
Service Share transactions (4,263,921) $ (47,571,578) (445,674) $ (4,911,153)
Net change resulting from share
transactions (15,761,586) $ (174,460,845) (17,011,381) $ (188,778,204)
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE -- Federated Management, the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.40% of the Trust's average daily net assets.

ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Trust with administrative
personnel and services. The fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors
for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.

DISTRIBUTION SERVICES FEE -- The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Trust will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Trust to finance activities intended
to result in the sale of the Trust's Institutional Service Shares. The Plan
provides that the Trust may incur distribution expenses up to 0.25% of the
average daily net assets of the Institutional Service Shares, annually to
compensate FSC. FSC may voluntarily choose to waive any portion of its fee.
FSC can modify or terminate this voluntary waiver at any time at its sole
discretion.

SHAREHOLDER SERVICES FEE -- Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Trust will pay
FSS up to 0.25% of average daily net assets of the Trust for the period. The
fee is to obtain certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive any portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its
sole discretion.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Trust. The fee paid to FSSC
is based on the size, type, and number of accounts and transactions made by
shareholders.

PORTFOLIO ACCOUNTING FEES -- FServ maintains the Trust's accounting records
for which it receives a fee. The fee is based on the level of the Trust's
average daily net assets for the period, plus out-of-pocket expenses.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended January 31, 1997, were as follows:

Purchases $994,730,976
Sales $846,282,185

INDEPENDENT AUDITORS' REPORT

To the Trustees and Shareholders of
FEDERATED GNMA TRUST:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated GNMA Trust as of
January 31, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for the years ended January
31, 1997 and 1996, and the financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility
of the Trust's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of January 31, 1997, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated GNMA
Trust as of January 31, 1997, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
March 12, 1997

ADDRESSES

Federated GNMA Trust
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

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

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

Transfer Agent and Dividend
Disbursing Agent
Federated Shareholder P.O. Box 8600
Services Company Boston, Massachusetts 02266-8600

Independent Auditors
Deloitte & Touche LLP 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401

FEDERATED GNMA TRUST
INSTITUTIONAL SHARES

Prospectus

An Open-End,
Diversified Management
Investment Company

March 31, 1997

[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 314184102

8022901A-IS (3/97)

[Graphic]

FEDERATED GNMA TRUST

INSTITUTIONAL SERVICE SHARES

PROSPECTUS

The Institutional Service Shares of Federated GNMA Trust (the "Trust")
offered by this prospectus represent interests in a diversified portfolio of
securities investing primarily in instruments issued or guaranteed by the
Government National Mortgage Association, to achieve current income. The
Trust is an open-end, diversified management investment company (a mutual
fund). Institutional Service Shares are sold at net asset value.

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

This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Trust. Keep this prospectus
for future reference.

The Trust has also filed a Statement of Additional Information dated March
31, 1997 with the Securities and Exchange Commission ("SEC"). The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of
the Statement of Additional Information or a paper copy of this prospectus,
if you received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the
Trust, contact the Trust at the address listed in the back of this
prospectus. The Statement of Additional Information, material incorporated
by reference into this document, and other information regarding the Trust
is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

Prospectus dated March 31, 1997

Table of Contents
<TABLE>
<S> <C>
SUMMARY OF TRUST EXPENSES 1
FINANCIAL HIGHLIGHTS --
INSTITUTIONAL SERVICE SHARES 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Investment Limitations 6
TRUST INFORMATION 6
Management of the Trust 6
DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES 8
ADMINISTRATION OF THE TRUST 9
NET ASSET VALUE 9
INVESTING IN INSTITUTIONAL SERVICE SHARES 9
Share Purchases 9
Exchange Privilege 10
Minimum Investment Required 10
What Shares Cost 10
Exchanging Securities for Trust Shares 10
Certificates and Confirmations 11
Dividends 11
Capital Gains 11
REDEEMING INSTITUTIONAL SERVICE SHARES 11
Telephone Redemption 11
Redeeming Shares By Mail 12
Accounts with Low Balances 12
SHAREHOLDER INFORMATION 12
Voting Rights 12
TAX INFORMATION 13
Federal Income Tax 13
State and Local Taxes 13
PERFORMANCE INFORMATION 13
OTHER CLASSES OF SHARES 14
FINANCIAL HIGHLIGHTS --
INSTITUTIONAL SHARES 15
FINANCIAL STATEMENTS 16
INDEPENDENT AUDITORS' REPORT 25
ADDRESSES 26

SUMMARY OF TRUST EXPENSES

</TABLE>
<TABLE>
<CAPTION>

INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee 0.40%
12b-1 Fee (after waiver)(1) 0.01%
Total Other Expenses 0.39%
Shareholder Services Fee (after waiver)(2) 0.24%
Total Operating Expenses(3) 0.80%
</TABLE>

(1) The 12b-1 fee has been reduced to reflect the voluntary waiver of a
portion of the 12b-1 fee. The distributor can terminate this voluntary
waiver at any time at its sole discretion. The maximum 12b-1 fee is 0.25%.

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

(3) The total operating expenses would have been 1.05% absent the voluntary
waivers of portions of the 12b-1 fee and the shareholder services fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Institutional Service
Shares of the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Trust
Information" and "Investing in Institutional Service Shares."
Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>

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

FEDERATED GNMA TRUST
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 25.
<TABLE>
<CAPTION>

* Computed on an annualized basis.

(a) Reflects operations for the period from June 18, 1992 (date of initial
public investment) to January 31, 1993.

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

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

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated December 10, 1981. The Declaration of Trust
permits the Trust to offer separate series of shares of beneficial interest
representing interests in separate portfolios of securities. The shares in
any one portfolio may be offered in separate classes. As of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes
of shares of the Trust, known as Institutional Service Shares and
Institutional Shares. This prospectus relates to Institutional Service
Shares of the Trust. Institutional Service Shares ("Shares") are designed
primarily for retail and private banking customers of financial institutions
as a convenient means of accumulating an interest in a professionally
managed, diversified portfolio of mortgage-backed securities. A minimum
initial investment of $25,000 over a 90-day period is required.

Shares are currently sold and redeemed at net asset value without a sales
charge imposed by the Trust.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

As operated within the above limitation, the Trust may also serve as an
appropriate vehicle for a national bank as an investment for its own
account.

Unless otherwise designated, the investment policies described below may not
be changed without shareholder approval.

The Trust's permissible investments are as follows:

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

* collateralized mortgage obligations;

* real estate mortgage investment conduits;

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

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

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

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Trust will be
collateralized by pools of mortgages in which each mortgage is guaranteed as
to payment of principal and interest by GNMA.

All CMOs purchased by the Trust are issued by an agency of the United States
and are rated in the highest rating category by a nationally recognized
statistical rating organization.

The following example illustrates how mortgage cash flows are prioritized in
the case of CMOs -- most of the CMOs in which the Trust invests use the same
basic structure:

(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities:
The first three (A, B, and C bonds) pay interest at their stated rates
beginning with the issue date; the final class (Z bond) typically receives
any excess income from the underlying investments after payments are made
to the other classes and receives no principal or interest payments until
the shorter maturity classes have been retired, but then receives all
remaining principal and interest payments.

(2) The cash flows from the underlying mortgages are applied first to pay
interest and then to retire securities.

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

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

* obligations of the U.S. government or its agencies or instrumentalities;
and

* repurchase agreements.

INVESTMENT LIMITATIONS

TRUST INFORMATION

MANAGEMENT OF THE TRUST

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

DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES

Federated Securities Corp. is the principal distributor for Institutional
Service Shares. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

DISTRIBUTION AND SHAREHOLDER SERVICES. Under a distribution plan adopted in
accordance with Rule 12b-1 under the Investment Company Act (the "Plan"),
the distributor may be paid a fee by the Trust in an amount computed at an
annual rate of 0.25% of the average daily net asset value of the
Institutional Service Shares. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds,
investment advisers, and broker/dealers to provide sales services or
distribution-related support services as agents for their clients or
customers.

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

In addition, the Trust has entered into a Shareholder Services Agreement
with Federated Shareholder Services, a subsidiary of Federated Investors,
under which the Trust may make payments up to 0.25% of the average daily net
asset value of the Institutional Service Shares to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may
be reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or
will select financial institutions to perform shareholder services.
Financial institutions will receive fees based upon shares owned by their
clients or customers. The schedules of such fees and the basis upon which
such fees will be paid will be determined from time to time by the Trust and
Federated Shareholder Services.

MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FEDERATED FUNDS
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million

0.075 of 1% on assets in excess of $750 million

NET ASSET VALUE

The Trust's net asset value per Share fluctuates. The net asset value for
Shares is determined by adding the interest of the Shares in the market
value of all securities and other assets of the Trust, subtracting the
interest of the Shares in the liabilities of the Trust and those
attributable to Shares, and dividing the remainder by the total number of
Shares outstanding. The net asset value for Institutional Shares may exceed
that of Shares due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

INVESTING IN INSTITUTIONAL SERVICE SHARES

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve wire system are open. Shares may be purchased either by wire or
mail.

PURCHASING SHARES BY WIRE. To purchase Shares by Federal Reserve wire, call
the Trust before 4:00 p.m. (Eastern time) to place an order. The order is
considered received immediately. Payment by federal funds must be received
before 3:00 p.m. (Eastern time) on the next business day following the
order. Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: Federated GNMA Trust
- --Institutional Service Shares; Trust Number (this number can be found on
the account statement or by contacting the Trust); Group Number or Order
Number; Nominee or Institution Name; and ABA Number 011000028. Shares cannot
be purchased by wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

PURCHASING SHARES BY MAIL. To purchase Shares by mail, send a check made
payable to Federated GNMA Trust -- Institutional Service Shares to Federated
Shareholder Services Company, c/o State Street Bank and Trust Company, P.O.
Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are considered
received after payment by check is converted by State Street Bank into
federal funds. This is normally the next business day after State Street
Bank receives the check.

EXCHANGE PRIVILEGE

Financial institutions that maintain master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors may exchange their Shares
for Institutional Shares of the Trust.

MINIMUM INVESTMENT REQUIRED

Individual accounts established through a non-affiliated bank or broker may
be subject to a smaller minimum investment.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Trust. Investors who
purchase Shares through a non-affiliated bank or broker may be charged an
additional service fee by that bank or broker.

EXCHANGING SECURITIES FOR TRUST SHARES

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Trust, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested by contacting the Trust. Detailed confirmations of
each purchase or redemption are sent to each shareholder. Monthly
confirmations are sent to report dividends paid during the month.

DIVIDENDS

CAPITAL GAINS

Capital gains realized by the Trust, if any, are distributed at least once
every 12 months.

REDEEMING INSTITUTIONAL SERVICE SHARES

The Trust redeems Shares at their net asset value next determined after the
Trust receives the redemption request. Redemptions will be made on days on
which the Trust computes its net asset value. Redemption requests must be
received in proper form and can be made by telephone request or by written
request.

TELEPHONE REDEMPTION

An authorization form permitting the Trust to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.
Telephone redemption instructions may be recorded. If reasonable procedures
are not followed by the Trust, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.

REDEEMING SHARES BY MAIL

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

ACCOUNTS WITH LOW BALANCES

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

SHAREHOLDER INFORMATION

VOTING RIGHTS

TAX INFORMATION

FEDERAL INCOME TAX

STATE AND LOCAL TAXES

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

PERFORMANCE INFORMATION

From time to time, the Trust advertises its total return and yield for
Shares. Total return represents the change, over a specified period of time,
in the value of an investment in the Shares of the Trust after reinvesting
all income and capital gains distributions. It is calculated by dividing
that change by the initial investment and is expressed as a percentage.

Shares are sold without any sales charge or other similar non-recurring
charges.

Total return and yield will be calculated separately for Institutional
Service Shares and Institutional Shares.

From time to time, advertisements for the Trust may refer to ratings,
rankings, and other information in certain financial publications and/or
compare the Trust's performance to certain indices.

OTHER CLASSES OF SHARES

Institutional Shares are sold to accounts for which financial institutions
act in a fiduciary or agency capacity, and other accounts where a financial
institution maintains master accounts with an aggregate investment of at
least $400 million in certain mutual funds which are advised or distributed
by affiliates of Federated Investors. Shares are also made available to
financial intermediaries, public, and private organizations. Institutional
Shares are sold at net asset value. Investments in Institutional Shares are
subject to a minimum initial investment of $25,000 over a 90-day period.

Institutional Shares are distributed without a 12b-1 Plan.

Financial institutions and brokers providing sales and administrative
services may receive different compensation depending upon which class of
shares of the Trust is sold.

The stated advisory fee is the same for both classes of shares.

FEDERATED GNMA TRUST
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 24.
<TABLE>
<CAPTION>

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

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

FEDERATED GNMA TRUST
PORTFOLIO OF INVESTMENTS

JANUARY 31, 1997
<TABLE>
<CAPTION>

FEDERATED GNMA TRUST
<TABLE>
<CAPTION>

(b) Indicates securities subject to dollar roll transactions with a total
market value of $17,850,456.

Note: The categories of investments are shown as a percentage of net assets
($1,273,590,472) at January 31, 1997.

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

FEDERATED GNMA TRUST
STATEMENT OF OPERATIONS

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

FEDERATED GNMA TRUST
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

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

FEDERATED GNMA TRUST
NOTES TO FINANCIAL STATEMENTS

JANUARY 31, 1997

1. ORGANIZATION

2. SIGNIFICANT ACCOUNTING POLICIES

INCREASE (DECREASE)
ACCUMULATED
PAID-IN CAPITAL NET REALIZED LOSS

($15,077,123) $15,077,123

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

EXPIRATION YEAR EXPIRATION AMOUNT
1998 $ 14,893,518
1999 $ 13,784,245
2001 $ 5,182,436
2003 $ 71,738,355
2004 $ 21,821,623

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value) for
each class of shares.

Transactions in shares were as follows:
<TABLE>
<CAPTION>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended January 31, 1997, were as follows:

Purchases $994,730,976
Sales $846,282,185

INDEPENDENT AUDITORS' REPORT

To the Trustees and Shareholders of
FEDERATED GNMA TRUST:

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
March 12, 1997

ADDRESSES

Federated GNMA Trust
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

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

Custodian

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

Transfer Agent and Dividend
Disbursing Agent

Federated Shareholder P.O. Box 8600
Services Company Boston, Massachusetts 02266-8600

Independent Auditors
Deloitte & Touche LLP 2500 PPG Place
Pittsburgh, Pennsylvania 15222-5401

FEDERATED GNMA TRUST

INSTITUTIONAL SERVICE SHARES

PROSPECTUS

An Open-End,
Diversified Management
Investment Company

March 31, 1997

[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 314184201

8022901A-SS (3/97)

[Graphic]

FEDERATED GNMA TRUST

INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES

STATEMENT OF ADDITIONAL INFORMATION

The Institutional Shares and Institutional Service Shares of Federated GNMA
Trust (the "Trust") represent interests in a diversified portfolio of
securities. This Statement of Additional Information should be read with the
respective prospectus for Institutional Shares and Institutional Service
Shares dated March 31, 1997. This Statement is not a prospectus itself. You
may request a copy of a prospectus or a paper copy of this Statement of
Additional Information, if you have received it electronically, free of
charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated March 31, 1997

[Graphic]
Federated Investors

Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 314184102
Cusip 314184201
8022901B (3/97)

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE TRUST 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
When-Issued and Delayed Delivery Transactions 1
Lending of Portfolio Securities 1
Repurchase Agreements 1
Reverse Repurchase Agreements 2
Portfolio Turnover 2
Investment Limitations 2
FEDERATED GNMA TRUST MANAGEMENT 4
Trust Ownership 7
Trustees Compensation 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
Adviser to the Trust 8
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
OTHER SERVICES 9
Trust Administration 9
Custodian and Portfolio Recordkeeper 9
Transfer Agent 9
Independent Auditors 10
PURCHASING SHARES 10
Distribution Plan and Shareholder Services 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
Determining Market Value of Securities 10
REDEEMING SHARES 11
MASSACHUSETTS PARTNERSHIP LAW 11
EXCHANGING SECURITIES FOR SHARES 11
Tax Consequences 11
TAX STATUS 11
The Trust's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 12
YIELD 12
PERFORMANCE COMPARISONS 12
Economic and Market Information 13
Duration 13
ABOUT FEDERATED INVESTORS 14
Mutual Fund Market 14
Institutional Clients 14
Bank Marketing 14
Broker/Dealers and Bank
Broker/Dealer Subsidiaries 14
GENERAL INFORMATION ABOUT THE TRUST

Federated GNMA Trust was established as a Massachusetts business trust under
a Declaration of Trust dated December 10, 1981.

Shares of the Trust are offered in two classes, known as Institutional
Shares and Institutional Service Shares (individually and collectively
referred to as "Shares"). This Statement of Additional Information relates
to the above-mentioned Shares of the Trust.

INVESTMENT OBJECTIVE AND POLICIES

The Trust's investment objective is current income. The investment objective
cannot be changed without approval of shareholders.

TYPES OF INVESTMENTS

The Trust will invest primarily in mortgage-backed securities. Under normal
circumstances, at least 65% of the Trust's portfolio will be invested in
instruments issued or fully guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA"). In addition, to the
extent that the Trust will invest in other mortgage-backed securities, these
will be collateralized by GNMA obligations.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

These transactions are made to secure what is considered to be an
advantageous price or yield for the Trust. Settlement dates may be a month
or more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. No fees or other
expenses, other than normal transaction costs, are incurred. However, liquid
assets of the Trust sufficient to make payment for the securities to be
purchased are segregated on the Trust's records at the trade date. These
assets are marked to market daily and are maintained until the transaction
has been settled. The Trust does not intend to engage in when-issued and
delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of its assets.

LENDING OF PORTFOLIO SECURITIES

The collateral received when the Trust lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Trust. During the
time portfolio securities are on loan, the borrower pays the Trust any
dividends or interest paid on such securities. Loans are subject to
termination at the option of the Trust or the borrower. The Trust may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.

REPURCHASE AGREEMENTS

The Trust requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Trust, the Trust could receive less than the repurchase
price on any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such
securities by the Trust might be delayed pending court action. The Trust
believes that under the regular procedures normally in effect for custody of
the Trust's portfolio securities subject to repurchase agreements, a court
of competent jurisdiction would rule in favor of the Trust and allow
retention or disposition of such securities. The Trust will only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are deemed by the Trust's adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees
("Trustees").

REVERSE REPURCHASE AGREEMENTS

The Trust may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Trust transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future the Trust will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate.

When effecting reverse repurchase agreements, liquid assets of the Trust, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.

The use of reverse repurchase agreements may enable the Trust to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Trust will be able to avoid selling portfolio
instruments at a disadvantageous time.

PORTFOLIO TURNOVER

The Trust 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 Trust's investment objective. During the fiscal years ended
January 31, 1997 and 1996, the portfolio turnover rates were 63% and 43%,
respectively.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

The Trust will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities.

BORROWING MONEY

The Trust will not borrow money directly or through reverse repurchase
agreements in amounts in excess of one-third of the value of its assets,
including the amounts borrowed.

The Trust will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary or
emergency measure or to facilitate management of the portfolio by enabling
the Trust to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Trust will
not purchase any securities while borrowings in excess of 5% of the value
of its total assets are outstanding.

ISSUING SENIOR SECURITIES

The Trust will not issue senior securities except as permitted by its
investment objective and policies.

PLEDGING ASSETS

The Trust will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may mortgage, pledge,
or hypothecate assets having a market value not exceeding the lesser of
the dollar amount borrowed or 10% of the value of total assets at the time
of the borrowing.

LENDING CASH OR SECURITIES

The Trust will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Trust from purchasing or holding U.S. government obligations, money market
instruments, bonds, debentures, notes, certificates of indebtedness or
other debt securities, entering into repurchase agreements, or engaging in
other transactions where permitted by the Trust's investment objective,
policies and limitations.

DIVERSIFICATION OF INVESTMENTS

With respect to securities comprising 75% of the value of its total assets,
the Trust will not purchase securities of any one issuer (other than cash,
cash items or securities issued or guaranteed by the government of the
United States or its agencies or instrumentalities and repurchase
agreements collateralized by U.S. government securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer.

INVESTING IN REAL ESTATE

The Trust will not buy or sell real estate, including limited partnership
interests in real estate, although it may invest in securities of companies
whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.

INVESTING IN COMMODITIES

The Trust will not purchase or sell commodities.

UNDERWRITING

The Trust will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Trust may purchase
pursuant to its investment objective, policies, and limitations.

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

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Trust may not own securities of open-end investment companies. The
Trust can acquire up to 3% of the total outstanding stock of closed-end
investment companies. The Trust will not be subject to any other
limitations with regard to the acquisition of securities of closed-end
investment companies so long as the public offering price of the Trust's
shares does not include a sales charge exceeding 11U2%. The Trust will
purchase securities of closed-end investment companies only in open-market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets; nor are they applicable with
respect to securities of investment companies that have been exempted from
registration under the Investment Company Act of 1940.

INVESTING IN ILLIQUID SECURITIES

The Trust will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, and certain restricted
securities not determined by the Trustees to be liquid.

Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.

For the purposes of its policies and limitations, the Trust considers
certificates of deposit and demand and time deposits issued by a U.S. branch
of a domestic bank or savings and loan having capital, surplus and undivided
profits in excess of $100,000,000 at the time of investment to be "cash
items."

FEDERATED GNMA TRUST MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated GNMA Trust, and principal occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924

Chairman and Trustee

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Trust.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934

Trustee

Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director or
Trustee of the Funds.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937

Trustee

President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918

Trustee

Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
and Director, Ryan Homes, Inc.; Director or Trustee of the Funds.

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

Trustee

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932

Trustee

Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc., formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932

Trustee

President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee

Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University, U.S. Space Foundation and Czech
Management Center; President Emeritus, University of Pittsburgh; founding
Chairman, National Advisory Council for Environmental Policy and Technology,
Federal Emergency Management Advisory Board and Czech Management Center;
Director or Trustee of the Funds.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935

Trustee

Public Relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department, Non-profit
entities; Director or Trustee of the Funds.

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President

Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949

Executive Vice President

President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Trust.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930

Executive Vice President

Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research, Ltd.;
Executive Vice President and Director, Federated Securities Corp.; Trustee,
Federated Shareholder Services Company; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer of some of the
Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President, Secretary and Treasurer

Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and Secretary
of the Funds; Treasurer of some of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923

Vice President

Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.

* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.

@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D.
Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate U.S.
Government Fund, Inc.; Federated American Leaders Fund, Inc.; Federated ARMs
Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.; Federated
Fund for U.S. Government Securities, Inc.; Federated GNMA Trust; Federated
Government Income Securities, Inc.; Federated Government Trust; Federated
High Income Bond Fund, Inc.; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty Term Trust, Inc. -- 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters
Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds; Trust
for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
Wesmark Funds; and World Investment Series, Inc.

TRUST OWNERSHIP

Officers and Trustees own less than 1% of the Trust's outstanding shares.

As of March 10, 1997, the following shareholders of record owned 5% or more
of the outstanding Institutional Service Shares of the Trust: Charles Schwab
& Co., Inc., San Francisco, California, owned approximately 640,950 Shares
(9.64%); Trucojo Trust Company of St. Joseph, St. Joseph, Missouri, owned
approximately 623,141 Shares (9.37%); and Ambank & Co., Baton Rouge,
Louisiana, owned approximately 994,140 Shares (14.95%).

As of March 10, 1997, the following shareholder of record owned 5% or more
of the outstanding Institutional Shares of the Trust: Edrayco, Gainesville,
Georgia, owned approximately 5,603,650 Shares (5.28%).

TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue $0 $0 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Thomas G. Bigley $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $2,630.40 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland $2,630.40 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
James E. Dowd $2,630.40 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $2,630.40 $119,615 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr. $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts $2,390.92 $108,725 for the Trust and
Trustee 56 other investment companies in the Fund Complex
</TABLE>

* Information is furnished for the fiscal year ended January 31, 1997.

# The aggregate compensation is provided for the Trust which is comprised of
one portfolio, as of January 31, 1997.

+ The information is provided for the last calendar year.

TRUSTEE LIABILITY

The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE TRUST

The Trust's investment adviser is Federated Management. It is a subsidiary
of Federated Investors. All of the voting securities of Federated Investors
are owned by a trust, the trustees of which are John F. Donahue, his wife,
and his son, J. Christopher Donahue.

The adviser shall not be liable to the Trust or any shareholder of the Trust
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
Trust.
ADVISORY FEES

For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectuses. During the fiscal
years ended January 31, 1997, 1996, and 1995, the Trust's adviser earned
$5,451,836, $6,160,922, and $6,989,013, respectively.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio transactions and selects
brokers and dealers subject to guidelines established by the Trustees. The
adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Trust or to the
adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the adviser or its affiliates in advising the Trust and other accounts. To
the extent that receipt of these services may supplant services for which
the adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.

Although investment decisions for the Trust are made independently from
those of the other accounts managed by the adviser, investments of the type
the Trust may make may also be made by those other accounts. When the Trust
and one or more other accounts managed by the adviser are prepared to invest
in, or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
adviser to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Trust or the size of the position
obtained or disposed of by the Trust. In other cases, however, it is
believed that coordination and the ability to participate in volume
transactions will be to the benefit of the Trust.

OTHER SERVICES

TRUST ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Trust for a fee as described in
the prospectuses. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Trust's administrator. The former
Administrator is a subsidiary of Federated Investors. For purposes of this
Statement of Additional Information, Federated Services Company and
Federated Administrative Services, may hereinafter collectively be referred
to as the Administrators.

For the fiscal year ended January 31, 1997, Federated Services Company
earned $1,030,132. For the fiscal years ended January 31, 1996 and 1995,
Federated Administrative Services earned $1,165,702 and $1,317,794,
respectively.

CUSTODIAN AND PORTFOLIO RECORDKEEPER

State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, is custodian for the securities and cash of the Trust.
Federated Services Company, Pittsburgh, PA, provides certain accounting and
recordkeeping services with respect to the Trust's portfolio investments.

TRANSFER AGENT

Federated Services Company, through it registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based on the size, type
and number of accounts and transactions made by shareholders.

INDEPENDENT AUDITORS

The independent auditors for the Trust are Deloitte & Touche LLP,
Pittsburgh, Pennsylvania.

PURCHASING SHARES

Shares are sold at their net asset value without a sales charge on days the
New York Stock Exchange and the Federal Reserve wire system are open for
business. The procedure for purchasing Shares is explained in the respective
prospectus under "Investing in Institutional Shares" or "Investing in
Institutional Service Shares."

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to, marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options,
account designations, and addresses.

With respect to the Institutional Service Shares class of the Trust, by
adopting the Distribution Plan, the Board of Trustees expects that the Trust
will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the Trust in pursuing its investment
objectives. By identifying potential investors whose needs are served by the
Trust's objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and sales.

Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.

For the fiscal year ended January 31, 1997, payments in the amount of
$272,453 were made pursuant to the Distribution Plan (Institutional Service
Shares only) of which $264,824 was waived. In addition, for the fiscal year
ended January 31, 1997, the Institutional Shares and Institutional Service
Shares paid shareholder service fees in the amount of $3,134,846 and
$272,453, respectively, of which $2,507,877 and $7,629, respectively, were
waived.

CONVERSION TO FEDERAL FUNDS

It is the Trust's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. State Street Bank acts
as the shareholder's agent in depositing checks and converting them to
federal funds.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which the net asset
value for each class of Shares is calculated by the Trust are described in
the respective prospectuses.

DETERMINING MARKET VALUE OF SECURITIES

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

* according to the mean between the over-the-counter bid and asked prices
provided by an independent pricing service, if available, or at fair value
as determined in good faith by the Trustees; or

* for short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost unless the Trustees determine that
particular circumstances of the security indicate otherwise.

REDEEMING SHARES

The Trust redeems Shares of either class at the next computed net asset
value after the Trust receives the redemption request. Redemption procedures
are explained in the respective prospectus under "Redeeming Institutional
Shares" or "Redeeming Institutional Service Shares." Although the transfer
agent does not charge for telephone redemptions, it reserves the right to
charge a fee for the cost of wire-transferred redemptions of less than
$5,000.

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 such acts or
obligations of the Trust. These documents require notice of this disclaimer
to be given in each agreement, obligation, or instrument that the Trust or
its Trustees enter into or sign on behalf of the Trust.

In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required 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 from its assets.

EXCHANGING SECURITIES FOR SHARES

Investors may exchange certain U.S. government securities they already own
for Shares of either class, or they may exchange a combination of U.S.
government securities and cash for Shares of either class. An investor
should forward the securities in negotiable form with an authorized letter
of transmittal to Federated Securities Corp. specifying whether the investor
will receive Institutional Shares or Institutional Service Shares in
exchange. The Trust will notify the investor of its acceptance and valuation
of the securities within five business days of their receipt by State Street
Bank.

The Trust values securities in the same manner as the Trust values its
assets. The basis of the exchange will depend upon the net asset value of
Shares on the day the securities are valued. One Share will be issued for
each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription,
or other rights attached to the securities become the property of the Trust,
along with the securities.

TAX CONSEQUENCES

Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Shares, a gain or loss may be realized by the investor.

TAX STATUS

THE TRUST'S TAX STATUS

The Trust will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Trust must,
among other requirements:

* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

* derive less than 30% of its gross income from the sale of securities held
less than three months;

* invest in securities within certain statutory limits; and

* distribute to its shareholders at least 90% of its net income earned
during the year.

SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Trust is eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital
gains, are taxable as ordinary income.

CAPITAL GAINS

Capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held Shares.

TOTAL RETURN

The Trust's average annual total returns for Institutional Shares for the
one-year, five-year, and ten-year periods ended January 31, 1997, and for
the period from March 23, 1982 (effective date of the Trust's registration
statement) to January 31, 1997 were 4.97%, 6.60%, 8.22%, and 10.46%,
respectively. The Trust's average annual total return for Institutional
Service Shares for the one-year period ended January 31, 1997, and for the
period from May 30, 1992 (start of performance) to January 31, 1997 were
4.76% and 6.19%, respectively.

The average annual total return for both classes of shares of the Trust is
the average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that investment.
The ending redeemable value is computed by multiplying the number of shares
owned at the end of the period by the offering price per share at the end of
the period. The number of shares owned at the end of the period is based on
the number of shares purchased at the beginning of the period with $1,000,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.

YIELD

The Trust's yield for Institutional Shares for the thirty-day period ended
January 31, 1997 was 6.86%. The Trust's yield for Institutional Service
Shares was 6.66% for the same period.

The yield for both classes of shares of the Trust is determined by dividing
the net investment income per share (as defined by the Securities and
Exchange Commission) earned by the respective class of shares over a
thirty-day period by the offering price per share of the respective class on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Trust because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.

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

PERFORMANCE COMPARISONS

The performance of both classes of Shares depends upon such variables as:

* portfolio quality;

* average portfolio maturity;

* type of instruments in which the portfolio is invested;

* changes in interest rates and market value of portfolio securities;

* changes in the Trust's expenses or either class of Shares' expenses; and

* various other factors.

Both classes of Shares' performance fluctuates on a daily basis largely
because net earnings and offering price per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation of
yield and total return.

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

* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in net asset value over a specified period of
time. From time to time, the Trust will quote its Lipper ranking in the
"GNMA Funds" category in advertising and sales literature.

* 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 is a total, comprehensive GNMA index comprised
of 30-year GNMA pass-throughs, 15-year GNMA pass-throughs, and GNMA GPM's.

* LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and publicly issued,
fixed rate, nonconvertible domestic bonds of companies in industry, public
utilities and finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers Inc., the index calculates total returns
for one-month, three-month, twelve-month and ten-year periods and
year-to-date.

* LEHMAN BROTHERS GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.

In addition, the Trust will make comparisons to certain direct market
securities in which it is permitted to invest. The type of security that
will be used for such comparisons, and the source of its performance
information is listed below.

* 10-YEAR TREASURY NOTES -- Source: Salomon Brothers. Total returns are
calculated for periods of one, three, and twelve months.

Advertisements and other sales literature for both classes of Shares may
quote total returns which are calculated on non-standardized base periods.
These total returns also represent the historic change in the value of an
investment in either class of Shares based on monthly reinvestment of
dividends over a specified period of time.

Advertising and other promotional literature may include charts, graphs and
other illustrations using the Trust's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Trust can
compare its performance, or performance for the types of securities in which
it invests, to a variety of other investments, such as bank savings
accounts, certificates of deposit, and Treasury bills.

ECONOMIC AND MARKET INFORMATION

Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Trust portfolio managers and their views and analysis on how
such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the
mutual fund industry, including the growth of the industry, from sources
such as the Investment Company Institute.

DURATION

Duration is a commonly used measure of the potential volatility in the price
of a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in
the price of a bond relative to a given change in the market rate of
interest. A bond's price volatility depends on three primary variables: the
bond's coupon rate; maturity date; and the level of market yields of similar
fixed-income securities. Generally, bonds with lower coupons or longer
maturities will be more volatile than bonds with higher coupons or shorter
maturities. Duration combines these variables into a single measure.

Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows.

When the Trust invests in mortgage pass-through securities, its duration
will be calculated in a manner which requires assumptions to be made
regarding future principal prepayments. A more complete description of this
calculation is available upon request from the Trust.

ABOUT FEDERATED INVESTORS

Federated Investors is dedicated to meeting investor needs which is
reflected in its investment decision making --structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.

The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts,
and traders dedicated to specific market sectors. These traders handle
trillions of dollars in annual trading volume.

J. Thomas Madden, Executive Vice President, oversees Federated Investors'
equity and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated Investors' domestic fixed
income management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated Investors' international and global portfolios.

MUTUAL FUND MARKET

Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000 funds
available.* Federated Investors, through its subsidiaries, distributes
mutual funds for a variety of investment applications. Specific markets
include:

INSTITUTIONAL CLIENTS

Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.

BANK MARKETING

Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2,000 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several surveys
performed by DALBAR, Inc. DALBAR is recognized as the industry benchmark for
service quality measurement. The marketing effort to these firms is headed
by James F. Getz, President, Federated Securities Corp.

* Source: Investment Company Institute [Graphic] [Graphic]

FEDERATED GNMA TRUST

ANNUAL REPORT FOR FISCAL YEAR ENDED JANUARY 31, 1997

MANAGEMENT DISCUSSION AND ANALYSIS

The Federated GNMA Trust (the "Trust"), is designed for shareholders seeking
participation in a professionally managed portfolio of GNMAs guaranteed as
to the payment of principal and interest by the U.S. Government. (Trust
shares are not guaranteed.) The Trust offers daily liquidity, credit control
and other advantages over comparable Treasuries while at the same time
allowing investors to avoid the complexities of managing a portfolio of
mortgage-backed securities. Shareholders receive a diversified portfolio
managed under a set of highly conservative disciplines.

Current portfolio strategy targets an effective duration of 4.0 years, which
is neutral to the Lehman GNMA single-family aggregate market weighted
average effective duration. The asset allocation mix reflects a blend of
GNMA mortgage securities with intermediate U.S. Treasuries with a
diversified range of coupons averaging 7.8%. During the course of the fiscal
year, the Trust allocated 8.3% of the portfolio assets to U.S. Treasuries in
lieu of discount GNMA securities. The Trust also maintained exposure to the
seasoned premium sector over new premium issues. The seasoned premiums have
better convexity than comparable coupon new issues and they have less
exposure to interest rate volatility. This portfolio strategy, during the
fiscal reporting period, produced an average annual total return of 4.97%*
on the Institutional Shares and 4.76%* for the Institutional Service Shares
versus the Lehman Brothers GNMA Index** return of 5.61% and the Merrill
Lynch 10-Year U.S. Treasury Index** return of (0.39%).

The U.S. Treasury market in 1996 offered lackluster returns to investors
versus 1995's awesome returns and played second fiddle to the stellar gains
in the equity market. Shorter duration U.S. Treasuries posted slightly
positive returns while the longer end produced negative returns. The theme
throughout 1996 was a trading range environment; however, there were points
where the market moved swiftly and sharply due to shifting Federal Reserve
Board expectations. Given this environment, the mortgage-backed securities
sector was the best performing fixed income sector during 1996. On a total
rate of return basis for the year, mortgages outperformed their Treasury
counterparts by over 200 basis points. The fundamentals and technicals in
the mortgage market were attractive for most of 1996 with relatively benign
prepayment rates.

Overall, our view on the mortgage market is one of fair value when viewed
from a historical perspective. However, the tight spreads in other fixed
income markets combined with the general desire for higher yields portrays a
favorable outlook for the mortgage market moving through 1997.

As of January 31, 1997, total net assets were $1.3 billion and the average
30-day net yield as calculated under SEC guidelines was 6.86% for
Institutional Shares and 6.66% for Institutional Service Shares.* Rated AAAf
by Standard & Poor's, for credit qualities, the Trust remains committed to
pursuing competitive yields and daily liquidity.***

* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than the original cost.

** These indices are unmanaged.

*** An AAAf rating means that the Trust's portfolio holdings and
counterparties provide extremely strong protection against losses from
credit defaults. Ratings are subject to change and do not remove market
risks.

FEDERATED GNMA TRUST
(INSTITUTIONAL SHARES)

GROWTH OF $25,000 INVESTED IN
FEDERATED GNMA TRUST (INSTITUTIONAL SHARES)

The graph below illustrates the hypothetical investment of $25,000 in the
Federated GNMA Trust (Institutional Shares) (the "Fund") from January 31,
1987 to January 31, 1997, compared to the Salomon Brothers 30-Year GNMA
Index (SB30YRGI),+ the Lipper GNMA Funds Average (LGFA),++ and the Lehman
Brothers GNMA Index (LBGNMA).+

"Graphic representation "A" omitted. See Appendix."

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.

THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS DATED
MARCH 31, 1997, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN,
CONSTITUTES THE FUND'S ANNUAL REPORT.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The SB30YRGI, LGFA, and the LBGNMA have been adjusted to
reflect reinvestment of dividends on securities in the indices and average.

+ The SB30YRGI and LBGNMA are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.

++ The LGFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
in the respective category, and is not adjusted to reflect any sales
charges. However, these total returns are reported net of expenses or other
fees that the SEC requires to be reflected in a fund's performance.

FEDERATED GNMA TRUST
(INSTITUTIONAL SERVICE SHARES)

GROWTH OF $25,000 INVESTED IN
FEDERATED GNMA TRUST (INSTITUTIONAL SERVICE SHARES)

The graph below illustrates the hypothetical investment of $25,000 in the
Federated GNMA Trust (Institutional Service Shares) (the "Fund") from May
30, 1992 (start of performance) to January 31, 1997, compared to the Salomon
Brothers 30-Year GNMA Index (SB30YRGI),+ the Lipper GNMA Funds Average
(LGFA),++ and the Lehman Brothers GNMA Index (LBGNMA).+

"Graphic representation "B" omitted. See Appendix."

THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY THE FUND'S PROSPECTUS DATED
MARCH 31, 1997, AND, TOGETHER WITH FINANCIAL STATEMENTS CONTAINED THEREIN,
CONSTITUTES THE FUND'S ANNUAL REPORT.

+ The SB30YRGI and LBGNMA are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.

[Graphic]
Federated Investors

Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 314184102
Cusip 314184201
8022901ARS (3/97)

A. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant of the graphic presentation. Federated GNMA Trust (Institutional
Shares) (the `Fund'') is represented by a solid line, whereas Salomon
Brothers 30-Year GNMA Index is represented by a dotted line, Lehman
Brothers GNMA Index is represented by a broken dotted line, and Lipper GNMA
Funds Average is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $25,000 in the Fund and Salomon Brothers 30-Year GNMA Index,
Lehman Brothers GNMA Index, and Lipper GNMA Funds Average for the period
from January 31, 1987 to January 31, 1997. The `y'' axis reflects the
cost of the investment. The `x'' axis reflects computation periods from
the ending value of the hypothetical investment in the Fund as compared to
Salomon Brothers 30-Year GNMA Index, Lehman Brothers GNMA Index, and Lipper
GNMA Funds Average; the ending values are $55,058; $58,834; $58,513; and
$51,738, respectively. Beneath the list of components that correspond to
the line graph are the following total return data for the Fund: total
return figures for the one year, five year, and ten year periods, and start
of performance-to-date average annualized total return. The corresponding
total return figures are as follows: 4.97%; 6.60%; 8.22%; and 10.46%,
respectively. The performance disclaimer and footnotes are listed directly
under the graphic presentation.

B. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed in the upper left
quadrant of the graphic presentation. Federated GNMA Trust (Institutional
Service Shares) (the `Fund'') is represented by a solid line, whereas
Salomon Brothers 30-Year GNMA Index is represented by a dotted line, Lehman
Brothers GNMA Index is represented by a broken dotted line, and Lipper GNMA
Funds Average is represented by a broken line. The line graph is a visual
representation of a comparison of change in value of a hypothetical
investment of $25,000 in the Fund and Salomon Brothers 30-Year GNMA Index,
Lehman Brothers GNMA Index, and Lipper GNMA Funds Average for the period
from May 30, 1992 (start of performance) to January 31, 1997. The `y''
axis reflects the cost of the investment. The `x'' axis reflects
computation periods from the ending value of the hypothetical investment in
the Fund as compared to Salomon Brothers 30-Year GNMA Index, Lehman
Brothers GNMA Index, and Lipper GNMA Funds Average; the ending values are
$33,102, $34,818, $35,077, and $33,089, respectively. Beneath the list of
components that correspond to the line graph are the following total return
data for the Fund: total return figures for the one year period and start
of performance-to-date average annualized total return. The corresponding
total return figures are as follows: 4.76% and 6.19%, respectively. The
performance disclaimer and footnotes are listed directly under the graphic
presentation.