FEDERATED ARMS FUND, 485APOS, 1999-08-26

FEDERATED ARMS FUND
485APOS, 1999-08-26

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1933 Act File No. 2-98491
1940 Act File No. 811-4539

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ..........................

Post-Effective Amendment No. 24 ......................... X
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and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 23 ........................................ X
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FEDERATED ARMs FUND

(Exact Name of Registrant as Specified in Charter)

Federated Investors Funds

5800 Corporate Drive

Pittsburgh, Pennsylvania 15237-7000

(Address of Principal Executive Offices)

(412) 288-1900

(Registrant's Telephone Number)

John W. McGonigle, Esquire

1001 Liberty Avenue

Federated Investors Tower

Pittsburgh, Pennsylvania 15222-3779

(Name and Address of Agent for Service)

(Notices should be sent to the Agent for Service)

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
_ on __ pursuant to paragraph (b)

60 days after filing pursuant to paragraph (a)(i) X on OCTOBER 31, 1999
pursuant to paragraph (a)(i)

75 days after filing pursuant to paragraph (a)(ii) on _________________
pursuant to paragraph (a)(ii) of Rule 485

If appropriate, check the following box:

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

Copies To: Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP

2101 L Street, N.W.
Washington, D.C. 20037

<PAGE>

PROSPECTUS

FEDERATED ARMS FUND

INSTITUTIONAL SHARES

A mutual fund seeking to provide current income consistent with minimal
volatility of principal by investing at least 65% of its assets in adjustable
and floating rate mortgage backed securities which are issued or guaranteed by
the U.S. government, its agencies or instrumentalities.

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

CONTENTS

Risk/Return Summary
What are the Fund's Fees and Expenses?
What are the Fund's Investment Strategies?
What are the Principal Securities in Which the Fund Invests?
What are the Specific Risks of Investing in the Fund?
What do Shares Cost?
How is the Fund Sold?
How to Purchase Shares
How to Redeem and Exchange Shares
Account and Share Information
Who Manages the Fund?
Last Meeting of Shareholders
Financial Information
Report of Independent Auditors

October 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

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

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in adjustable (including floating rate) mortgage backed securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund limits its investments to those that would enable it
to qualify as a permissible investment for federal credit unions and Federal
savings associations, and as an appropriate direct investment for national
banks.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

o INTEREST RATE RISK. Prices of fixed income securities generally fall when
interest rates rise.

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

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

o LIQUIDITY RISKS. Trading opportunities are more limited for fixed income
securities that have not received any credit ratings, have received ratings
below investment grade, have complex terms or are not widely held.

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

<PAGE>

RISK/RETURN BAR CHART AND TABLE

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Shares as of the calendar
year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with "0" and increasing in
increments of 2.00% up to 16.00%.

The `x' axis represents calculation periods for the last ten calendar years of
the Fund, beginning with the earliest year. The light gray shaded chart features
ten distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentage for the Fund's
Institutional Shares for each calendar year is stated directly at the top of
each respective bar, for the calendar years 1989 through 1998. The percentages
noted are: 15.85%, 6.62%, 15.73%, 3.71%, 4.29%, 0.27%, 8.81%, 6.52%, 6.24% and
4.19% respectively.

The bar chart shows the variability of the Fund's Institutional Shares total
returns on a calendar year-end basis.

The Fund's Institutional Shares are not sold subject to a sales charge (load).
The total returns displayed above are based upon net asset value.

The Fund's Institutional Shares total return for the six-month period from
January 1, 1999 to June 30, 1999 was 2.37%.

Within the period shown in the Chart, the Fund's Institutional Shares
highest quarterly return was 10.09% (quarter ended June 30, 1989). Its lowest
quarterly return was (3.05%) (quarter ended March 31, 1990).

AVERAGE ANNUAL TOTAL RETURN TABLE

The following table represents the Fund's Institutional Shares Average Annual
Total Returns for the calendar period ended December 31, 1999. The table shows
the Fund's total returns averaged over a period of years relative to the Lehman
Brothers 1-3 Year Government Bond Index (LB1-3GBI), the Lehman Brothers
Adjustable Rate Mortgage Index (LBARMI), broad-based market indexes and the
Lipper Adjustable Rate Mortgage Funds Average (LARMFA, an average of funds with
similar investment objectives. Total returns for the indexes shown do not
reflect sales charges, expenses or other fees that the Securities and Exchange
Commission (SEC) requires to be reflected in the Fund's performance. Indexes are
unmanaged, and it is not possible to invest directly in an index.

INSTITUTIONAL

CALENDAR PERIOD SHARES LB1-3GBI LBARMI LARMFA
1 Year 4.19%

5 Years 5.18%
10 Years 7.13%

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

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED ARMS FUND

FEES AND EXPENSES

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

SHAREHOLDER FEES

FEES PAID DIRECTLY FROM YOUR INVESTMENT

Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None

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

ANNUAL FUND OPERATING EXPENSES (Before Waivers)1

EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee 2 0.60%
Distribution (12b-1) Fee 3 None
Shareholder Services Fee 0.25%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 0.99%

1 Although not contractually obligated to do so, the Adviser and shareholder
services provider waived certain amounts. These are shown below along with
the net expenses the Fund ACTUALLY PAID for the fiscal year ended
August 31, 1999.

Total Waiver of Fund Expenses 0.44%
Total Annual Operating Expenses (after waivers)...........0.55%

2 The Adviser voluntarily waived a portion of the management fee. The Adviser
can terminate this voluntary waiver at any time. The management fee paid by
the Fund (after the voluntary waiver) was 0.41% for the year ended August
31, 1999.

3 The shareholder services fee has been voluntarily reduced. This voluntary
reduction can be terminated at any time. The shareholder services fee paid by
the Fund's Institutional Shares (after the voluntary reduction) was 0.00% for
the year ended August 31, 1999.

<PAGE>

EXAMPLE

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

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

1 YEAR $101
- --------------------------------------------

3 YEARS $315
- --------------------------------------------

5 YEARS $547
- --------------------------------------------

10 YEARS $1,213
- ---------------------------------------------------

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

The Fund, under normal circumstances, invests at least 65% of its total assets
in adjustable rate mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. It is anticipated that such a
portfolio will generally provide higher current yields than money market
securities or alternative investments of comparable credit quality and
volatility. While the Fund's net asset value will exhibit greater volatility
than that of a money market portfolio, it should exhibit less volatility than a
portfolio of fixed-rate mortgages. The Fund may invest up to 35% of its total
assets in other U.S. government securities and in investment grade mortgage
backed securities issued by non-governmental entities. A description of the
various types of securities in which the Fund invests, and their risks,
immediately follows this strategy discussion.

Mortgage backed securities generally offer higher yields than comparable U.S.
Treasury securities. The extra yield compensates for prepayment risk. Underlying
mortgages, which act as collateral for mortgage securities, may, in most cases,
be prepaid by homeowners at any time without penalty. One important reason for
prepayments is changes in market interest rates from the time of mortgage
origination.

The Adviser attempts to manage the Fund's prepayment risk by selecting mortgage
backed securities with characteristics that make prepayment less likely. An
important factor in the Adviser's assessment of these characteristics is the
Adviser's interest rate outlook. Characteristics that the Adviser may consider
in selecting securities include the interest rate formulas of the underlying
mortgages, the index upon which the mortgage rate is based, the length of time
the underlying mortgages have been outstanding, the prior prepayment history of
the mortgages and the federal agencies that securitize the mortgages.

The Adviser formulates its interest rate outlook and otherwise attempts to
anticipate changes in economic and market conditions by analyzing a variety of
factors such as:

o current and expected U.S. economic growth;

o current and expected interest rates and inflation;

o the Federal Reserve Board monetary policy; and

o changes in the supply of or demand for U.S. government securities.

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

The Adviser may attempt to take advantage of current and potential yield
differentials existing from time to time between various government adjustable
rate mortgage backed securities in order to increase the Fund's return. In
addition, the Adviser may invest up to 35% of the Fund's assets in fixed rate
U.S. government mortgage securities, investment grade mortgage backed securities
issued by non-governmental entities, or U.S. government securities that are not
mortgage backed securities, such as U.S. Treasury securities and U.S. government
agency securities, when in the Adviser's judgment, such investment will
potentially enhance return or manage risk under current or anticipated economic
and market conditions. The Fund may also engage in dollar roll transactions for
their potential to enhance income.

The Adviser may use investment grade collateralized mortgage obligations
("CMOs") with relatively predictable cash flows (such as sequential pay, planned
amortization class and targeted amortization class), to reduce pre-payment risk.

TEMPORARY DEFENSIVE INVESTMENTS

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

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

FIXED INCOME SECURITIES

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

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

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

MORTGAGE BACKED SECURITIES

Mortgage backed securities represent interests in "pools" (groups) of mortgages.
The mortgages that comprise a pool normally have similar interest rates,
maturities and other terms. Mortgages may have fixed or adjustable interest
rates.

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

ADJUSTABLE RATE MORTGAGES

The Fund invests in interests in pools of adjustable rate mortgages, which are
known as ARMs. While fixed rate mortgage securities have a stated interest rate,
ARMs have periodic adjustments in the interest rate on the underlying mortgages.
The adjustable rate feature of the mortgages underlying the ARMs will help to
limit sharp movements in the Fund's net asset value in response to normal
fluctuations in interest rates. As interest rates on the mortgages underlying
ARMs reset periodically (for example, semi-annually or annually), the yields of
the ARMs held in the portfolio will gradually adjust to reflect the overall
changes in interest rates.

COLLATERALIZED MORTGAGE OBLIGATIONS

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

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

Non-government mortgage backed securities (including non-governmental CMOs) are
issued by private entities, rather than by U.S. government agencies. These
securities involve credit risks and liquidity risks. The Fund may invest in
non-government mortgage backed securities that are rated BBB or higher by a
nationally recognized statistical rating agency.

TREASURY SECURITIES

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

AGENCY SECURITIES

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

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

CREDIT ENHANCEMENT

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

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

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

DELAYED DELIVERY TRANSACTIONS

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

To Be Announced Securities (TBAs)

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

Dollar Rolls

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

ASSET COVERAGE

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

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

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

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

INTEREST RATE RISKS

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

Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.

PREPAYMENT RISKS

Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments on
mortgage backed securities include both interest and a partial payment of
principal. This partial payment of principal may be comprised of a scheduled
principal payment as well as an unscheduled payment from the voluntary
prepayment, refinancing, or foreclosure of the underlying loans. These
unscheduled payments of principal can adversely affect the price and yield of
mortgage backed securities. For example, during periods of declining interest
rates, prepayments can be expected to accelerate, and the Fund would be required
to reinvest the proceeds at the lower interest rates then available. In
addition, like other interest- bearing securities, the values of mortgage backed
securities generally fall when interest rates rise. Since rising interest rates
generally result in decreased prepayments of mortgage backed securities, this
could cause mortgage securities to have greater average lives than expected and
their value may decline more than other fixed income securities. Conversely,
when interest rates fall, their potential for capital appreciation is limited
due to the existence of the prepayment feature.

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

CREDIT RISKS

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

Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services, Inc. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not received
a rating, the Fund must rely entirely upon the Adviser's credit assessment.

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

Credit risk includes the possibility that a party to a transaction involving the
Fund will fail to meet its obligations. This could cause the Fund to lose the
benefit of the transaction or prevent the Fund from selling or buying other
securities to implement its investment strategy.

<PAGE>

LIQUIDITY RISKS

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

Trading opportunities are more limited for CMOs that have complex terms or that
are not widely held. These features may make it more difficult to sell or buy a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash or give up
an investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility.

Liquidity risk also refers to the possibility that the Fund may not be able to
sell a security when it wants to. If this happens, the Fund will be required to
continue to hold the security, and the Fund could incur losses.

WHAT DO SHARES COST?

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

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

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

HOW IS THE FUND SOLD?

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

The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to financial intermediaries, public, and private
organizations or individuals, directly or through investment professionals.

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

HOW TO PURCHASE SHARES

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

<PAGE>

THROUGH AN INVESTMENT PROFESSIONAL

o Establish an account with the investment professional; and

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

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

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

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

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

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

BY WIRE Send your wire to:

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

ABA Number 011000028
Attention: EDGEWIRE

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

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

BY CHECK

Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317

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

BY AUTOMATED CLEARING HOUSE (ACH)

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

HOW TO REDEEM SHARES

You should redeem Shares:

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

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

THROUGH AN INVESTMENT PROFESSIONAL

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

DIRECTLY FROM THE FUND

BY TELEPHONE

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

BY MAIL

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

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:

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

All requests must include:

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

o amount to be redeemed and

o signatures of all shareholders exactly as registered.

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

<PAGE>

SIGNATURE GUARANTEES Signatures must be guaranteed if:

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

o your redemption will be sent to an address of record that was changed
within the last 30 days;

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

A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union or broker, dealer, or securities exchange member. A NOTARY PUBLIC CANNOT
PROVIDE A SIGNATURE GUARANTEE.

PAYMENT METHODS FOR REDEMPTIONS

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

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

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

REDEMPTION IN KIND

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

o to allow your purchase to clear;

o during periods of market volatility; or

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

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

ADDITIONAL CONDITIONS

TELEPHONE TRANSACTIONS

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

SHARE CERTIFICATES

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

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

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

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

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

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

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

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

<PAGE>

WHO MANAGES THE FUND?

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

The Adviser and other subsidiaries of Federated advise approximately 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees.

More than 4,000 investment professionals make Federated Funds available to their
customers.

THE FUND'S PORTFOLIO MANANGERS ARE:

TODD A. ABRAHAM

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

KATHLEEN M. FOODY-MALUS

Kathleen M. Foody-Malus has been the Fund's portfolio manager since January
1992. She is Vice President of the Trust. Ms. Foody-Malus joined Federated in
1983 and has been a Senior Portfolio Manager since 1996 and a Vice President of
the Fund's Adviser since 1993. She was a Portfolio Manager and a Vice President
of the Fund's Adviser from 1993 to 1996. Ms. Foody-Malus received her M.B.A. in
Accounting/Finance from the University of Pittsburgh.

ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.60% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses. This does not include
reimbursement to the Fund of any expenses incurred by shareholders who use the
transfer agent's subaccounting facilities.

YEAR 2000 READINESS

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

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

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

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. The financial impact of these issues for the Fund is still being
determined. There can be no assurance that potential Year 2000 problems would
not have a material adverse effect on the Fund.

LAST MEETING OF SHAREHOLDERS

A Special Meeting of the Trust's shareholders was held on June 21, 1999. On
April 23, 1999, the record date for shareholders voting at the meeting, there
were 46,352,326 total outstanding shares. The following items were considered by
shareholders and the results of their voting were as follows:

1. Election of Trustees:

NAMES FOR AGAINST ABSTENTIONS AND WITHHELD
AUTHORITY TO

BROKER VOTE
NON-VOTES

Thomas G. Bigley 30,067,640 7,423,084
Nicholas P. 30,067,640 7,423,084
Constantakis
John F. Cunningham 30,067,640 7,423,084
J. Christopher 30,067,640 7,423,084
Donohue
Charles F. 30,067,640 7,423,084
Mansfield, Jr.

John E. Murray, 30,067,640 7,423,084
Jr.
John S. Walsh 30,067,640 7,423,084

1. The following Directors of the Trust continued their terms as Directors of
the Trust: John F. Donohue, Lawrence D. Ellis, and Marjorie P. Smuts.

2. To ratify the selection of Ernst & Young LLP as the Fund's Independent
Auditors.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

37,448,755 24,557 17,411

3. To make changes to the Fund's fundamental investment policies.

a. To amend the Fund's fundamental investment policy regarding
diversification.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

b. To amend the Fund's fundamental investment policy regarding borrowing
money and issuing senior securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

c. To amend the Fund's fundamental investment policy regarding
investments in real estate..

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

d. To amend the Fund's fundamental policy regarding investing in
commodities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

e. To amend the Fund's fundamental investment policy regarding
underwriting securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

f. To amend the Fund's fundamental investment policy regarding lending
by the Fund.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

g. To amend, and to make non-fundamental, the Fund's fundamental
investment policy buying securities on margin.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

h. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding pledging assets.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

i. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding investing in illiquid securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

j. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding investing in other investment companies.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

k. To make non-fundamental the Fund's fundamental investment policy
regarding investing in adjustable and floating rate mortgage securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

l. To make non-fundamental the Fund's fundamental investment policy
regarding investing in U.S. government securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

m. To make non-fundamental the Trust's fundamental investment policy
regarding investing in mortgage related securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

n. To make non-fundamental the Fund's fundamental investment policy
regarding purchasing collateralized mortgage obligations.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

o. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in dollar roll transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

p. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in repurchase agreements.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

q. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in reverse repurchase agreements.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

r. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in securities lending transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

s. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in when-issued and delayed delivery transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

t. To make non-fundamental the Fund's fundamental investment policy
regarding investing in stripped mortgage securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

4. To eliminate certain of the Fund's fundamental investment policies.

a. To remove the Trust's fundamental investment policy on investing in
securities of new issuers.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

b. To remove the Trust's fundamental investment policy on selling
securities short.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

c. To remove the Trust's fundamental investment policy regarding
portfolio trading.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

<PAGE>

d. To remove the Trust's fundamental investment policy regarding
temporary investments.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

5. To approve an amendment and restatement to the Fund's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Fund without seeking
shareholder approval.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,610,128 12,230,086 650,510

</TABLE>

<PAGE>

FINANCIAL INFORMATION

FINANCIAL HIGHLIGHTS

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

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

<PAGE>

FEDERATED ARMS FUND

INSTITUTIONAL SHARES

A Statement of Additional Information (SAI) dated October 31, 1999 is
incorporated by reference into this prospectus. Additional information about the
Fund and its investments is contained in the Fund's SAI and Annual and
Semi-Annual Report to shareholders as they become available. The Annual Report
discusses market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year. To obtain the SAI,
the Annual Report, Semi-Annual Report and other information without charge, and
make inquiries, call your investment professional or the Fund at 1-800-341-7400.

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

INVESTMENT COMPANY ACT FILE NO. 811-4539
CUSIP 314082108

8100309A-IS (10/99)

PROSPECTUS

FEDERATED ARMS FUND

INSTITUTIONAL SERVICE SHARES

CONTENTS

October 31, 1999

<PAGE>

RISK/RETURN SUMMARY

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in adjustable (including floating) rate mortgage backed securities which
are issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund limits its investments to those that would enable it
to qualify as a permissible investment for federal credit unions and Federal
savings associations, and as an appropriate direct investment for national
banks.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

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

o INTEREST RATE RISK. Prices of fixed income securities generally fall when
interest rates rise.

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

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

<PAGE>

RISK/RETURN BAR CHART AND TABLE

The graphic presentation displayed here consists of a bar chart representing the
annual total returns of the Fund's Institutional Service Shares as of the
calendar year-end for each of five years.

The `y' axis reflects the "% Total Return" beginning with "0" and increasing in
increments of 1.00% up to 9.00%.

The `x' axis represents calculation periods from the earliest calendar year end
of the Fund's start of business through the calendar year ended 1998. The light
gray shaded chart features five distinct vertical bars, each shaded in charcoal,
and each visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentage for the Fund's Institutional Service Shares for each calendar year is
stated directly at the top of each respective bar, for the calendar years 1993
through 1998. The percentages noted are: 4.03%, 8.54%, 6.25%, 6.00% and 3.93%
respectively.

The bar chart shows the variability of the Fund's Institutional Service Shares
total returns on a calendar year-end basis.

The Fund's Institutional Service Shares are not sold subject to a sales charge
(load). The total returns displayed above are based upon net asset value.

The Fund's Institutional Service Shares total return for the six-month period
from January 1, 1999 to June 30, 1999 was 2.25%.

Within the period shown in the Chart, the Fund's Institutional Service
Shares highest quarterly return was 3.00% (quarter ended March 31, 1995. Its
lowest quarterly return was (0.63%) (quarter ended June 30, 1994).

AVERAGE ANNUAL TOTAL RETURN TABLE

The following table represents the Fund's Institutional Service Shares Average
Annual Total Returns for the calendar period ended December 31, 1999. The table
shows the Fund's total returns averaged over a period of years relative to the
Lehman Brothers 1-3 Year Government Bond Index (LB1-3GBI), the Lehman Brothers
Adjustable Rate Mortgage Index (LBARMI), broad-based market indexes and the
Lipper Adjustable Rate Mortgage Funds Average (LARMFA), an average of funds with
similar investment objectives. Total returns for the indexes shown do not
reflect sales charges, expenses or other fees that the Securities and Exchange
Commission (SEC) requires to be reflected in the Fund's performance. Indexes are
unmanaged, and it is not possible to invest directly in an index.

CALENDAR PERIOD INSTITUTIONAL LB1-3GBI LBARMI LARMFA
SERVICE
SHARE

1 Year 3.93%
5 Years 4.92%
Start of 4.80%
Performance1

1 THE FUND'S INSTITUTIONAL SERVICE SHARES START OF PERFORMANCE DATE WAS APRIL
25, 1992.

<PAGE>

WHAT ARE THE FUND'S FEES AND EXPENSES?

FEDERATED ARMS FUND

FEES AND EXPENSES

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

SHAREHOLDER FEES

FEES PAID DIRECTLY FROM YOUR INVESTMENT

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

ANNUAL FUND OPERATING EXPENSES (Before Waivers)1

EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fee 2 0.60%
Distribution (12b-1) Fee 3 0.25%
Shareholder Services Fee 0.25%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 1.24%
- ------------------------------------------------------------------------------

1 Although not contractually obligated to do so, the Adviser and distributor
waived certain amounts. These are shown below along with the net expenses
the Fund ACTUALLY

PAID for the fiscal year ended August 31, 1999.
Total Waiver of Fund Expenses 0.44%
Total Annual Operating Expenses (after waivers).........0.80%

3 The distribution (12b-1) fee has been voluntarily reduced. This voluntary
reduction can be terminated at any time. The distribution (12b-1) fee paid
by the Fund's Institutional Service Shares (after the voluntary reduction)
was 0.00% for the year ended August 31, 1999.

<PAGE>

EXAMPLE

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

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

1 YEAR ..............$126..................
3 YEARS ..............$393..................
5 YEARS ..............$681..................
10 YEARS.....................$1,500.........

WHAT ARE THE FUND'S INVESTMENT STRATEGIES?

The Adviser formulates its interest rate outlook and otherwise attempts to
anticipate changes in economic and market conditions by analyzing a variety of
factors such as:

o current and expected U.S. economic growth;

o current and expected interest rates and inflation;

o the Federal Reserve Board monetary policy; and

o changes in the supply of or demand for U.S. government securities.

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

TEMPORARY DEFENSIVE INVESTMENTS

WHAT ARE THE PRINCIPAL SECURITIES IN WHICH THE FUND INVESTS?

FIXED INCOME SECURITIES

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

MORTGAGE BACKED SECURITIES

ADJUSTABLE RATE MORTGAGES

COLLATERALIZED MORTGAGE OBLIGATIONS

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

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

TREASURY SECURITIES

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

AGENCY SECURITIES

CREDIT ENHANCEMENT

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

DELAYED DELIVERY TRANSACTIONS

To Be Announced Securities (TBAs)

Dollar Rolls

ASSET COVERAGE

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?

INTEREST RATE RISKS

PREPAYMENT RISKS

CREDIT RISKS

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

<PAGE>

LIQUIDITY RISKS

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

WHAT DO SHARES COST?

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

HOW IS THE FUND SOLD?

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

The Fund's Distributor, Federated Securities Corp., markets the Shares described
in this prospectus to financial institutions, credit unions, savings
associations and national banks or individuals, directly or through investment
professionals.

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

RULE 12B-1 PLAN

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

HOW TO PURCHASE SHARES

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

THROUGH AN INVESTMENT PROFESSIONAL

o Establish an account with the investment professional; and

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

DIRECTLY FROM THE FUND

o Establish your account with the Fund by submitting a completed New Account
Form; and

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

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

BY WIRE Send your wire to:

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

ABA Number 011000028
Attention: EDGEWIRE

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

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

BY CHECK

Make your check payable to THE FEDERATED FUNDS, note your account number on the
check, and mail it to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

If you send your check by a PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317

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

BY AUTOMATED CLEARING HOUSE (ACH)

HOW TO REDEEM SHARES

You should redeem Shares:

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

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

THROUGH AN INVESTMENT PROFESSIONAL

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

DIRECTLY FROM THE FUND

BY TELEPHONE

BY MAIL

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

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

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

Send requests by PRIVATE COURIER OR OVERNIGHT DELIVERY SERVICE to:

Federated Shareholder Services Company
1099 Hingham Street

Rockland, MA 02370-3317 All requests must include:

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

o amount to be redeemed and

o signatures of all shareholders exactly as registered.

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

SIGNATURE GUARANTEES Signatures must be guaranteed if:

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

o your redemption will be sent to an address of record that was changed
within the last 30 days;

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

PAYMENT METHODS FOR REDEMPTIONS

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

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

REDEMPTION IN KIND

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

o to allow your purchase to clear;

o during periods of market volatility; or

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

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

ADDITIONAL CONDITIONS

TELEPHONE TRANSACTIONS

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

SHARE CERTIFICATES

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

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

<PAGE>

WHO MANAGES THE FUND?

The Adviser and other subsidiaries of Federated advise APPROXIMATELY 175 mutual
funds and separate accounts, which totaled approximately $111 billion in assets
as of December 31, 1998. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States with approximately
1,900 employees.

More than 4,000 investment professionals make Federated Funds available to their
customers.

THE FUND'S PORTFOLIO MANANGERS ARE:

TODD A. ABRAHAM

KATHLEEN M. FOODY-MALUS

ADVISORY FEES

YEAR 2000 READINESS

LAST MEETING OF SHAREHOLDERS

1. Election of Trustees:

NAMES FOR AGAINST ABSTENTIONS AND WITHHELD
AUTHORITY TO

BROKER VOTE
NON-VOTES

John E. Murray, 30,067,640 7,423,084
Jr.
John S. Walsh 30,067,640 7,423,084

1. The following Directors of the Trust continued their terms as Directors of
the Trust: John F. Donohue, Lawrence D. Ellis, and Marjorie P. Smuts.

2. To ratify the selection of Ernst & Young LLP as the Fund's Independent
Auditors.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

37,448,755 24,557 17,411

3. To make changes to the Fund's fundamental investment policies.

a. To amend the Fund's fundamental investment policy regarding
diversification.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

b. To amend the Fund's fundamental investment policy regarding borrowing
money and issuing senior securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

c. To amend the Fund's fundamental investment policy regarding
investments in real estate..

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

d. To amend the Fund's fundamental policy regarding investing in
commodities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

e. To amend the Fund's fundamental investment policy regarding
underwriting securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

f. To amend the Fund's fundamental investment policy regarding lending
by the Fund.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

g. To amend, and to make non-fundamental, the Fund's fundamental
investment policy buying securities on margin.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

h. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding pledging assets.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

i. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding investing in illiquid securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

j. To amend, and to make non-fundamental, the Fund's fundamental
investment policy regarding investing in other investment companies.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

k. To make non-fundamental the Fund's fundamental investment policy
regarding investing in adjustable and floating rate mortgage securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

l. To make non-fundamental the Fund's fundamental investment policy
regarding investing in U.S. government securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

m. To make non-fundamental the Trust's fundamental investment policy
regarding investing in mortgage related securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

n. To make non-fundamental the Fund's fundamental investment policy
regarding purchasing collateralized mortgage obligations.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

o. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in dollar roll transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

p. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in repurchase agreements.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

q. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in reverse repurchase agreements.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

r. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in securities lending transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

s. To make non-fundamental the Fund's fundamental investment policy
regarding engaging in when-issued and delayed delivery transactions.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

t. To make non-fundamental the Fund's fundamental investment policy
regarding investing in stripped mortgage securities.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,639,087 12,060,446 791,191

4. To eliminate certain of the Fund's fundamental investment policies.

a. To remove the Trust's fundamental investment policy on investing in
securities of new issuers.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

b. To remove the Trust's fundamental investment policy on selling
securities short.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

c. To remove the Trust's fundamental investment policy regarding
portfolio trading.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

<PAGE>

d. To remove the Trust's fundamental investment policy regarding
temporary investments.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,499,144 12,195,063 796,517

5. To approve an amendment and restatement to the Fund's Declaration of Trust to
permit the Board of Trustees to liquidate assets of the Fund without seeking
shareholder approval.

FOR AGAINST ABSTENTIONS AND WITHHELD AUTHORITY
BROKER NON-VOTES TO VOTE

24,610,128 12,230,086 650,510

<PAGE>

FINANCIAL INFORMATION

FINANCIAL HIGHLIGHTS

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

<PAGE>

FEDERATED ARMS FUND

INSTITUTIONAL SERVICE SHARES

INVESTMENT COMPANY ACT FILE NO. 811-4539
CUSIP 314082207

8100309A-SS (10/99)

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

FEDERATED ARMS FUND

INSTITUTIONAL SHARES

INSTITUTIONAL SERVICE SHARES

This Statement of Additional Information (SAI) is not a prospectus. Read this
SAI in conjunction with the prospectuses for Federated ARMS Fund (the "Fund"),
dated October 31, 1999. Obtain the prospectuses without charge by calling
1-800-341-7400.

October 31, 1999

CONTENTS
How is the Fund Organized?
Securities in Which the Fund Invests
What do Shares Cost?
How is the Fund Sold?
Exchanging Securities for Shares
Subaccounting Services
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings
Addresses

CUSIP 314082108

CUSIP 314082207

8100309B (10/99)

<PAGE>

HOW IS THE FUND ORGANIZED?

The Fund is a diversified open-end, management investment company that was
established under the laws of the Commonwealth of Massachusetts on May 24, 1985.

The Board of Trustees (the Board) has established two classes of shares of the
Fund, known as Institutional Shares and Institutional Service Shares (Shares).
This SAI relates to both classes of Shares. The Fund's investment adviser is
Federated Investment Management Company (Adviser). Effective March 31, 1999,
Federated Management, former Adviser to the Fund, became Federated Investment
Management Company (formerly, Federated Advisers).

SECURITIES IN WHICH THE FUND INVESTS

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

FIXED INCOME SECURITIES

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

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

TREASURY SECURITIES

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

AGENCY SECURITIES

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

MORTGAGE BACKED SECURITIES

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

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

<PAGE>

Adjustable Rate Mortgages

The fund invests in interests in "pools" (groups) of adjustable rate mortgages,
which are known as ARMs. While fixed rate mortgage securities have a stated
interest rate, ARMs have periodic adjustments in the interest rate on the
underlying mortgages. The adjustable rate feature of the mortgages underlying
the ARMs will help to limit sharp movements in the Fund's net asset value in
response to normal fluctuations in interest rates. As interest rates on the
mortgages underlying ARMs reset periodically (for example, semi-annually or
annually), the yields of the ARMs held in the portfolio will gradually adjust to
reflect the overall changes in interest rates.

Collateralized Mortgage Obligations

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

Sequential CMOs

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

PACs and TACs

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

NON-GOVERNMENT MORTGAGE BACKED SECURITIES

CREDIT ENHANCEMENT

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

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

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

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

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

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

DELAYED DELIVERY TRANSACTIONS

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

To Be Announced Securities (TBAs)

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

Dollar Rolls

Asset Coverage

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

SECURITIES LENDING

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

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

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

Securities lending activities are subject to market risks and credit risks.

INVESTMENT RISKS

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

There are many factors which may effect an investment in the Fund. The Fund's
risks are described below:

INTEREST RATE RISKS

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

CREDIT RISKS

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

PREPAYMENT RISKS

Unlike traditional fixed income securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount is due, payments on
mortgage backed securities include both interest and a partial payment of
principal. This partial payment of principal may be comprised of a scheduled
principal payment as well as an unscheduled payment from the voluntary
prepayment, refinancing or foreclosure of the underlying loans. These
unscheduled payments of principal can adversely affect the price and yield of
mortgage backed securities. For example, during periods of declining interest
rates, prepayments can be expected to accelerate, and the Fund would be required
to reinvest the proceeds at the lower interest rates then available. In
addition, like other interest bearing securities, the values of mortgage backed
securities generally fall when interest rates rise. Since rising interest rates
generally result in decreased prepayments of mortgage backed securities, this
could cause mortgage securities to have greater average lives than expected and
their value may decline more than other fixed income securities. Conversely,
when interest rates fall, their potential for capital appreciation is limited
due to the existence of the prepayment feature.

LIQUIDITY RISKS

o Trading opportunities are more limited for fixed income securities that
have not received any credit ratings, have received ratings below
investment grade or are not widely held.

o Trading opportunities are more limited for CMOs that have complex terms or
that are not widely held. These features may make it more difficult to sell
or buy a security at a favorable price or time. Consequently, the Fund may
have to accept a lower price to sell a security, sell other securities to
raise cash or give up an investment opportunity, any of which could have a
negative effect on the Fund's performance. Infrequent trading of securities
may also lead to an increase in their price volatility.

o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security when it wants to. If this happens, the Fund will be
required to continue to hold the security, and the Fund could incur losses.

REGULATORY COMPLIANCE

In accordance with the rules and regulations established by the National Credit
Union Administration (NCUA), unless the purchase is made solely to reduce
interest-rate risk, the Fund will not invest in any CMO or REMIC security that
meets any of the following three tests: (1) the CMO or REMIC has an expected
average life greater than 10 years; (2) the average life of the CMO or REMIC
extends by more than four years assuming an immediate and sustained parallel
shift in the yield curve of plus 300 basis points, or shortens by more than six
years assuming an immediately and sustained parallel shift in the yield curve of
minus 300 basis points; or (3) the estimated change in the price of the CMO or
REMIC is more than 17%, due to an immediate and sustained parallel shift in the
yield curve of plus or minus 300 basis points.

Neither test (1) nor (2) above apply to floating or adjustable rate CMOs or
REMICs with all of the following characteristics: (a) the interest rate of the
instrument is reset at least annually; (b) the interest rate is below the
contractual cap of the instrument; (c) the instrument is tied to a widely used
market rate; and (d) the instrument varies directly (no inversely) and is reset
in proportion with the index's changes.

The Fund may not purchase a residual interest in CMO or REMIC. In addition,
the Fund will not purchase zero coupon securities with maturities greater than
10 years.

FUNDAMENTAL INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to pursue current income with minimal
volatility of principal. The investment objective may not be changed by the
Fund's Directors without shareholder approval.

INVESTMENT LIMITATIONS

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund may borrow money, directly or indirectly, and issue senior securities
to the maximum extent permitted under the 1940 Act.

DIVERSIFICATION OF INVESTMENTS

With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities of any one issuer (other than cash, cash
items, securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized by
U.S. government securities; and securities of other investment companies) if, as
a result, more than 5% of the value of its total assets would be invested in
securities of that issuer, or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

INVESTING IN REAL ESTATE

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

INVESTING IN COMMODITIES

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

UNDERWRITING

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

LENDING CASH OR SECURITIES

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

THE ABOVE LIMITATIONS CANNOT BE CHANGED UNLESS AUTHORIZED BY THE BOARD OF
DIRECTORS (BOARD) AND BY THE "VOTE OF A MAJORITY OF ITS OUTSTANDING VOTING
SECURITIES," AS DEFINED BY THE INVESTMENT COMPANY ACT. THE FOLLOWING
LIMITATIONS, HOWEVER, MAY BE CHANGED BY THE BOARD WITHOUT SHAREHOLDER APPROVAL.
SHAREHOLDERS WILL BE NOTIFIED BEFORE ANY MATERIAL CHANGE IN THESE LIMITATIONS
BECOMES EFFECTIVE.

BUYING ON MARGIN

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

PLEDGING ASSETS

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

INVESTING IN ILLIQUID SECURITIES

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

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest its assets in securities of other investment companies,
including securities of affiliated investment companies, as an efficient means
of carrying out its investment policies and managing its uninvested cash.

STRIPPED MORTGAGE SECURITIES

The Fund will not invest in stripped mortgage securities, including securities
which represent a share of only the interest payments or only the principal
payments from underlying mortgage related securities.

RELATED POLICY INFORMATION

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

As a non-fundamental operating policy, for purposes of the foregoing policy,
investments in transactions involving futures contracts and options, forward
currency contracts, swap transaction and other financial contracts that settle
by payment of cash are not deemed to be investments in commodities.

PORTFOLIO TURNOVER

The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. For the fiscal years ended August 31, 1998, and
1997, the portfolio turnover rates were 56% and 84%, respectively.

DETERMINING MARKET VALUE OF SECURITIES

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

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

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

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

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

WHAT DO SHARES COST?

The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund.

The NAV for each class of Shares may differ due to the variance in daily net
income realized by each class. Such variance will reflect only accrued net
income to which the shareholders of a particular class are entitled.

HOW IS THE FUND SOLD?

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

RULE 12B-1 PLAN (INSTITUTIONAL SERVICE SHARES)

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

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

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

SHAREHOLDER SERVICES

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

SUPPLEMENTAL PAYMENTS

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

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

EXCHANGING SECURITIES FOR SHARES

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

SUBACCOUNTING SERVICES

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

REDEMPTION IN KIND

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

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

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

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

MASSACHUSETTS PARTNERSHIP LAW

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

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

ACCOUNT AND SHARE INFORMATION

VOTING RIGHTS

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

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

As of XXXXX, the following shareholders owned of record, beneficially, or both,
5% or more of outstanding Shares:

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

TAX INFORMATION

FEDERAL INCOME TAX

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

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD OF TRUSTEES

The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birth date, present position(s) held with the Fund,
principal occupations for the past five years and positions held prior to the
past five years, total compensation received as a Trustee from the Fund for its
most recent fiscal year, and the total compensation received from the Federated
Fund Complex for the most recent calendar year. The Federated Fund Complex is
comprised of 54 investment companies, whose investment advisers are affiliated
with the Fund's Adviser.

As of [DATE], the Fund's Board and Officers as a group owned [approximately #
(___%)] [less than 1%] of the Fund's outstanding Shares.

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

<PAGE>

NAME AGGREGATE TOTAL
BIRTH DATE COMPENSATION COMPENSATION
ADDRESS PRINCIPAL OCCUPATIONS FROM FUND FROM FUND
POSITION WITH FUND FOR PAST FIVE YEARS AND FUND COMPLEX

JOHN F. DONAHUE*+ Chief Executive Officer and Director or $0 $0 for the Fund and
Birth Date: July 28, Trustee of the Federated Fund Complex; 54 other investment
1924 Chairman and Director, Federated Investors, companies in the
Federated Investors Inc.; Chairman and Trustee, Federated Fund Complex
Tower Investment Management Company; Chairman and
1001 Liberty Avenue Director, Federated Investment Counseling,
Pittsburgh, PA and Federated Global Investment Management
CHAIRMAN AND TRUSTEE Corp.; Chairman, Passport Research, Ltd.

THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,417.96 $113,860.22 for the
Birth Date: February 3, Complex; Director, Member of Executive Fund and 54 other
1934 Committee, Children's Hospital of Pittsburgh; investment
15 Old Timber Trail Director, Robroy Industries, Inc. (coated companies in the
Pittsburgh, PA steel conduits/computer storage equipment); Fund Complex
TRUSTEE formerly: Senior Partner, Ernst & Young LLP;
Director, MED 3000 Group, Inc. (physician
practice management); Director, Member of
Executive Committee, University of Pittsburgh.

JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,559.99 $125,264.48 for the
Birth Date: June 23, Complex; President, Investment Properties Fund and 54 other
1937 Corporation; Senior Vice President, investment ompanies
Wood/Commercial Dept. John R. Wood and Associates, Inc., Realtors; in the Fund Complex
John R. Wood Partner or Trustee in private real estate
Associates, Inc. ventures in Southwest Florida; formerly:
Realtors President, Naples Property Management, Inc.
3255 Tamiami Trail and Northgate Village Development Corporation.
North

Naples, FL

TRUSTEE

NICHOLAS CONSTANTAKIS Director or Trustee of the Federated Fund $1,056.13 $47,958.02 for the
Birth Date: September Complex; formerly: Partner, Andersen Fund and

3, 1939 Worldwide SC. 29 other investment
175 Woodshire Drive companies in the
Pittsburgh, PA Fund Complex

TRUSTEE

JOHN F. CUNNINGHAM Director or Trustee of some of the Federated $0 $0 for the Fund and
Birth Date: March 5, Fund Complex; Chairman, President and Chief 40 other investment
1943 Executive Officer, Cunningham & Co., Inc. companies in the
353 El Brillo Way (strategic business consulting) ; Trustee Fund Complex
Palm Beach, FL Associate, Boston College; Director, EMC
TRUSTEE Corporation (computer storage systems);
formerly: Director, Redgate Communications.

Previous Positions: Chairman of the Board and
Chief Executive Officer, Computer Consoles,
Inc.; President and Chief Operating Officer,
Wang Laboratories; Director, First National
Bank of Boston; Director, Apollo Computer,

Inc.

LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,417.96 $113,860.22 for the
Birth Date: October 11, Complex; Professor of Medicine, University of Fund and
1932 Pittsburgh; Medical Director, University of 54 other investment
3471 Fifth Avenue Pittsburgh Medical Center - Downtown; companies in the
Suite 1111 Hematologist, Oncologist, and Internist, Fund Complex
Pittsburgh, PA University of Pittsburgh Medical Center;
TRUSTEE Member, National Board of Trustees, Leukemia
Society of America.

PETER E. MADDEN Director or Trustee of the Federated Fund $1,417.96 $113,860.22 for the
Birth Date: March 16, Complex; formerly: Representative, Fund and
1942 Commonwealth of Massachusetts General Court; 54 other investment
One Royal Palm Way President, State Street Bank and Trust companies in the
100 Royal Palm Way Company and State Street Corporation. Fund Complex
Palm Beach, FL

TRUSTEE Previous Positions: Director, VISA USA and
VISA International; Chairman and Director,
Massachusetts Bankers Association; Director,
Depository Trust Corporation; Director, The
Boston Stock Exchange.

CHARLES F. MANSFIELD, Director or Trustee of some of the Federated $0 $0 for the Fund and
JR. Fund Complex; Management Consultant. 43 other
Birth Date: April 10, investment
1945 Previous Positions: Chief Executive Officer, companies in the
80 South Road PBTC International Bank; Partner, Arthur Fund Complex

Westhampton Beach, NY Young & Company (now Ernst & Young LLP);
Chief Financial Officer of Retail Banking

TRUSTEE Sector, Chase Manhattan Bank; Senior Vice
President, Marine Midland Bank; Vice
President, Citibank; Assistant Professor of
Banking and Finance, Frank G. Zarb School of
Business, Hofstra University.

JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,417.96 $113,860.22 for the
J.D., S.J.D. Complex; President, Law Professor, Duquesne Fund and 54 other
Birth Date: December University; Consulting Partner, Mollica & investment
20, 1932 Murray; Director, Michael Baker Corp. companies in the
President, Duquesne (engineering, construction, operations, and Fund Complex
University technical services).
Pittsburgh, PA

TRUSTEE Previous Positions: Dean and Professor of
Law, University of Pittsburgh School of Law;
Dean and Professor of Law, Villanova
University School of Law.

MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,417.96 $113,860.22 for the
Birth Date: June 21, Complex; Public Fund and 54 other
1935 Relations/Marketing/Conference Planning. investment
4905 Bayard Street companies in the
Pittsburgh, PA Previous Positions: National Spokesperson, Fund Complex
TRUSTEE Aluminum Company of America; television
producer; business owner.

JOHN S. WALSH Director or Trustee of some of the Federated $0 $0 for the Fund and
Birth Date: November Fund Complex; President and Director, Heat 41 other investment
28, 1957 Wagon, Inc. (manufacturer of construction companies in the
2007 Sherwood Drive temporary heaters); President and Director, Fund Complex
Valparaiso, IN Manufacturers Products, Inc. (distributor of
TRUSTEE portable construction heaters); President,
Portable Heater Parts, a division of
Manufacturers Products, Inc.; Director, Walsh
& Kelly, Inc. (heavy highway contractor);
formerly: Vice President, Walsh & Kelly, Inc.

GLEN R. JOHNSON Trustee, Federated Investors, Inc.; staff $0 $0 for the Fund and
Birth Date: May 2, 1929 member, Federated Securities Corp. 8 other investment
Federated Investors companies
Tower in the Fund Complex
1001 Liberty Avenue
Pittsburgh, PA
PRESIDENT

J. CHRISTOPHER DONAHUE+* President or Executive Vice President of the $0 $0 for the Fund and
Birth Date: April 11, Federated Fund Complex; Director or Trustee 16 other investment
1949 of some of the Funds in the Federated Fund companies in the
Federated Investors Complex; President and Director, Federated Fund Complex
Tower Investors, Inc.; President and Trustee,

1001 Liberty Avenue Federated Investment Management Company;
Pittsburgh, PA President and Director, Federated Investment
TRUSTEE AND EXECUTIVE Counseling and Federated Global Investment
VICE PRESIDENT Management Corp.; President, Passport

Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.

<PAGE>

EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the Fund and
Birth Date: October 22, the Federated Fund Complex; President, 1 other investment
1930 Executive Vice President and Treasurer of company
Federated Investors some of the Funds in the Federated Fund in the Fund Complex
Tower Complex; Vice Chairman, Federated Investors,
1001 Liberty Avenue Inc.; Vice President, Federated Investment
Pittsburgh, PA Management Company and Federated Investment
EXECUTIVE VICE PRESIDENT Counseling, Federated Global Investment
Management Corp. and Passport Research, Ltd.;
Executive Vice President and Director,
Federated Securities Corp.; Trustee,
Federated Shareholder Services Company.

JOHN W. MCGONIGLE Executive Vice President and Secretary of the $0 $0 for the Fund and
Birth Date: October 26, Federated Fund Complex; Executive Vice 54 other investment
1938 President, Secretary, and Director, Federated companies in the
Federated Investors Investors, Inc.; Trustee, Federated Fund Complex
Tower Investment Management Company; Director, 1001 Liberty Avenue Federated
Investment Counseling and Federated Pittsburgh, PA Global Investment Management
Corp.; Director, EXECUTIVE VICE Federated Services Company; Director, PRESIDENT
AND SECRETARY Federated Securities Corp.

RICHARD J. THOMAS Treasurer of the Federated Fund Complex; Vice $0 $0 for the Fund and
Birth Date: June 17, President - Funds Financial Services 54 other investment
1954 Division, Federated Investors, Inc.; companies in the
Federated Investors formerly: various management positions within Fund Complex
Tower Funds Financial Services Division of

1001 Liberty Avenue Federated Investors, Inc.
Pittsburgh, PA

TREASURER

RICHARD B. FISHER President or Vice President of some of the $0 $0 for the Fund and
Birth Date: May 17, Funds in the Federated Fund Complex; Director 6 other investment
1923 or Trustee of some of the Funds in the companies
Federated Investors Federated Fund Complex; Executive Vice in the Fund Complex

Tower President, Federated Investors, Inc.;
1001 Liberty Avenue Chairman and Director, Federated Securities

Pittsburgh, PA Corp.

VICE PRESIDENT

WILLIAM D. DAWSON, III Chief Investment Officer of this Fund and $0 $0 for the Fund and
Birth Date: March 3, various other Funds in the Federated Fund 41 other investment
1949 Complex; Executive Vice President, Federated companies in the
Federated Investors Investment Counseling, Federated Global Fund Complex
Tower Investment Management Corp., Federated
1001 Liberty Avenue Investment Management Company and Passport
Pittsburgh, PA Research, Ltd.; Registered Representative,
CHIEF INVESTMENT OFFICER Federated Securities Corp.; Portfolio

Manager, Federated Administrative Services; Vice
President, Federated Investors, Inc.; formerly:
Executive Vice President and Senior Vice President,
Federated Investment Counseling Institutional
Portfolio Management Services Division; Senior Vice
President, Federated Investment Management Company
and Passport Research, Ltd.

TODD A. ABRAHAM Todd A. Abraham has been the Fund's portfolio $0 $0 for the Fund and
Birth Date: February manager since August 1995. He is Vice 1 other investment
10, 1966 President of the Fund. Mr. Abraham has been company
Federated Investors a Portfolio Manager since 1995 and a Vice in the Fund Complex
Tower President of the Fund's investment adviser
1001 Liberty Avenue since 1997. Mr. Abraham joined Federated in
Pittsburgh, PA 1993 as an Investment Analyst and served as
VICE PRESIDENT Assistant Vice President from 1995 to 1997.
Mr. Abraham is a Chartered Financial Analyst
and received his M.B.A. in Finance from
Loyola College.

</TABLE>

+ MR. DONAHUE IS THE FATHER OF J. CHRISTOPHER DONAHUE, EXECUTIVE VICE
PRESIDENT AND TRUSTEE OF THE FUND.

++MESSRS. CUNNINGHAM, MANSFIELD AND WALSH BECAME MEMBERS OF THE BOARD OF
TRUSTEES/DIRECTORS ON JANUARY 1, 1999, JULY 1, 1999 AND .JANUARY 1, 1999,
RESPECTIVELY. THEY DID NOT EARN ANY FEES FOR SERVING THE FUND COMPLEX SINCE
THESE FEES ARE REPORTED AS OF THE END OF THE LAST CALENDAR YEAR. THEY DID NOT
RECEIVE ANY FEES AS OF THE FISCAL YEAR END OF THE FUND.

INVESTMENT ADVISER

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

The Adviser is a wholly owned subsidiary of Federated.

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

OTHER RELATED SERVICES

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

BROKERAGE TRANSACTIONS

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

RESEARCH SERVICES

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

ADMINISTRATOR

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

MAXIMUM ADMINISTRATIVE AVERAGE AGGREGATE DAILY NET ASSETS OF
FEE THE FEDERATED FUNDS
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.

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

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

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

INDEPENDENT AUDITORS

The independent auditor for the Fund, Ernst & Young LLP, plans and performs its
audit so that it may provide an opinion as to whether the Fund's financial
statements and financial highlights are free of material misstatement.

<PAGE>

FEES PAID BY THE FUND FOR SERVICES

FOR THE YEAR/PERIOD ENDED

AUGUST 31 1999 1998 1997

Advisory Fee Earned $ $3,325,847 $3,977,723
Advisory Fee Reduction $ $1,037,318 $1,270,395
Brokerage Commissions $0 $0 $0
Administrative Fee $ $418,154 $500,691
12b-1 Fee
Institutional Service Shares $ ---- ----
Shareholder Services Fee
Institutional Share $ ---- ----
Institutional Service Shares $ ---- ----

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

HOW DOES THE FUND MEASURE PERFORMANCE?

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

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

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

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns given for the one-year , five-year and ten-year periods ended
August 31, 1999.

Yield given for the 30-day period ended August 31, 1999.

30-DAY PERIOD 1 Year 5 Years 10 Years
INSTITUTIONAL SHARES

Total Return
Yield

30-DAY PERIOD 1 Year 5 Years Start of Performance on
4/25/92
INSTITUTIONAL

SERVICE SHARES

Total Return
Yield

TOTAL RETURN

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

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

YIELD

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

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

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

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

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

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

LEHMAN BROTHERS ADJUSTABLE RATE MORTGAGE FUNDS AVERAGE is comprised of
all agency guaranteed securities with coupons that periodically adjust over a
spread of a published index.

LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX is comprised of all publicly
issued, non-convertible domestic debt of the U.S. government, or any agency
thereof, or any quasi-federal corporation. The index also includes corporate
debt guaranteed by the U.S. government. Only notes and bonds with a minimum
maturity of one year and maximum maturity of 2.9 years are included.

LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories
by making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends and
takes into account any change in net asset value over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the "U.S.
Mortgage 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.

WHO IS FEDERATED INVESTORS, INC.?

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

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

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS

In the municipal sector, as of December 31, 1998, Federated managed 10 bond
funds with approximately $2.2 billion in assets and 23 money market funds with
approximately $12.5 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

EQUITY FUNDS

In the equity sector, Federated has more than 28 years' experience. As of
December 31, 1998, Federated managed 27 equity funds totaling approximately
$14.9 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

CORPORATE BOND FUNDS

In the corporate bond sector, as of December 31, 1998, Federated managed 9 money
market funds and 15 bond funds with assets approximating $22.8 billion and $7.1
billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 26 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset backed securities market, a market
totaling more than $209 billion.

GOVERNMENT FUNDS

In the government sector, as of December 31, 1998, Federated manages 9 mortgage
backed, 5 government/agency and 19 government money market mutual funds, with
assets approximating $5.3 billion, $1.8 billion and $41.6 billion, respectively.
Federated trades approximately $425 million in U.S. government and mortgage
backed securities daily and places approximately $25 billion in repurchase
agreements each day. Federated introduced the first U.S. government fund to
invest in U.S. government bond securities in 1969. Federated has been a major
force in the short- and intermediate-term government markets since 1982 and
currently manages approximately $43.2 billion in government funds within these
maturity ranges.

MONEY MARKET FUNDS

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1998, Federated managed more than $76.7 billion in assets across 52 money market
funds, including 19 government, 9 prime and 23 municipal with assets
approximating $41.6 billion, $22.8 billion and $12.5 billion, respectively.

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

advisory companies.

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $5 trillion to the more than 7,300 funds available,
according to the Investment Company Institute.

FEDERATED CLIENTS OVERVIEW

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

INSTITUTIONAL CLIENTS

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

BANK MARKETING

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

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

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

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended August 31, 1999
are incorporated herein by reference to the Annual Report to Shareholders of the
Federated ARMS Fund dated August 31, 1999.

(To be filed by amendment.)

<PAGE>

INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FITCH IBCA, INC. LONG-TERM DEBT RATING DEFINITIONS

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

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

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

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

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

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

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

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

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

<PAGE>

ADDRESSES

FEDERATED ARMS FUND

Institutional Shares

Institutional Service Shares

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

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

INVESTMENT ADVISER

Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue

Pittsburgh, PA 15222-3779

CUSTODIAN

State Street Bank and Trust Company
P.O. Box 8600

Boston, MA 02266-8600

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

INDEPENDENT AUDITORS

Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072

PART C. OTHER INFORMATION.

Item 23. EXHIBITS:

(a) (i) Conformed copy of Declaration of Trust of
the Registrant; (16)
(ii) Conformed copy of Amendment No. 1 to the
Declaration of Trust of the Registrant;(16)
(iii) Conformed copy of Amendment No. 2 to the
Declaration of Trust of the Registrant; (16)
(iv) Conformed copy Amended and Restated
Declaration of Trust of the Registrant; (14)
(b) (i) Copy of By-Laws of the Registrant as
Restated and Amended; (16)
(ii) Copy of Restated and Amended By-Laws of the
Registrant; (14)
(iii) Copy of Amendment No. 5 to the By-Laws of
the Registrant; (19)
(iv) Copy of Amendment No. 6 to the By-Laws of
the Registrant; (19)
(v) Copy of Amendment No. 7 to the By-Laws of
the Registrant; (19)
(vi) Copy of Amendment No. 8 to the By-Laws of
the Registrant; (19)

(c) Copy of Specimen Certificate for Shares of
Beneficial Interest of the Registrant; (15)
(d) Conformed copy of Investment Advisory
Contract of the Registrant; (9)
(e) (i) Conformed copy of Distributor's Contract of
the Registrant; (14)
(ii) Conformed copy of Exhibit A to Distributor's
Contract of the Registrant; (16)
(iii) The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds
Sales and Service Agreement; Mutual Funds
Service Agreement; and Plan Trustee/Mutual
Funds Service Agreement from Item 24(b)(6)
of the Cash Trust Series II Registration
Statement on Form N-1A filed with the
Commission on July 24, 1995.
(File Nos. 33-38550 and 811-6269);
(f) Not applicable;

(g) (i) Conformed copy of Custodian Contract of
the Registrant; (16)
(ii) Conformed copy of Custodian Fee
Schedule; (19)

9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed August 24, 1989. (File Nos. 2-98491 and
811-4539).

14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 2-98491
and 811-4539).

15. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 15 on Form N-1A filed October 25, 1993. (File Nos. 2-98491
and 811-4539).

16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 2-98491
and 811-4539).

19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed October 29, 1998. (File Nos. 2-98491
and 811-4539).

<PAGE>

(h) (i) Conformed copy of Agreement for Fund
Accounting Services, Administrative
Services, Shareholder Transfer Agency
Services and Custody Services Procurement
of the Registrant; (17)

(ii) The responses described in Item 24(b)(6)
are hereby incorporated by reference;

(iii) Conformed copy of Amended and restated
Shareholder Services Agreement of the
Registrant; (19)

(iv) The Registrant hereby incorporates by
reference the conformed copy of the
Shareholder Services Sub-Contract between
Fidelity and Federated Shareholder Services
from Item 24(b)(9)(iii) of Federated GNMA
Trust Registration Statement on Form N-1A,
filed with the Commission on March 25, 1996.
(File Nos. 2-75670 and 811-3375).
(i) Conformed copy of Opinion and Consent of
Counsel as to legality of shares being
registered; (16)
(j) Conformed copy of Consent of Independent
Auditors; (19)
(k) Not applicable;
(l) Conformed copy of Initial Capital
Understanding; (16)
(m) (i) Conformed copy of Rule 12b-1 Distribution
Plan of the Registrant; (14)
(ii) The responses described in Item 24(b)(6)
are hereby incorporated by reference;

(n) Copy of Financial Data Schedules; (not
included per footnote 60 of
Release No. 33-7684).
(o) The Registrant hereby incorporates the
conformed copy of specimen Multiple Class
Plan from Item 24(b)(18) of the World
Investment Series, Inc. Registration
Statement on Form N-1A, filed with the
Commission on January 26, 1996.
(File Nos. 33-52149 and 811-07141).

(p) (i) Conformed copy of Power of Attorney of the
Registrant; +

(ii) Conformed copy of Power of Attorney of Chief
Investment Officer of the Registrant; +
(iii) Conformed copy of Power of Attorney of
Trustee of the Registrant; +

+ All exhibits have been file electronically.

14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14 on Form N-1A filed October 22, 1992. (File Nos. 2-98491
and 811-4539).

16. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 17 on Form N-1A filed October 26, 1994. (File Nos. 2-98491
and 811-4539).

17. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed October 24, 1996. (File Nos. 2-98491
and 811-4539).

19. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed October 29, 1998. (File Nos. 2-98491
and 811-4539).

Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:

None

Item 25. INDEMNIFICATION: (12)

Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:

For a description of the other business of the investment
adviser, see the section entitled "Who Manages the Fund?" in Part
A. The affiliations with the Registrant of four of the Trustees
and one of the Officers of the investment adviser are included in
Part B of this Registration Statement under "Who Manages and
Provides Services to the Fund?" The remaining Trustee of the
investment adviser, his position with the investment adviser,
and, in parentheses, his principal occupation is: Mark D. Olson
(Partner, Wilson, Halbrook & Bayard), 107 W. Market Street,
Georgetown, Delaware 19947.

The remaining Officers of the investment adviser are:

Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden

Senior Vice Presidents: Joseph M. Balestrino
David A. Briggs
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Michael P. Donnelly
Mark E. Durbiano
Jeffrey A. Kozemchak
Sandra L. McInerney
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski

Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Arthur J. Barry
Randall S. Bauer
G. Andrew Bonnewell
Micheal W. Casey
Robert E. Cauley
Kenneth J. Cody
Alexandre de Bethmann
B. Anthony Delserone, Jr.
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Marc Halperin
Patricia L. Heagy
Susan R. Hill

12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11 on Form N-1A filed December 27, 1991. (File Nos. 2-98491
and 811-4539).

William R. Jamison
Constantine J. Kartsonas
Stephen A. Keen
Robert M. Kowit
Richard J. Lazarchic
Steven Lehman
Marian R. Marinack
William M. Painter
Jeffrey A. Petro
Keith J. Sabol
Frank Semack
Aash M. Shah
Michael W. Sirianni, Jr.
Christopher Smith
Tracy P. Stouffer
Edward J. Tiedge
Peter Vutz
Paige M. Wilhelm
George B. Wright
Jolanta M. Wysocka

Assistant Vice Presidents: Nancy J. Belz
Lee R. Cunningham, II
James H. Davis, II
Jacqueline A. Drastal
Paul S. Drotch
Salvatore A. Esposito
Donna M. Fabiano
Gary E. Farwell
Eamonn G. Folan
John T. Gentry
John W. Harris
Nathan H. Kehm
John C. Kerber
Grant K. McKay
Natalie F. Metz
Joseph M. Natoli
Ihab Salib
James W. Schaub
John Sheehy
Matthew K. Stapen
Diane Tolby
Timothy G. Trebilcock
Leonardo A. Vila
Steven J. Wagner
Lori A. Wolff

Secretary: G. Andrew Bonnewell

Treasurer: Thomas R. Donahue

Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher

Assistant Treasurer: Richard B. Fisher

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

<PAGE>

Item 27. PRINCIPAL UNDERWRITERS:

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

Cash Trust Series II; Cash Trust Series, Inc.; CCB Funds; 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 Core
Trust; 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 Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal 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.; Fixed Income
Securities, Inc.; ; Hibernia Funds; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Managed Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; Regions Funds; RIGGS Funds;
SouthTrust Funds; Tax-Free Instruments Trust; The Planters Funds; The Wachovia
Funds; The Wachovia Municipal Funds; Vision Group of Funds, Inc.; World
Investment Series, Inc.; Blanchard Funds; Blanchard Precious Metals Fund, Inc.;
DG Investor Series; High Yield Cash Trust; Investment Series Trust; Star Funds;
Targeted Duration Trust; The Virtus Funds; Trust for Financial Institutions;

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Richard B. Fisher Chairman, Chief Executive Vice President
Federated Investors Tower Officer, Chief Operating
1001 Liberty Avenue Officer, Asst. Secretary

Pittsburgh, PA 15222-3779 and Asst. Treasurer,
Federated Securities Corp.

Arthur L. Cherry Director --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John B. Fisher President-Institutional Sales --
Federated Investors Tower and Director
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Thomas R. Donahue Director, Assistant Secretary --
Federated Investors Tower and Assistant Treasurer
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer and --
Federated Investors Tower Director
1001 Liberty Avenue Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward C. Gonzales Executive Vice President Executive Vice
Federated Investors Tower Federated Securities Corp. President
1001 Liberty Avenue

Pittsburgh, PA 15222-3779

David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Ernest G. Anderson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Matthew W. Brown Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David J. Callahan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark Carroll Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Steven R. Cohen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Marc C. Danile Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert J. Deuberry Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark A. Gessner Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

G. Tad Gullickson Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Dayna C. Haferkamp Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Raymond Hanley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Charlene H. Jennings Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael W. Koenig Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Christopher A. Layton Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael H. Liss Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael R. Manning Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Alec H. Neilly Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward J. Segura Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Colin B. Starks Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert W. Bauman Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Beth C. Dell Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

David L. Immonen Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

John T. Glickson Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Renee L. Martin Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Robert M. Rossi Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices

BUSINESS ADDRESS WITH DISTRIBUTOR WITH REGISTRANT

Matthew S. Hardin Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Leslie K. Ross Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

</TABLE>

Item 28. LOCATION OF ACCOUNTS AND RECORDS:

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

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

(Notices should be sent to the Agent for service at the above address)

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

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

Disbursing Agent)

Federated Services Company Federated Investors Tower
("Administrator") 1001 Liberty Avenue

Pittsburgh, PA 15222-3779

Federated Investment Management Company Federated Investors Tower
("Adviser") 1001 Liberty Avenue

Pittsburgh, PA 15222-3779

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

Item 29. MANAGEMENT SERVICES: Not applicable.

Item 30........UNDERTAKINGS:

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

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED ARMs FUND, has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, duly authorized, in the City of Pittsburgh and Commonwealth
of Pennsylvania, on the 26th day of August, 1999.

FEDERATED INCOME SECURITIES TRUST

BY: /s/ C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue

August 26, 1999

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

NAME TITLE DATE

By: /s/ C. Grant Anderson
C. Grant Anderson Attorney In Fact August 26, 1999
ASSISTANT SECRETARY For the Persons

Listed Below

NAME TITLE

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

William D. Dawson, III* Chief Investment Officer

Glen R. Johnson* President

Richard J. Thomas* Treasurer
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

Nicholas P. Constantakis* Trustee

John F. Cunningham* Trustee

Lawrence D. Ellis, M.D.* Trustee

Peter E. Madden* Trustee

John E. Murray, Jr., J.D., S.J.D.* Trustee

Marjorie P. Smuts* Trustee

* By Power of Attorney

Exhibit (p)(iii) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretaries of FEDERATED ARMS FUND and each
of them, their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and stead, in
any and all capacities, to sign any and all documents to be filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, by means
of the Securities and Exchange Commission's electronic disclosure system known
as EDGAR; and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
sign and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as each of them
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

SIGNATURES TITLE DATE

/S/ JOHN F. CUNNINGHAM Trustee August 3, 1999
John F. Cunningham

Sworn to and subscribed before me this 3rd, day of August, 1999

/S/ CHERI S. GOOD

Exhibit (p)(ii) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

SIGNATURES TITLE DATE

/S/ WILLIAM D. DAWSON, III Chief Investment Officer August 3, 1999
William D. Dawson, III

Sworn to and subscribed before me this 3rd day of August, 1999

/S/ CHERI S. GOOD

Exhibit (p)(i) under Form N-1A
Exhibit (24) under Item 601/Reg. S-K

POWER OF ATTORNEY

SIGNATURES TITLE DATE

/S/JOHN F. DONAHUE Chairman August 3, 1999
John F. Donahue (Chief Executive Officer)

/S/GLEN R. JOHNSON President August 3, 1999
Glen R. Johnson

/S/RICHARD J. THOMAS Treasurer August 3, 1999
Richard J. Thomas (Principal Financial and
Accounting Officer)

/S/THOMS G. BIGLEY Trustee August 3, 1999
Thomas G. Bigley

/S/JOHN T. CONROY, JR. Trustee August 3, 1999
John T. Conroy, Jr.

/S/NICHOLAS P. CONSTANTAKIS Trustee August 3, 1999
Nicholas P. Constantakis

/S/LAWRENCE D. ELLIS, M.D. Trustee August 3, 1999
Lawrence D. Ellis, M.D.

/S/PETER E. MADDEN Trustee August 3, 1999
Peter E. Madden

/S/JOHN E. MURRAY, JR. Trustee August 3, 1999
John E. Murray, Jr.

/S/MARJORIE P. SMUTS Trustee August 3, 1999
Marjorie P. Smuts

Sworn to and subscribed before me this 3rd day of August, 1999

/S/ CHERI S. GOOD