[Graphic] Federated Investors
Federated Adjustable Rate U.S. Government Fund, Inc.
7th Semi-Annual Report
August 31, 1997
ESTABLISHED 1991
President's Message
[Graphic]
Dear Fellow Shareholder:
Federated Adjustable Rate U.S. Government Fund, Inc. was created in 1991,
and I am pleased to present the 7th Semi-Annual Report for the fund. The
fund's net assets totaled $200 million as of August 31, 1997, serving over
5,500 shareholders.
The report covers the six-month period from March 1, 1997, through
August 31, 1997. Kathy Foody-Malus, Vice President of Federated
Advisers, discusses today's interest-rate environment, its past and
present effect on adjustable-rate, mortgage-backed issues, and the
fund's performance. Following her discussion, you will find a complete
listing of the fund's holdings and its financial statements.
The fund's short-maturity holdings seek to offer shareholders a higher
level of income than money market funds and help to protect against a
significant loss of principal in periods of rising interest rates.+
The fund's income distributions totaled $0.27 per share during the
period. The fund's six-month and one-year net total returns as of
August 31, 1997, were 2.92% and 6.69%, respectively, based on net
asset value.*
In addition, the fund maintained an AAAf credit rating by Standard &
Poor's Ratings Group, the highest credit quality rating available for
a mutual fund.**
Thank you for your continued confidence in Federated Adjustable Rate U.S.
Government Fund, Inc. Consider the advantage of adding to your account and
reinvesting your dividends. As always, we welcome your comments and
questions.
Sincerely,
[Graphic]
Richard B. Fisher
President
October 15, 1997
+ Unlike money market funds, the share value of the fund will
fluctuate.
* Performance quoted represents past performance and is not indicative
of future results. 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 fund's six-month and
one-year total returns as of August 31, 1997, were 1.85% and 5.68%,
respectively, based on the fund's 1% contingent deferred sales
charge.
** An AAAf rating means that the fund's portfolio holdings and
counterparties provide extremely strong protection against losses
from credit defaults. Ratings are subject to change, and do not
remove market risks.
Investment Review
[Graphic]
Kathy Foody-Malus
Vice President
Federated Advisers
[Graphic]
WHAT IS YOUR ANALYSIS OF THE MIXED BAG OF ECONOMIC SIGNALS AND THEIR
EFFECT ON THE BOND MARKET?
During the last six months, the U.S. economy has been in a pleasing
configuration of modest growth and benign inflation. The economic data
for the semi-annual period has, for the near-term, alleviated
investors' concerns over any potential tightening moves by the Federal
Reserve Board (the "Fed"). However, investors are aware that the
economic data does portray an economy growing at a solid pace. Demand
that had appeared to have softened in the second quarter based upon
initial releases is now showing vigor. The pickup in spending has been
reflected in increased housing sales and manufacturing activity.
This news, in combination with strong Gross Domestic Product growth,
has caused the U.S. bond market to be skittish during August. In this
environment, the U.S. Treasury market continues to drift from data
release to data release without any clear conviction. Of course, any
action by the Fed will be reflected in the U.S. bond market.
[Graphic]
HOW DID FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC. PERFORM FOR
SHAREHOLDERS IN TERMS OF TOTAL RETURN AND INCOME DURING THE FIRST SIX MONTHS
OF ITS FISCAL YEAR?
The fund paid a monthly dividend stream totaling $0.27 per share over
the period. The fund's net total return based on net asset value was
2.92% for the six-month period ending on August 31, 1997. This
compares to total returns of 3.12% for the Merrill Lynch 1-Year
Treasury Note Index, 3.40% for the Merrill Lynch 2-Year Treasury Note
Index, and 2.88% for the Lipper ARMs Fund Average.*
* The Merrill Lynch 1-Year and 2-Year Treasury Note Indices are
comprised of the most recently issued 1-year and 2-year Treasury
notes, respectively. Index returns are calculated as total returns
for periods of 1, 3, 6, and 12 months as well as year-to-date. These
indices are unmanaged, and investments cannot be made in an index.
Lipper figures represent the average of the total returns reported
by all of the mutual funds designated by Lipper Analytical Services,
Inc. as falling into the respective categories indicated. These
figures do not reflect sales charges.
[Graphic]
HOW IS THE PORTFOLIO STRUCTURED TO OFFER VALUE TO A TYPICAL
INCOME-ORIENTED INVESTOR WITH A ONE- TO TWO-YEAR TIME HORIZON?
This portfolio is an extremely suitable vehicle for the investor who
has a one- to two-year time horizon for two key reasons:
First, the fund seeks to offer an attractive income stream versus
other short duration alternatives. Typically, the fund pursues 50-75
basis points of additional income over money market instruments under
normal market conditions.
Second, investors can benefit from a favorable demand/supply
situation. Currently, due to the shape of the yield curve, homeowners
are favoring fixed-rate mortgages over adjustable-rate mortgages
("ARMs"), therefore, the supply of ARMs is minimal. On the flip side,
demand from investors due to lack of alternative short-investment
products has been increasing steadily.
[Graphic]
HOW WERE THE ASSETS OF THE FUND INVESTED AT THE END OF THE PERIOD?
As of August 31, 1997, the fund's portfolio was primarily invested in
the following issues:
PERCENTAGE
OF TOTAL
MATURITIES MARKET VALUE
Federal Home Loan
Mortgage Corporation
(FHLMC) 11/01/2016 to 04/01/2029 37.80%
Government National
Mortgage Association
(GNMA) 03/15/2010 to 04/20/2026 30.58%
Federal National
Mortgage Association
(FNMA) 12/01/2010 to 06/01/2029 22.04%
U.S. Treasury Notes 03/31/1999 to 11/15/1999 8.74%
[Graphic]
AS WE MOVE TOWARD THE END OF 1997, DO YOU SEE ANY SIGNS THAT MAY POINT
TO A CLEARER DIRECTION FOR THE BOND MARKET?
The U.S. Treasury market continues to trade in a betwixt and between
state. Yields over the course of the last six months on the 2-year
Treasury have been as low as 5.72% and as high as 6.54%. The spread
between 2-year U.S. Treasuries and 30-year U.S. Treasuries has ranged
between 57 and 79 basis points during this period. The Treasury market
has gyrated quite a bit, but has not traded with a solid set of
convictions to establish any pattern moving into the final quarter of
1997.
In an environment of a market in a trading range, low volatility and
attractive yield spreads versus other fixed-income sectors, our
traditional strategy seems to offer the best approach to manage the
fund's portfolio. In the long run, management believes the fund's
returns will be driven primarily by sector and security allocation
decisions.
TWO WAYS YOU MAY SEEK TO INVEST FOR SUCCESS IN
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
INITIAL INVESTMENT:
IF YOU MADE AN INITIAL INVESTMENT OF $7,000 IN THE FUND ON 7/25/91,
REINVESTED DIVIDENDS AND CAPITAL GAINS, AND DID NOT REDEEM ANY SHARES,
YOUR ACCOUNT WOULD HAVE BEEN WORTH $9,306 ON 8/31/97. YOU WOULD HAVE
EARNED A 4.78% AVERAGE ANNUAL TOTAL RETURN FOR THE SIX-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 9/30/97, the fund's average annual one-year, five-year, and
since-inception (7/25/91) total returns were 5.44%, 4.46%, and 4.81%
respectively.*
GRAPHIC PRESENTATION A1 OMITTED. 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 prior to 48 months.
Data quoted represents past performance and does 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.
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
ONE STEP AT A TIME:
$1,000 INVESTED EACH YEAR FOR SEVEN YEARS (REINVESTING ALL DIVIDENDS AND
CAPITAL GAINS) GREW TO $8,171.
With this approach, the key is consistency.
If you had started investing $1,000 annually in the fund on 7/25/91,
reinvested your dividends and capital gains, and didn't redeem any
shares, you would have invested only $7,000, but your account would
have reached a total value of $8,171* by 8/31/97. You would have
earned an average annual total return of 4.98%.
A practical investment plan helps you pursue long-term performance
from U.S. government securities. Through systematic investing, you buy
shares on a regular basis and reinvest all earnings. This investment
plan works for you even if you invest only $1,000 annually. You can
take it one step at a time.
Put time, money, and compounding to work.
GRAPHIC PRESENTATION A2 OMITTED. SEE APPENDIX.
* This chart assumes that the subsequent annual investments are made
on the last day of the anniversary month. 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.
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--89.1%
FEDERAL HOME LOAN MORTGAGE CORP. PC ARM--36.1%
$ 68,775,578 7.699% - 7.980%, 4/1/2018 - 4/1/2029 $ 72,107,946
FEDERAL HOME LOAN MORTGAGE CORP. --1.2%
2,183,628 9.000%, 11/1/2016 2,329,668
FEDERAL NATIONAL MORTGAGE ASSOCIATION ARM--18.3%
35,258,975 6.077% - 7.816%, 7/1/2018 - 6/1/2029 36,565,865
FEDERAL NATIONAL MORTGAGE ASSOCIATION--3.4%
6,157,118 9.500% - 12.25%, 12/1/2010 - 7/1/2016 6,839,504
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ARM--16.7%
32,538,922 6.875% - 7.375%, 3/20/2017 - 4/20/2026 33,411,121
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--13.4%
23,966,756 9.500% - 12.000%, 3/15/2010 - 12/15/2021 26,813,300
TOTAL U.S. GOVERNMENT OBLIGATIONS (IDENTIFIED COST $175,557,002)
178,067,404
U.S. TREASURY NOTES--8.6%
17,200,000 5.875% - 6.250%, 3/31/1999 - 11/15/1999 17,211,972
TOTAL U.S. TREASURY NOTES (IDENTIFIED COST $17,168,439) 17,211,972
(A)REPURCHASE AGREEMENT--0.8%
1,665,000 BT Securities Corporation, 5.580%, dated 8/29/1997,
due 9/2/1997 (AT AMORTIZED COST) 1,665,000
TOTAL INVESTMENTS (IDENTIFIED COST $194,390,441)(B) $ 196,944,376
</TABLE>
(a) 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 agreement
is through participation in a joint account with other Federated
funds.
(b) The cost of investments for federal tax purposes amounts to
$194,390,441. The net unrealized appreciation of investments on a
federal tax basis amounts to $2,553,935 which is comprised of
$2,790,338 appreciation and $236,403 depreciation at August 31,
1997.
Note: The categories of investments are shown as a percentage of net assets
($199,804,733) at August 31, 1997.
The following acronyms are used throughout this portfolio:
ARM --Adjustable Rate Mortgage
PC --Participation Certificate
(See Notes which are an integral part of the Financial Statements)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and
tax cost $194,390,441) $ 196,944,376
Income receivable 3,529,654
Receivable for shares sold 28,011
Total assets 200,502,041
LIABILITIES:
Payable for shares redeemed $ 233,088
Income distribution payable 333,412
Payable to Bank 2,364
Accrued expenses 128,444
Total liabilities 697,308
NET ASSETS for 20,881,924 shares outstanding $ 199,804,733
NET ASSETS CONSIST OF:
Paid in capital $ 240,269,258
Net unrealized appreciation of investments 2,553,935
Accumulated net realized loss on investments (43,142,433)
Accumulated undistributed net investment income 123,973
Total Net Assets $ 199,804,733
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($199,804,733 / 20,881,924 shares outstanding) $9.57
Redemption Proceeds Per Share (99/100 of $9.57)* $9.47
</TABLE>
* See "Contingent Deferred Sales Charge" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 6,974,594
EXPENSES:
Investment advisory fee $ 636,666
Administrative personnel and services fee 80,114
Custodian fees 17,253
Transfer and dividend disbursing agent fees and expenses 114,785
Directors'/Trustees' fees 7,147
Auditing fees 8,647
Legal fees 3,035
Portfolio accounting fees 29,789
Distribution services fee 265,278
Shareholder services fee 265,278
Share registration costs 16,546
Printing and postage 22,801
Insurance premiums 2,358
Taxes 13,043
Miscellaneous 16,631
Total expenses 1,499,371
Waivers--
Waiver of investment advisory fee $ (147,089)
Waiver of distribution services fee (254,667)
Waiver of shareholder services fee (10,611)
Total waivers (412,367)
Net expenses 1,087,004
Net investment income 5,887,590
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 362,654
Net change in unrealized appreciation of investments (318,380)
Net realized and unrealized gain on investments 44,274
Change in net assets resulting from operations $ 5,931,864
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
AUGUST 31, FEBRUARY 28,
1997 1997
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 5,887,590 $ 13,919,021
Net realized gain (loss) on investments ($362,654 and $254,661
net gains, respectively, as computed for federal tax purposes) 362,654 254,661
Net change in unrealized appreciation (depreciation) of investments (318,380) 222,590
Change in net assets resulting from operations 5,931,864 14,396,272
NET EQUALIZATION CREDITS (DEBITS)-- (10,266) (117,558)
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (5,800,930) (13,801,463)
Distributions in excess of net investment income -- (408,205)
Change in net assets resulting from distributions to shareholders (5,800,930) (14,209,668)
SHARE TRANSACTIONS--
Proceeds from sale of shares 2,780,367 19,371,631
Net asset value of shares issued to shareholders in payment of
distributions declared 3,680,531 8,817,292
Cost of shares redeemed (31,224,158) (108,002,125)
Change in net assets resulting from share transactions (24,763,260) (79,813,202)
Change in net assets (24,642,592) (79,744,156)
NET ASSETS:
Beginning of period 224,447,325 304,191,481
End of period (including undistributed net investment income
of $123,973 and $47,579, respectively) $ 199,804,733 $ 224,447,325
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
AUGUST 31, YEAR ENDED FEBRUARY 28 OR 29,
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.56 $ 9.55 $ 9.46 $ 9.79 $ 9.90 $ 9.98
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.27 0.52 0.54 0.47 0.43 0.53
Net realized and unrealized gain
(loss) on investments 0.01 0.03 0.08 (0.32) (0.11) (0.08)
Total from investment operations 0.28 0.55 0.62 0.15 0.32 0.45
LESS DISTRIBUTIONS
Distributions from net investment
income (0.27) (0.52) (0.53) (0.47) (0.43) (0.53)
Distributions in excess of net
investment income(a) -- (0.02) -- (0.01) -- --
Total distributions (0.27) (0.54) (0.53) (0.48) (0.43) (0.53)
NET ASSET VALUE, END OF PERIOD $ 9.57 $ 9.56 $ 9.55 $ 9.46 $ 9.79 $ 9.90
TOTAL RETURN(B) 2.92% 5.90% 6.77% 1.58% 3.27% 4.58%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.02%* 1.02% 1.02% 1.02% 1.02% 1.01%
Net investment income 5.55%* 5.42% 5.67% 4.76% 4.38% 5.29%
Expense waiver/reimbursement(c) 0.39%* 0.42% 0.34% 0.30% 0.24% 0.01%
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $199,805 $224,447 $304,191 $419,095 $798,213 $1,136,198
Portfolio turnover 46% 108% 144% 170% 40% 56%
</TABLE>
* Computed on an annualized basis.
(a) Distributions in excess of net investment income 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) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(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)
FEDERATED ADJUSTABLE RATE U.S. GOVERNMENT FUND, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997 (UNAUDITED)
1. ORGANIZATION
Federated 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. The
investment objective of the Fund is to provide current income with
volatility of principal which is lower than investment companies
investing primarily in fixed-rate mortgage securities.
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. These policies are in conformity with generally accepted
accounting principles.
INVESTMENT VALUATIONS --U.S. government securities are generally
valued at the mean of the latest bid and asked price as furnished by
an independent pricing service. Short-term securities are valued at
the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of 60 days or less
at the time of purchase may be valued at amortized cost, which
approximates fair market value.
REPURCHASE AGREEMENTS --It is the policy of the 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 under
repurchase agreement transactions. Additionally, procedures have
been established by the Fund to monitor, on a daily basis, the
market value of each repurchase agreement's collateral to ensure
that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.
The Fund is also permitted to enter into reverse repurchase
agreements, in which the Fund sells U.S. government securities to
financial institutions and agrees to repurchase the securities at an
agreed-upon price and date.
The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers,
which are deemed by the Fund's adviser to be creditworthy pursuant
to the guidelines and/or standards reviewed or established by the
Board of Directors (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.
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. Distributions in excess of net investment
income were the result of certain book and tax timing differences.
These distributions do not represent a return of capital for federal
income tax purposes.
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
income. Accordingly, no provisions for federal tax are necessary.
At February 28, 1997, the Fund, for federal tax purposes, had a
capital loss carryforward of $43,505,087, 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 as follows:
EXPIRATION YEAR EXPIRATION AMOUNT
2001 $ 5,982,598
2002 $12,916,149
2003 $21,867,393
2004 $ 2,738,947
EQUALIZATION --The Fund follows the accounting practice known as
equalization. With equalization, a portion of the proceeds from
sales and costs of redemptions of Fund shares (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 Fund
shares.
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.
DOLLAR ROLL TRANSACTIONS --The Fund enters into dollar roll
transactions, with respect to mortgage securities issued by
Government National Mortgage Association, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation, in which
the Fund sells mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same-type,
coupon and maturity) securities at a later date at an agreed-upon
price. Dollar roll transactions are short-term financing
arrangements which will not exceed twelve months. The 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. For the period ended August 31, 1997, the Fund did not
engage in dollar roll transactions.
USE OF ESTIMATES --The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
of assets, liabilities, expenses, and revenues reported in the
financial statements. Actual results could differ from those
estimated.
OTHER --Investment transactions are accounted for on the trade date.
At August 31, 1997, there were 5,000,000,000 shares of $0.001 par
value capital stock authorized. Transactions in capital stock were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28,
1997 1997
<S> <C> <C>
Shares sold 290,557 2,031,531
Shares issued to shareholders in payment of distributions declared 385,362 926,281
Shares redeemed (3,262,719) (11,343,231)
Net change resulting from share transactions (2,586,800) (8,385,419)
</TABLE>
3. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE --Federated Advisers, the Fund's investment
adviser (the "Adviser"), receives for its services an annual
investment advisory fee equal to 0.60% of the Fund's average daily
net assets. The Adviser may voluntarily choose to waive any portion
of its fee. The Adviser can modify or terminate this voluntary
waiver at any time at its sole discretion.
ADMINISTRATIVE FEE --Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with
administrative personnel and services. The fee paid to FServ is
based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors for the period.
The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per
portfolio and $30,000 per each additional class of shares.
DISTRIBUTION SERVICES FEE --The 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's
shares. The Plan provides that the Fund may incur distribution
expenses up to 0.25% of the average daily net assets of the Fund
shares, annually, to compensate FSC. FSC may voluntarily choose to
waive any portion of its fee. FSC can modify or terminate this
voluntary waiver at any time at its sole discretion.
SHAREHOLDER SERVICES FEE --Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will
pay FSS up to 0.25% of average daily net assets of the Fund shares
for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. FSS
may voluntarily choose to waive any portion of its fee. FSS can
modify or terminate this voluntary waiver at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES --FServ,
through its subsidiary, Federated Shareholder Services Company
("FSSC"), serves as transfer and dividend disbursing agent for the
Fund. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES --FServ maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level
of the Fund's average daily net assets for the period, plus
out-of-pocket expenses.
GENERAL --Certain of the Officers and Directors of the Fund are
Officers and Directors or Trustees of the above companies.
4. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities,
for the period ended August 31, 1997, were as follows:
PURCHASES $ 94,421,019
SALES $118,308,485
DIRECTORS
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr.
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Richard B. Fisher
President
J. Christopher Donahue
Executive Vice President
Edward C. Gonzales
Executive Vice President
John W. McGonigle
Executive Vice President, Treasurer, and Secretary
J. Crilley Kelly
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not 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. Investment in mutual funds involves
investment 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.
[Graphic] Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 314072109
2091401 (10/97)
[Graphic]
A1. The graphic presentation here displayed consists of a boxed legend
in the upper left quadrant indicating the components of the
corresponding mountain chart. The color-coded mountain chart is a
visual representation of the narrative text above it. The "x" axis
reflects computation periods from 7/25/91 to 8/31/97. The "y" axis is
measured in increments of $2,200 ranging from $0 to $11,000 and
indicates that the ending value of a hypothetical initial investment
of $7,000 in the fund, assuming the reinvestment of capital gains and
dividends, would have grown to $9,306 on 8/31/97.
A2. The graphic presentation here displayed consists of a boxed legend
in the upper left quadrant indicating the components of the
corresponding mountain chart. The color-coded mountain chart is a
visual representation of the narrative text above it. The "x" axis
reflects computation periods from 7/25/91 to 8/31/97. The "y" axis is
measured in increments of $1,900 ranging from $0 to $9,500 and
indicates that the ending value of hypothetical yearly investments of
$1,000 in the fund, assuming the reinvestment of capital gains and
dividends, would have grown to $8,171 on 8/31/97.
