FORTRESS ADJUSTABLE RATE U S GOVERNMENT FUND INC
N-30D, 1994-10-31
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[LOGO]  FEDERATED

        FORTRESS
        ADJUSTABLE RATE
        U.S. GOVERNMENT
        FUND, INC.

        4th SEMI-ANNUAL REPORT
        August 31, 1994

        Established 1991

PRESIDENT'S MESSAGE

Dear Fellow Shareholder:

I am pleased to present the Fortress Adjustable Rate U.S. Government Fund,
Inc.'s (the "Fund") Semi-Annual Report for the period March 1, 1994 to August
31, 1994. You will find the design and investment charts make the report easier
to read. This report contains an interview with the Fund's portfolio manager,
Gary Madich, Senior Vice President of Federated Advisers. The pages following
the interview contain the Fund's Financial Statements and a complete listing of
the Fund's investments in U.S. government securities.

On August 31, 1994, the Fund's net assets stood at $569.2 million and the net
asset value per share was $9.53. Shareholders received income dividends of $13.8
million, or $0.20 per share, for the six-month period. The Fund's annualized
rate of total return for the period ended August 31, 1994 was -1.61%, and from
January 1, 1994 to August 31, 1994 was -1.07%. Since inception on July 25, 1991,
the annualized total return was 3.26% as of September 30, 1994.*

The Fund pursues current income with modest fluctuation in share price by
investing exclusively in U.S. government adjustable rate mortgage securities.
Since the Fund's inception in July 1991, Fund share prices and distributions
have reflected short-term interest rate changes. The table below details the
Fund's share performance.

<TABLE>
<CAPTION>

                NAV       NAV              PER SHARE
   DATE      BEGINNING  ENDING  $ CHANGE  DISTRIBUTION  % CHANGE
<S>          <C>        <C>     <C>       <C>           <C>

   1991         $10.00  $10.01      0.01        0.3260      0.10%
   1992         $10.01  $ 9.90     -0.11        0.5560     -1.10%
   1993         $ 9.90  $ 9.80     -0.10        0.4440     -1.00%
  9/30/94       $ 9.80  $ 9.49     -0.31        0.3060     -3.16%
</TABLE>

This adjustable rate fund offers relative safety because of its investment in
U.S. government securities. The portfolio is, of course, considered to be high-
quality since it is invested in only U.S. government securities, and is rated
AAAf by Standard & Poor's Ratings Group.**

 * Performance quoted represents past performance. Investment return and
   principal value will fluctuate, so that an investor's shares, when redeemed,
   may be worth more or less than their original cost. The average annualized
   total returns for the 1-year and since inception on July 25, 1991, were
   -0.42% and 3.32%, respectively. The above figures include the 1% contingent
   deferred sales charge which applies to shares redeemed within four years.

** Ratings are subject to change.



Currently, the Fund's portfolio has a modified duration of 1.81 years and an
average coupon of 6.1%. Furthermore, in an adjustable fund, it is important to
know the average months to reset is 7.0 months.

The Fund's managers are conservative in their selection and management of
adjustable rate mortgage-backed securities. They did not use derivative
securities such as inverse floaters and interest-only strips. Also, the Fund's
portfolio is reset against the 1-year Constant Maturity Treasury Index, as well
as the London Interbank Offering Rate (LIBOR).

I urge you to read the interview with Gary Madich and recommend that you add to
your account.

Thank you for your continued support of Fortress Adjustable Rate U.S. Government
Fund, Inc. If you have any questions or comments, please do not hesitate to
write.

Very sincerely yours,

Richard B. Fisher
President
October 15, 1994


INVESTMENT REVIEW

Gary Madich,
Senior Vice President,
Federated Advisers

Q  PLEASE COMMENT ON THE INTEREST RATE ENVIRONMENT BEFORE AND DURING THE
   REPORTING PERIOD.

A  Interest rates increased all along the yield curve during the first three
quarters of 1994. Just as the market began to recover in January from the
negative fourth quarter of 1993, the Federal Reserve Board (the "Fed") increased
the Fed Funds' target rate from 3% to 3.25% in early February. This was in
reaction to a stronger U.S. economy and as a preemptive strike against any
threat of inflation. Interest rates continued to rise after the Fed's move due
to market expectations of further Fed tightenings. These tightenings did follow
in March, April, May, and August, resulting in a Fed Funds' rate of 4.75%, as
the Fed moved toward a more neutral monetary policy stance from the
accommodative posture in 1993. In response to this continued tightening of
monetary policy, the short end of the curve had the largest increase in yields.
The 2-year Treasury note yield increased from 4.23% at the end of 1993 to 6.15%
at the end of August, 1994. The Fund's total rate of return for the first half
of 1994 was -0.57%** compared to -0.61% for the Merrill Lynch 2-year Treasury
Note Index* and -0.09% for the Lehman Brothers Adjustable Rate Mortgage Index.*

Q  IN THE ADJUSTABLE RATE MORTGAGE FUND UNIVERSE, FORTRESS ADJUSTABLE RATE U.S.
   GOVERNMENT FUND, INC. (THE "FUND") HAS BEEN DESCRIBED AS A "PURE GOVERNMENT
   FUND." HAS THIS CHANGED DUE TO MARKET CONDITIONS?

A  No. The Fund has maintained Moody's Investors Services, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P") highest ratings,*** and the prospectus
precludes us from using mortgage and other derivatives.  Emphasis continues to
be on government agencies with adjustable rate features and a yield curve target
of one to two years. The Fund is a short-term bond fund with a fluctuating share
price and monthly dividends.

  * This index is unmanaged.

 ** The above figure does not include the 1% contingent deferred sales charge
    which applies to shares redeemed within four years.

*** Ratings are subject to change.

Q  AS A RESULT OF CURRENT MARKET VOLATILITIES, HOW DID THE FUND PERFORM OVER THE
   PERIOD?

A  When Alan Greenspan, Chairman of the Federal Reserve Board, raised the Fed
Funds' rates, all bonds declined in value. During the six-month period ended
August 31, 1994, the Fund's net asset value ranged from a low of $9.52 per share
to a high of $9.78 per share and the Fund had a total return of -.57% or -1.21%,
the latter including the 1% contingent deferred sales charge.

Q  WHAT ARE YOUR CURRENT INVESTMENT STRATEGIES IN RESPONSE TO THE INTEREST RATE
   ENVIRONMENT?

A  The current portfolio strategy continues to favor a more defensive approach.
Our security selection process currently favors Adjustable Rate Mortgage
("ARM") products that are tied to responsive indices such as the 1-year
Constant Maturity Treasury Index,* shorter durations and less interest rate cap
risk. These ARMs issues provide an investment that will perform well in a
stable-to- rising rate environment. Our diversification encompasses three
government issues of adjustable rate mortgages with various maturities. We will
continue to monitor the adjustable rate mortgage-backed market in an effort to
maximize relative value and total return performance.

Q  WHAT ARE THE FUND'S ASSETS INVESTED IN?

A  The Fund's assets are primarily invested in adjustable rate mortgage issues
of the following: 58.2% in the Federal Home Loan Mortgage Corporation
("FHLMC"), 16.8% in Federal National Mortgage Association ("FNMA"), and 5.8% in
Government National Mortgage Association ("GMNA").


* This index is unmanaged.

TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.

INITIAL INVESTMENT:

A $40,000 INVESTMENT (REINVESTING ALL DIVIDENDS AND CAPITAL GAINS) GREW TO
$44,262.

If you had invested $40,000 in Fortress Adjustable Rate U.S. Government Fund,
Inc. on July 25, 1991, reinvested dividends and capital gains, and didn't
redeem any shares, your account would have been worth $44,262 on August 31,
1994. You would have earned a 3.26%* average annual total return for the 3-year
investment life span.

One key to investing wisely is to reinvest all distributions in Fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.

As of September 30, 1994, the Fund's average annual one-year, and since
inception (July 25, 1991) total returns were -.61%, and 3.26%, respectively.*

                          See appendix

* Total return represents the change in the value of an investment after
  reinvesting all income and capital gains, and takes into account the 1%
  contingent deferred sales charge on shares redeemed within four years.

  Data quoted represents past performance and do not guarantee future results.
  Investment return and principal value will fluctuate so an investor's shares,
  when redeemed, may be worth more or less than their original cost.


FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.

ONE STEP AT A TIME:

$10,000 INVESTED EACH YEAR FOR 3 YEARS (REINVESTING ALL DIVIDENDS AND CAPITAL
GAINS) GREW TO $41,324.

With this approach, the key is consistency.

If you had started investing $10,000 annually in Fortress Adjustable Rate U.S.
Government Fund, Inc. on July 25, 1991, reinvested your dividends and capital
gains, and didn't redeem any shares, you would have invested only $40,000, but
your account would have reached a total value of $41,324 by August 31, 1994.
You would have earned an average annual total return of 2.06%.*

A practical investment plan helps you pursue current income through U.S.
government securities. Through systematic investing, you buy shares on a
regular basis and reinvest all earnings. An investment plan works for you when
you invest only $10,000 annually. You can take it one step at a time. Put time
and compounding to work!

                       See appendix

* No method of investing can guarantee a profit or protect against loss in
  down markets. However, by investing regularly over time and buying shares at
  various prices, investors can purchase more shares at lower prices, and all
  accumulated shares have the ability to pay income to the investor.

  Because such a plan involves continuous investment, regardless of changing
  price levels, the investor should consider whether or not to continue
  purchases through periods of low price levels.



FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)

<TABLE>
<CAPTION>
  PRINCIPAL
    AMOUNT                                                                                             VALUE
<C>             <S>                                                                                <C>
- --------------  ---------------------------------------------------------------------------------  --------------
GOVERNMENT OBLIGATIONS--80.8%
- -------------------------------------------------------------------------------------------------
                FEDERAL HOME LOAN MORTGAGE CORP. PC,
                ADJUSTABLE RATE MORTGAGES--56.4%
                ---------------------------------------------------------------------------------
$  315,147,439  4.25%-7.018%, 9/1/2017-4/1/2029                                                    $  320,849,926
                ---------------------------------------------------------------------------------  --------------
                FEDERAL HOME LOAN MORTGAGE CORP. REMIC--1.8%
                ---------------------------------------------------------------------------------
     5,000,000  4.875%, Series 1608-B, 11/15/2007                                                       4,862,300
                ---------------------------------------------------------------------------------
     4,371,155  5.275%, Series 1095-D, 6/15/2021                                                        4,374,914
                ---------------------------------------------------------------------------------
       745,752  5.325%, Series B, 5/15/2019                                                               748,914
                ---------------------------------------------------------------------------------  --------------
                Total                                                                                   9,986,128
                ---------------------------------------------------------------------------------  --------------
                FEDERAL NATIONAL MORTGAGE ASSOCIATION--1.8%
                ---------------------------------------------------------------------------------
     9,204,170  11.500%-12.250%, 12/1/2010-2/1/2020                                                    10,233,865
                ---------------------------------------------------------------------------------  --------------
                FEDERAL NATIONAL MORTGAGE ASSOCIATION,
                ADJUSTABLE RATE MORTGAGES--14.0%
                ---------------------------------------------------------------------------------
    78,161,820  4.235%-7.50%, 3/1/2013-7/1/2024                                                        80,007,920
                ---------------------------------------------------------------------------------  --------------
                FEDERAL NATIONAL MORTGAGE ASSOCIATION, REMIC--1.0%
                ---------------------------------------------------------------------------------
     5,906,659  5.412%, Series G92-16F, 3/25/2022                                                       5,906,541
                ---------------------------------------------------------------------------------  --------------
                GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--3.3%
                ---------------------------------------------------------------------------------
    16,651,539  11.500%-12.000%, 11/15/2012-7/15/2019                                                  18,875,399
                ---------------------------------------------------------------------------------  --------------
                GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,
                ADJUSTABLE RATE MORTGAGE--2.5%
                ---------------------------------------------------------------------------------
    14,139,166 *6.50%, 5/20/2022-9/20/2024                                                             14,154,605
                ---------------------------------------------------------------------------------  --------------
                TOTAL GOVERNMENT OBLIGATIONS
                (IDENTIFIED COST, $462,016,940)                                                       460,014,384
                ---------------------------------------------------------------------------------  --------------
U.S. TREASURY OBLIGATIONS--7.7%
- -------------------------------------------------------------------------------------------------
                U.S. TREASURY BILLS--3.3%
                ---------------------------------------------------------------------------------
    20,000,000  8/24/95                                                                                18,965,200
                ---------------------------------------------------------------------------------  --------------
                U.S. TREASURY NOTES--4.4%
                ---------------------------------------------------------------------------------
$   25,000,000  5.875%-6.000%, 5/31/96-6/30/96                                                     $   24,961,500
                ---------------------------------------------------------------------------------  --------------
                TOTAL U.S. TREASURY OBLIGATIONS
                (IDENTIFIED COST, $43,945,766)                                                         43,926,700
                ---------------------------------------------------------------------------------  --------------
**REPURCHASE AGREEMENTS--7.4%
- -------------------------------------------------------------------------------------------------
    10,000,000  Goldman Sachs & Co., 4.71%, dated 8/23/94, due 9/26/94                                 10,000,000
                ---------------------------------------------------------------------------------
    16,915,000  J.P. Morgan Securities, Inc., 4.85%, dated 8/31/94, due 9/1/94                         16,915,000
                ---------------------------------------------------------------------------------
    15,000,000  Kidder, Peabody & Co., 4.80%, dated 8/31/94, due 9/1/94                                15,000,000
                ---------------------------------------------------------------------------------  --------------
                TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) (NOTE 2B)                              41,915,000
                ---------------------------------------------------------------------------------  --------------
                TOTAL INVESTMENTS (IDENTIFIED COST, $547,877,706)                                  $  545,856,084+
                ---------------------------------------------------------------------------------  --------------
</TABLE>

 * Includes securities with a market value of $10,012,500 subject to dollar roll
   transactions.

** The repurchase agreement is fully collateralized by U.S. government and/or
   agency obligations based on market prices at the date of the portfolio. The
   investment in the repurchase agreements is through participation in a joint
   account with other Federated Funds.

 + The cost of investments for federal tax purposes amounts to $547,877,706. The
   net unrealized depreciation on a federal tax cost basis amounts to
   $2,021,622, and is comprised of $823,222 appreciation and $2,844,844
   depreciation at August 31, 1994.

++ Although final maturity falls beyond seven days, a liquidity feature is
   included in each transaction to permit termination of the repurchase
   agreement.

PC-Participation Certificates
REMIC-Real Estate Mortgage Investment Conduit

Note: The categories of investments are shown as a percentage of net assets
      ($569,151,501) at August 31, 1994.

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


FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)

<TABLE>
<S>                                                                                 <C>           <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Total investments, at value (identified and tax cost $547,877,706)                                $   545,856,084
- ------------------------------------------------------------------------------------------------
Cash                                                                                                        3,706
- ------------------------------------------------------------------------------------------------
Receivable for investments sold                                                                        30,048,325
- ------------------------------------------------------------------------------------------------
Interest receivable                                                                                    11,169,424
- ------------------------------------------------------------------------------------------------
Receivable for capital stock sold                                                                         571,419
- ------------------------------------------------------------------------------------------------
Deferred expenses                                                                                         249,780
- ------------------------------------------------------------------------------------------------  ---------------
     Total assets                                                                                     587,898,738
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------
Payable for dollar roll transactions                                                $  9,975,459
- ----------------------------------------------------------------------------------
Payable for capital stock repurchased                                                  7,412,351
- ----------------------------------------------------------------------------------
Dividends payable                                                                      1,251,437
- ----------------------------------------------------------------------------------
Accrued expenses                                                                         107,990
- ----------------------------------------------------------------------------------  ------------
     Total liabilities                                                                                 18,747,237
- ------------------------------------------------------------------------------------------------  ---------------
NET ASSETS for 59,752,125 shares of capital stock outstanding                                     $   569,151,501
- ------------------------------------------------------------------------------------------------  ---------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid-in capital                                                                                   $   609,684,659
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments                                              (2,021,622)
- ------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments                                                   (38,871,675)
- ------------------------------------------------------------------------------------------------
Undistributed net investment income                                                                       360,139
- ------------------------------------------------------------------------------------------------  ---------------
     Total Net Assets                                                                             $   569,151,501
- ------------------------------------------------------------------------------------------------  ---------------
NET ASSET VALUE and Offering Price Per Share:
($569,151,501 / 59,752,125 shares of capital stock outstanding)                                             $9.53
- ------------------------------------------------------------------------------------------------  ---------------
REDEMPTION PROCEEDS Per Share (99/100 of $9.53)*                                                            $9.43
- ------------------------------------------------------------------------------------------------  ---------------
</TABLE>

* See "Redeeming Shares" in the prospectus.

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

FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended August 31, 1994
(unaudited)

<TABLE>
<S>                                                                       <C>         <C>           <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Interest income (net of interest expense $54,176)                                                   $   17,908,811
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee                                                               $  2,016,046
- ------------------------------------------------------------------------------------
Directors' fees                                                                              8,249
- ------------------------------------------------------------------------------------
Distribution services fee                                                                  279,822
- ------------------------------------------------------------------------------------
Shareholder services fee                                                                   794,782
- ------------------------------------------------------------------------------------
Administrative personnel and services                                                      257,697
- ------------------------------------------------------------------------------------
Custodian and portfolio accounting fees                                                    113,533
- ------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses                                   192,790
- ------------------------------------------------------------------------------------
Capital stock registration costs                                                            66,191
- ------------------------------------------------------------------------------------
Auditing fees                                                                               13,614
- ------------------------------------------------------------------------------------
Legal fees                                                                                  10,177
- ------------------------------------------------------------------------------------
Printing and postage                                                                        12,362
- ------------------------------------------------------------------------------------
Taxes                                                                                      105,559
- ------------------------------------------------------------------------------------
Miscellaneous                                                                                7,000
- ------------------------------------------------------------------------------------  ------------
     Total expenses                                                                      3,877,822
- ------------------------------------------------------------------------------------
Deduct--
- ------------------------------------------------------------------------------------
Waiver of investment advisory fee                                         $  215,960
- ------------------------------------------------------------------------
Waiver of distribution services fee                                          234,584       450,544
- ------------------------------------------------------------------------  ----------  ------------
     Net expenses                                                                                        3,427,278
- --------------------------------------------------------------------------------------------------  --------------
          Net investment income                                                                         14,481,533
- --------------------------------------------------------------------------------------------------  --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis)                                        (17,415,440)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments                                     (1,695,792)
- --------------------------------------------------------------------------------------------------  --------------
     Net realized and unrealized gain (loss) on investments                                            (19,111,232)
- --------------------------------------------------------------------------------------------------  --------------
          Change in net assets resulting from operations                                            $   (4,629,699)
- --------------------------------------------------------------------------------------------------  --------------
</TABLE>

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


FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED FEBRUARY 28,
<S>                                                                             <C>              <C>
                                                                                     1995*             1994
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------------------
Net investment income                                                           $    14,481,533  $     42,111,457
- ------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($17,415,440 net loss and
$12,916,149 net loss, respectively, as computed for federal tax purposes)           (17,415,440)      (12,060,236)
- ------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on
investments                                                                          (1,695,792)        1,386,612
- ------------------------------------------------------------------------------  ---------------  ----------------
     Change in net assets resulting from operations                                  (4,629,699)       31,437,833
- ------------------------------------------------------------------------------  ---------------  ----------------
NET EQUALIZATION (DEBITS) CREDITS--                                                    (199,988)         (584,335)
- ------------------------------------------------------------------------------  ---------------  ----------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------------------
Dividends to shareholders from net investment income                                (13,809,155)      (41,092,219)
- ------------------------------------------------------------------------------  ---------------  ----------------
CAPITAL STOCK TRANSACTIONS
(EXCLUSIVE OF AMOUNTS ALLOCATED TO NET INVESTMENT INCOME)--
- ------------------------------------------------------------------------------
Proceeds from sales of shares                                                        33,767,798       392,365,761
- ------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of dividends declared                                                         6,348,642        19,232,330
- ------------------------------------------------------------------------------
Cost of shares redeemed                                                            (250,539,376)     (739,344,309)
- ------------------------------------------------------------------------------  ---------------  ----------------
     Change in net assets resulting from capital stock transactions                (210,422,936)     (327,746,218)
- ------------------------------------------------------------------------------  ---------------  ----------------
          Change in net assets                                                     (229,061,778)     (337,984,939)
- ------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------
Beginning of period                                                                 798,213,279     1,136,198,218
- ------------------------------------------------------------------------------  ---------------  ----------------
End of period (including undistributed net investment income of $360,139)       $   569,151,501  $    798,213,279
- ------------------------------------------------------------------------------  ---------------  ----------------
</TABLE>

* Six months ended August 31, 1994 (unaudited).

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


FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
                                                                    YEAR ENDED FEBRUARY 28 OR 29,
                                                               1995**       1994       1993       1992*
<S>                                                          <C>          <C>        <C>        <C>
NET ASSET VALUE, BEGINNING OF PERIOD                          $     9.79  $    9.90  $    9.98  $   10.00
- -----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------
  Net investment income                                             0.21       0.43       0.53       0.47
- -----------------------------------------------------------
  Net realized and unrealized gain/(loss)
  on investments                                                   (0.27)     (0.11)     (0.08)     (0.06)
- -----------------------------------------------------------  -----------  ---------  ---------  ---------
  Total from investment operations                                 (0.06)      0.32       0.45       0.41
- -----------------------------------------------------------  -----------  ---------  ---------  ---------
LESS DISTRIBUTIONS
- -----------------------------------------------------------
  Dividends to shareholders from net investment income             (0.20)     (0.43)     (0.53)     (0.42)
- -----------------------------------------------------------
  Distributions in excess of net investment income               --          --         --          (0.01)(a)
- -----------------------------------------------------------  -----------  ---------  ---------  ---------
  Total distributions                                              (0.20)     (0.43)     (0.53)     (0.43)
- -----------------------------------------------------------  -----------  ---------  ---------  ---------
NET ASSET VALUE, END OF PERIOD                               $      9.53  $    9.79  $    9.90  $    9.98
- -----------------------------------------------------------  -----------  ---------  ---------  ---------
TOTAL RETURN***                                                    (0.57%)      3.27%      4.58%      4.14%
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------
  Expenses                                                          1.02%(b)      1.02%      1.01%      0.63%(b)
- -----------------------------------------------------------
  Net investment income                                             4.31%(b)      4.38%      5.29%      6.79%(b)
- -----------------------------------------------------------
  Expense waiver/reimbursement (c)                                  0.13 (b)      0.24%      0.01%      0.37%(b)
- -----------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------
  Net assets, end of period (000 omitted)                       $569,152      $798,213 $1,136,198   $965,289
- -----------------------------------------------------------
  Portfolio turnover rate                                             87%           40%        56%        22%
- -----------------------------------------------------------
</TABLE>

  * Reflects operations for the period from July 25, 1991 (date of initial
    public investment) to February 29, 1992. For the period from June 13, 1991
    (start of business), to July 24, 1991, net investment income for the Fund
    aggregating $0.0562 per share ($562) was distributed to the Fund's
    investment adviser.

 ** Six months ended August 31, 1994 (unaudited).

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

(a) Distributions in excess of net investment income for the period ended
    February 29, 1992, were the result of certain book and tax timing
    differences. These distributions do not represent a return of capital for
    federal income tax purposes.

(b) Computed on an annualized basis.

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

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


FORTRESS ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
August 31, 1994
(unaudited)

(1) ORGANIZATION

Fortress Adjustable Rate U.S. Government Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "Act"), as a
diversified, open-end management investment company.

(2) SIGNIFICANT ACCOUNTING POLICIES

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

A.   INVESTMENT VALUATIONS--U.S. government obligations are valued at the mean
     between the over-the-counter bid and asked prices as furnished by an
     independent pricing service. Short-term securities with remaining
     maturities of sixty days or less may be stated at amortized cost, which
     approximates value.

B.   REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
     custodian bank to take possession, to have legally segregated in the
     Federal Reserve Book Entry System, or to have segregated within the
     custodian bank's vault, all securities held as collateral in support of
     repurchase agreement investments. Additionally, procedures have been
     established by the Fund to monitor, on a daily basis, the market value of
     each repurchase agreement's underlying collateral to ensure that the value
     of collateral at least equals the principal amount of the repurchase
     agreement, including accrued interest.

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

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

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

     At February 28, 1994, the Fund, for federal tax purposes, had a capital
     loss carryover of $19,153,407, which will reduce the Fund's taxable income
     arising from future net realized gain on investments, if any, to the extent
     permitted by the Code, and thus will reduce the
     amount of the distributions to shareholders which would otherwise be
     necessary to relieve the Fund of any liability for federal tax. Pursuant to
     the Code, such capital loss carryforward will expire in 2000 ($135,570),
     2001 ($6,101,688) and 2002 ($12,916,149). Additionally, net capital losses
     of $2,302,827 attributable to security transactions incurred after October
     31, 1993 are treated as arising on March 1, 1994, the first day of the
     Fund's next taxable year.

E.   EQUALIZATION--The Fund follows the accounting practice known as
     equalization, by which a portion of the proceeds from sales and costs of
     redemptions of capital stock equivalent, on a per share basis, to the
     amount of undistributed net investment income on the date of the
     transaction, is credited or charged to undistributed net investment income.
     As a result, undistributed net investment income per share is unaffected by
     sales or redemptions of capital stock.

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

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

H.   DEFERRED EXPENSES--The costs incurred by the Fund with respect to
     registration of its shares in its first fiscal year, excluding the initial
     expense of registering its shares, have been deferred and are being
     amortized using the straight-line method through May, 1996.

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


(3) CAPITAL STOCK

At August 31, 1994, there were 5,000,000,000 shares of $.001 par value stock
authorized. Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED FEBRUARY 28,
                                                                                        1995*          1994
<S>                                                                                 <C>            <C>
- ----------------------------------------------------------------------------------
Shares sold                                                                             3,489,366     39,767,211
- ----------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared                            661,469      1,954,128
- ----------------------------------------------------------------------------------
Shares redeemed                                                                       (25,933,363)   (74,951,362)
- ----------------------------------------------------------------------------------  -------------  -------------
  Net change resulting from capital stock transactions                                (21,782,528)   (33,230,023)
- ----------------------------------------------------------------------------------  -------------  -------------
</TABLE>

* Six months ended August 31, 1994.

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

Federated Advisers, the Fund's investment adviser ("Adviser"), receives for its
services an annual investment advisory fee equal to .60% of 1% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive a portion
of its fee. The Adviser can modify or terminate this voluntary waiver at any
time at its sole discretion.

Federated Administrative Services ("FAS") provides the Fund with administrative
personnel and services. Prior to March 1, 1994, these services were provided at
approximate cost. Effective March 1, 1994, the FAS fee is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during the
period of the Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of share.

The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan, the Fund will compensate Federated
Securities Corp. ("FSC"), the principal distributor, from the net assets of the
Fund to finance activities intended to result in the sale of the Fund. The Plan
provides that the Fund may incur distribution expenses of up to .25 of 1% of the
Fund's average daily net assets, annually, to compensate FSC. The distributor
may voluntarily choose to waive a portion of its fee. The distributor can modify
or terminate this voluntary waiver at any time at its sole discretion.

Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services ("FSS"), the Fund will pay FSS up to .25 of 1% of average daily net
assets of the Fund for the period. This fee is to obtain certain personal
services for shareholders and to maintain the shareholder accounts.

Certain of the Officers and Directors of the Fund are Officers and Directors or
Trustees of the above companies.

(5) INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended August 31, 1994, were as follows:

<TABLE>
<S>                                                                                                 <C>
- --------------------------------------------------------------------------------------------------
Purchases                                                                                           $  551,301,894
- --------------------------------------------------------------------------------------------------  --------------
Sales                                                                                               $  715,956,840
- --------------------------------------------------------------------------------------------------  --------------
</TABLE>



DIRECTORS                                              OFFICERS

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

<TABLE>
<S>                                                <C>
John F. Donahue                                    John F. Donahue
John T. Conroy, Jr.                                 Chairman
William J. Copeland                                Richard B. Fisher
James E. Dowd                                       President
Lawrence D. Ellis, M.D.                            J. Christopher Donahue
Richard B. Fisher                                   Vice President
Edward L. Flaherty, Jr.                            Edward C. Gonzales
Peter E. Madden                                     Vice President and Treasurer
Gregor F. Meyer                                    John W. McGonigle
Wesley W. Posvar                                    Vice President and Secretary
Marjorie P. Smuts                                  David M. Taylor
                                                    Assistant Treasurer
                                                   Charles H. Field
                                                     Assistant Secretary
</TABLE>

Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank,
and are not insured or guaranteed by the FDIC, the Federal Reserve Board,
or any other government agency. Investment in mutual funds involves risk,
including possible loss of principal.

This report is authorized for distribution to prospective investors only when
preceded
or accompanied by the Fund's prospectus, which contains facts concerning its
objective and policies, management fees, expenses and other information.


[LOGO] FEDERATED SECURITIES CORP.
       ------------------------------------------------------------------
       Distributor

       A subsidiary of FEDERATED INVESTORS

       FEDERATED INVESTORS TOWER
       PITTSBURGH, PA 15222-3779

       349554105
       2091401 (10/94)

 Fortress Adjustable Rate U. S. Government Income Fund, Inc.
                          Appendix
A.   The graphic presentation here displayed consists of a
boxed legend in the lower center half indicating the
components of  the corresponding graphic mountain chart.
The color-coded mountain chart is a visual representation of
the narrative text above it, which shows a one time
investment of $40,000  (reinvesting all dividends and
capital gains) beginning July 25, 1991, would have grown to
$44,262 by 1994.  The "Y" axis reflects computation periods
from July 25, 1991 through fiscal year 1994, and the right
margin reflects a total investment range from $0 to$50,000.
The chart further indicates the ending market value
attributable to principal, as well as the ending market
value attributable to reinvested income.

B.   The graphic presentation here displayed consists of a
boxed legend in the lower center half indicating the
components of  the corresponding graphic mountain chart.
The color-coded mountain chart is a visual representation of
the narrative text above it, which shows that $10,000
invested each year for three years (reinvesting all
dividends and capital gains) beginning July 25, 1991, would
have grown to $41,324 by 1994.  The "Y" axis reflects
computation periods from July 25, 1991 through fiscal year
1994, and the right margin reflects a total investment range
from $0 to $45,000.  The chart further indicates the ending
market value attributable to principal, as well as the
ending market  value attributable to reinvested income.



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