FEDERATED TOTAL RETURN SERIES INC, N-30D, 1997-12-01

FEDERATED TOTAL RETURN SERIES INC
N-30D, 1997-12-01

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Federated Total Return Bond Fund

(A Portfolio of Federated Total Return Series, Inc.)

Institutional Shares

PROSPECTUS
The Institutional Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund). The investment objective of the Fund is to provide
total return. The Fund pursues this investment objective by seeking value among
most sectors of fixed income securities, focusing on investment grade debt
securities.

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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov). THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Prospectus
dated November 30, 1997

TABLE OF CONTENTS

Summary of Fund Expenses 1 Financial Highlights--Institutional Shares 2 General
Information 3 Investment Information 3 Investment Objective 3 Investment
Policies 3 Investment Limitations 12 Hub and Spoke(R) Option 12 Net Asset Value
12 Investing in Institutional Shares 12 Share Purchases 12 Minimum Investment
Required 13 What Shares Cost 13 Exchanging Securities for Fund Shares 13
Confirmations and Account Statements 13 Dividends and Distributions 13
Redeeming Institutional Shares 14 Telephone Redemption 14 Written Requests 14
Accounts with Low Balances 14 Fund Information 14 Management of the Fund 14
Distribution of Institutional Shares 16 Administration of the Fund 16
Shareholder Information 16 Voting Rights 16 Tax Information 17 Federal Income
Tax 17 State and Local Taxes 17 Performance Information 17 Other Classes of
Shares 17 Financial Highlights--Institutional Service Shares 18 Financial
Statements 19 Report of Ernst & Young LLP, Independent Auditors 29 Appendix 30

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
Institutional Shares
Shareholder Transaction Expenses
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
Annual Operating Expenses
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee None
Total Other Expenses (after expense reimbursement) 0.35%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses(3) 0.35%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%. (2) Institutional
Shares has no present intention of paying or accruing the shareholder services
fee during the fiscal year ending September 30, 1998. If Institutional Shares
were paying or accruing the shareholder services fee, Institutional Shares would
be able to pay up to 0.25% of its average daily net assets for the shareholder
services fee. See "Fund Information." (3) The total operating expenses in the
table above are based on expenses expected during the fiscal year ending
September 30, 1998. The total operating expenses were 0.01% for the fiscal year
ended September 30, 1997 and would have been 4.40% absent the voluntary waiver
of the management fee and the voluntary reimbursement of certain other operating
expenses. The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of Institutional Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Institutional Shares" and
"Fund Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period.
<S> <C>
1 year $ 4
3 years $11
5 years $20
10 years $44
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.72
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.72)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.52%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.01%
Net investment income 7.15%
Expense waiver/reimbursement(c) 4.39%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $16,700
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997. (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) GENERAL
INFORMATION The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." and the name of the Fund was changed from "Insight U.S. Government
Fund" to "Federated Government Total Return Fund." On May 15, 1996, the name of
the Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to Institutional
Shares of Federated Total Return Bond Fund. Institutional Shares ("Shares") of
the Fund are sold primarily to accounts for which financial institutions act in
a fiduciary or agency capacity as a convenient means of accumulating an interest
in a professionally managed, diversified portfolio of investment grade debt
securities. A minimum initial investment of $100,000 over a 90-day period is
required. Shares are sold and redeemed at net asset value without a sales charge
imposed by the Fund. INVESTMENT INFORMATION INVESTMENT OBJECTIVE The investment
objective of the Fund is to provide total return. The investment objective
cannot be changed without approval of shareholders. While there is no assurance
that the Fund will achieve its investment objective, it endeavors to do so by
following the investment policies described in this prospectus. INVESTMENT
POLICIES

The Fund pursues its investment objective by investing primarily in a
diversified portfolio of investment grade debt securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A,
or BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. Unless indicated otherwise, the
investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective.

ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of investment grade debt securities. The Fund may also invest in
convertible securities. The Fund may also invest in derivative instruments of
such securities (including instruments with demand features or credit
enhancement and stripped mortgage-backed securities), as well as money market
instruments and cash. The securities in which the Fund invests principally are:
* asset-backed securities;
* domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less; * time deposits
(including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured banks
or which have at least $100 million in capital; and
* repurchase agreements collateralized by eligible investments. CORPORATE AND
FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS The Fund invests in corporate and
foreign government/agency debt obligations, including bonds, notes, medium term
notes, and debentures, which may have floating or fixed rates of interest. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities. Increasing rate securities, which
currently do not make up a significant share of the market in corporate debt
securities, are generally offered at an initial interest rate which is at or
above prevailing market rates. Interest rates are reset periodically (most
commonly every 90 days) at different levels on a predetermined scale. These
levels of interest are ordinarily set at progressively higher increments over
time. Some increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer the
option to convert the increasing rate of interest to a fixed rate under such
terms, conditions, and limitations as are described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed rate security with
short-term characteristics would include a fixed income security priced close to
call or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high. Fixed rate securities tend to
exhibit more price volatility during times of rising or falling interest rates
than securities with floating rates of interest. This is because floating rate
securities, as described above, behave like short-term instruments in that the
rate of interest they pay is subject to periodic adjustments based on a
designated interest rate index. Fixed rate securities pay a fixed rate of
interest and are more sensitive to fluctuating interest rates. In periods of
rising interest rates, the value of a fixed rate security is likely to fall.
Fixed rate securities with short-term characteristics are not subject to the
same price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to price
volatility.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term debt instruments that have variable or
floating interest rates and provide the Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued interest.
Such securities typically bear interest at a rate that is intended to cause the
securities to trade at par. The interest rate may float or be adjusted at
regular intervals (ranging from daily to annually), and is normally based on a
published interest rate or interest rate index. Many variable rate demand notes
allow the Fund to demand the repurchase of the security on not more than seven
days prior notice. Other notes only permit the Fund to tender the security at
the time of each interest rate adjustment or at other fixed intervals. See
"Demand Features." U.S. GOVERNMENT SECURITIES The Fund may invest in U.S.
government securities, which generally include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes, and bonds) and obligations
(including mortgage-backed securities, bonds, notes and discount notes) issued
or guaranteed by the following U.S. government agencies or instrumentalities:
Farm Credit System, including the National Bank for Cooperatives, Farm Credit
Banks, and Banks for Cooperatives; Farmers Home Administration; Federal Home
Loan Banks; Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association. These securities are backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow an amount limited to a
specific line of credit from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations. Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Federal National Mortgage Association; Student Loan Marketing
Association; and Federal Home Loan Mortgage Corporation. MORTGAGE-BACKED
SECURITIES Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. There are currently four basic types of mortgage-backed
securities: (i) those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; (iii) those issued by private issuers that
represent an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government. The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and/or principal. The interest
portion of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities. COLLATERALIZED
MORTGAGE OBLIGATIONS ("CMOS") CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities. CMOs may have
fixed or floating rates of interest. The Fund may invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") REMICs are
offerings of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as amended.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee. INVESTMENT RISKS
OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Mortgage-backed and asset-backed
securities generally pay back principal and interest over the life of the
security. At the time the Fund reinvests the payments and any unscheduled
prepayments of principal are received, the Fund may receive a rate of interest
which is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities. While mortgage-backed securities generally entail less
risk of a decline during periods of rapidly rising interest rates,
mortgage-backed securities may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may result in
some loss of a holder's principal investment to the extent of the premium paid.
Conversely, if mortgage-backed securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal would
increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. FOREIGN SECURITIES The Fund may invest in foreign securities.
Foreign securities do not include American Depository Receipts, but do include
foreign securities not publicly traded in the United States. Investments in
foreign securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities. RISKS The risks associated with investments in foreign securities
relate to political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are not
limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability, ability to obtain or enforce court judgments
abroad and adverse diplomatic developments. Moreover, individual foreign
economies may differ favorably or unfavorably from the domestic economy in such
respects as growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries. CURRENCY RISKS Foreign securities may be denominated
in foreign currencies. Therefore, the value in U.S. dollars of the Fund's assets
and income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holdings of foreign currencies to U.S. dollars daily. When the Fund converts
its holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices at which
they buy and sell currencies. The Fund will engage in foreign currency exchange
transactions in connection with its investments in foreign securities. The Fund
will conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies. FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. When the Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency, it may want to establish the
U.S. dollar cost or proceeds, as the case may be. By entering into a forward
contract in U.S. dollars for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction, the Fund attempts to
protect itself against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the U.S. dollar and
such foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships. The Fund will not
enter into forward foreign currency exchange contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency or denominated in a currency or
currencies that the adviser believes will reflect a high degree of correlation
with the currency with regard to price movements. The Fund generally will not
enter into forward foreign currency exchange contracts with a term longer than
one year. STRIPPED MORTGAGE-BACKED SECURITIES

The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased - the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.

MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment. The two principal
classifications of municipal securities are "general obligation" and "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith and credit and taxing power for the payment of principal and interest.
Interest on and principal of revenue bonds, however, are payable only from the
revenue generated by the facility financed by the bond or other specified
sources of revenue. Revenue bonds do not represent a pledge of credit or create
any debt of or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as revenue
bonds.
CONVERTIBLE SECURITIES
Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which can or
otherwise limit returns to the convertible security holder, such as DECS
(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common Stock when
issued as a debt security.), LYONS (Liquid Yield Option Notes which are
corporate bonds that are purchased at prices below par with no coupons and are
convertible into stock), PERCS (Preferred Equity Redemption Cumulative Stock
which are an equity issue that pays a high cash dividend, has a cap price and
mandatory conversion to common stock at maturity), and PRIDES (Preferred
Redeemable Increased Dividend Securities, which are essentially the same as
DECS; the difference is little more than who initially underwrites the issue).

Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding convertible securities rated below investment grade by an NRSRO or in
the Fund holding such securities where they have acquired a rating below
investment grade after the Fund has purchased it. See "High Yield Debt
Obligations."

BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping and the public availability of
information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment. Revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. As the borrower repays the
loan, an amount equal to the repayment may be borrowed again during the term of
the facility. The Fund generally acquires a participation interest in a
revolving credit facility from a bank or other financial institution. The terms
of the participation require the Fund to make a pro rata share of all loans
extended to the borrower and entitles the Fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving facilities usually
provide for floating or variable rates of interest. CREDIT ENHANCEMENT Certain
of the Fund's acceptable investments may have been credit-enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat credit
enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security. DEMAND FEATURES The Fund may acquire
securities that are subject to puts and standby commitments ("demand features")
to purchase the securities at their principal amount (usually with accrued
interest) within a fixed period following a demand by the Fund. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities or by another third party, and may not be transferred separately
from the underlying security. The Fund uses these arrangements to provide the
Fund with liquidity and not to protect against changes in the market value of
the underlying securities. The bankruptcy, receivership or default by the issuer
of the demand feature, or a default on the underlying security or other event
that terminates the demand feature before its exercise, will adversely affect
the liquidity of the underlying security. Demand features that are exercisable
even after a payment default on the underlying security are treated as a form of
credit enhancement. INTEREST RATE SWAPS As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars, and
floors. Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund. FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES The
Fund may purchase and sell financial and foreign currency futures contracts to
hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time. The Fund may also write (sell) or
purchase put and call options on financial and foreign currency futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call or put option on a futures
contract, it is undertaking the obligation of selling or purchasing,
respectively, a futures contract at a fixed price at any time during a specified
period if the option is exercised. Conversely, as purchaser of a call or put
option on a futures contract, the Fund is entitled (but not obligated) to buy or
sell, respectively, a futures contract at the fixed price during the life of the
option. The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses futures and options on futures as hedging devices, there is a risk that the
prices of the instruments subject to the futures contracts may not correlate
perfectly with the prices of the instruments in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio's holdings to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the Fund may
lose money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary market
on an exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market. HIGH-YIELD DEBT
OBLIGATIONS The Fund may invest up to but not including 35% of its assets in
debt securities that are not investment-grade but are rated BB or lower by an
NRSRO (or, if unrated, determined by the adviser to be of comparable quality).
Some of these securities may involve equity characteristics. The Fund may invest
in equity securities, including unit offerings which combine fixed rate
securities and common stock or common stock equivalents such as warrants, rights
and options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.

The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio.

RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds. The
Fund's investment adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objective, policies and limitations. TOTAL RETURN The "total return"
sought by the Fund will consist of interest and dividends from underlying
securities, capital appreciation reflected in unrealized increases in value of
portfolio securities (realized by the shareholder only upon selling Shares) or
realized from the purchase and sale of securities, and successful use of futures
and options, or gains from favorable changes in foreign currency exchange rates.
Generally, over the long term, the total return obtained by a portfolio
investing primarily in fixed income securities is not expected to be as great as
that obtained by a portfolio that invests primarily in equity securities. At the
same time, the market risk and price volatility of a fixed income portfolio is
expected to be less than that of an equity portfolio. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed-upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned at all times.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticipate that portfolio turnover
will result in adverse tax consequences. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs.

INVESTMENT LIMITATIONS The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund. The initial shareholder of the Fund (who is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment. In making its determination, the Directors will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. Although it is expected that the
Directors will not approve an arrangement that is likely to result in higher
costs, no assurance is given that costs will remain the same or be materially
reduced if this investment structure is implemented. NET ASSET VALUE The Fund's
net asset value per Share fluctuates. The net asset value for Shares is
determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled. INVESTING IN INSTITUTIONAL SHARES SHARE PURCHASES Shares are sold
at their net asset value, without a sales charge, next determined after an order
is received on days on which the New York Stock Exchange is open for business.
Shares may be purchased either by wire or mail. To purchase shares of the Fund,
open an account by calling Federated Securities Corp. Information needed to
establish the account will be taken over the telephone. The Fund reserves the
right to reject any purchase request. BY WIRE To purchase Shares by Federal
Reserve wire, call the Fund before 4:00 p.m. (Eastern time) to place an order.
The order is considered received immediately. Payment by federal funds must be
received before 3:00 p.m. (Eastern time) on the next business day following the
order. Federal funds should be wired as follows: Federated Shareholder Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Total Return Bond
Fund--Institutional Shares; Fund Number (this number can be found on the account
statement or by contacting the Fund); Group Number or Order Number; Nominee or
Institution Name; ABA Number 011000028. Shares cannot be purchased by wire on
holidays when wire transfers are restricted. Questions on wire purchases should
be directed to your shareholder services representative at the telephone number
listed on your account statement. BY MAIL

To purchase Shares by mail, send a check made payable to Federated Total Return
Bond Fund--Institutional Shares to: Federated Shareholder Services Company, P.O.
Box 8600, Boston, MA 02266-8600. Orders by mail are considered received when
payment by check is converted by State Street Bank and Trust Company ("State
Street Bank") into federal funds. This is normally the next business day after
State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $100,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $100,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares
are sold at their net asset value next determined after an order is received.
There is no sales charge imposed by the Fund. Investors who purchase Shares
through a financial intermediary may be charged a service fee by that financial
intermediary.

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

Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale.

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund shares on the day the securities are valued. One share of the Fund will
be issued for the equivalent amount of securities accepted. Any interest earned
on the securities prior to the exchange will be considered in valuing the
securities. All interest, dividends, subscription or other rights attached to
the securities become the property of the Fund, along with the securities. If an
exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor. CONFIRMATIONS AND
ACCOUNT STATEMENTS

Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.

Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, MA 2266-8600. If share
certificates have been issued, they should be sent unendorsed with the written
request by registered or certified mail to the address noted above.

The written request should state: Federated Total Return Bond
Fund--Institutional Shares; the account name as registered with the Fund; the
account number; and the number of shares to be redeemed or the dollar amount
requested. All owners of the account must sign the request exactly as the Shares
are registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed. Shareholders requesting a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company or savings
association whose deposits are insured by an organization which is administered
by the Federal Deposit Insurance Corporation; a member firm of a domestic stock
exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed
by a notary public. ACCOUNTS WITH LOW BALANCES Due to the high cost of
maintaining accounts with low balances, the Fund may redeem Shares in any
account, and pay the proceeds to the shareholder, if the account balance falls
below a required minimum value of $100,000 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below $100,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement. FUND INFORMATION MANAGEMENT
OF THE FUND BOARD OF DIRECTORS The Fund is managed by a Board of Directors. The
Directors are responsible for managing the Corporation's business affairs and
for exercising all the Corporation's powers except those reserved for the
shareholders. The Executive Committee of the Board of Directors handles the
Directors' responsibilities between meetings of the Directors. INVESTMENT
ADVISER Investment decisions for the Fund are made by Federated Management, the
Fund's investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund. ADVISORY FEES

The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.

Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide. Both
the Corporation and the adviser have adopted strict codes of ethics governing
the conduct of all employees who manage the Fund and its portfolio securities.
These codes recognize that such persons owe a fiduciary duty to the Fund's
shareholders and must place the interests of shareholders ahead of the
employees' own interests. Among other things, the codes: require preclearance
and periodic reporting of personal securities transactions; prohibit personal
transactions in securities being purchased or sold, or being considered for
purchase or sale, by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less than 60 days.
Violations of the codes are subject to review by the Directors and could result
in severe penalties.

PORTFOLIO MANAGER'S BACKGROUND

Joseph M. Balestrino has been a portfolio manager of the Fund since
inception. Mr. Balestrino joined Federated Investors in 1986 and has been a
Vice President of the Fund's investment adviser and Federated Research Corp.
since 1995. Mr. Balestrino served as an Assistant Vice President of the
investment adviser and Federated Research Corp. from 1991 to 1995. Mr.
Balestrino is a Chartered Financial Analyst and received his Master's Degree
in Urban and Regional Planning from the University of Pittsburgh.

John T. Gentry has been a portfolio manager of the Fund since November 1997.
Mr. Gentry joined Federated Investors in 1995 as an Investment Analyst and
has been an Assistant Vice President of the Fund's adviser and Federated
Research Corp. since April 1997. Mr. Gentry served as a Senior Treasury
Analyst at Sun Company, Inc. from 1991 to 1995. Mr. Gentry is a Chartered
Financial Analyst and earned his M.B.A., with concentrations in Finance and
Accounting, from Cornell University.
Donald T. Ellenberger has been a portfolio manager of the Fund since
November 1997. Mr. Ellenberger joined Federated in 1996 as a Vice President
of a Federated advisory subsidiary. He has been a Vice President of the
Fund's adviser and Federated Research Corp. since March 1997. From 1986 to
1996, he served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr.
Ellenberger received his M.B.A. in Finance from Stanford University.

Mark E. Durbiano has been the Fund's portfolio manager for the high-yield
corporate bonds asset category of the Fund since inception. He has performed
these duties since the Fund's inception. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Vice President of the Fund's adviser
and Federated Research Corp. since January 1996. Mr. Durbiano was a Vice
President of the Fund's adviser and Federated Research Corp. from 1988
through 1995. Mr. Durbiano is a Chartered Financial Analyst and received his
M.B.A. in Finance from the University of Pittsburgh.

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

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

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund' s investment adviser or its
affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES Federated
Services Company, a subsidiary of Federated Investors, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at an annual rate which relates to the average aggregate daily net assets
of all funds advised by subsidiaries of Federated Investors ("Federated Funds")
as specified below:

MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of its fee.

SHAREHOLDER INFORMATION
VOTING RIGHTS

Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 208,177 (91.14%) of the
Institutional Service Shares of the Fund, may for certain purposes be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.

The yield of the Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a 30-day period by the maximum offering price per share of the Fund on the
last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

Shares are sold without any sales charge or other similar non-recurring charges.
Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares. From time to time, advertisements for the
Fund's Institutional Shares may refer to ratings, rankings, and other
information in certain financial publications and/or compare the Fund's
Institutional Shares performance to certain indices. OTHER CLASSES OF SHARES The
Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund. Institutional Service Shares and Institutional Shares are subject to
certain of the same expenses. Expense differences, however, between
Institutional Service Shares and Institutional Shares may affect the performance
of each class. To obtain more information and a prospectus for Institutional
Service Shares, investors may call 1-800-341-7400. FINANCIAL
HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.69
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.69)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.22%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.31%
Net investment income 6.71%
Expense waiver/reimbursement(c) 4.59%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $2,289
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997. (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)
PORTFOLIO OF INVESTMENTS
FEDERATED TOTAL RETURN BOND FUND

SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--38.2%
BANKING--1.4%
$ 260,000 FirstBank Puerto Rico, Sub. Note, 7.625%, 12/20/2005 $ 266,231
BROADCAST RADIO & T.V.--0.7%
125,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 131,408
CABLE TELEVISION--2.7%
200,000 Continental Cablevision, Sr. Deb., 9.50%, 8/1/2013 231,974
250,000 TKR Cable, Inc., 10.50%, 10/30/2007 279,240
TOTAL 511,214
CONGLOMERATES--1.3%
250,000 (a)Hutchison Whampoa Finance, Company Guarantee, 7.50%, 247,318
8/1/2027
ECOLOGICAL SERVICES & EQUIPMENT--1.5%
250,000 WMX Technologies, Inc., Deb., 8.75%, 5/1/2018 279,143
ELECTRONICS--1.4%
250,000 Anixter International, Inc., Company Guarantee, 8.00%, 259,512
9/15/2003
FINANCIAL INTERMEDIARIES--1.6%
250,000 Green Tree Financial Corp., Sr. Sub. Note, 10.25%, 6/1/2002 287,013
25,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 25,133
TOTAL 312,146
FINANCIAL SERVICES--3.1%
500,000 AIM Management Group, 9.00%, 11/15/2003 540,240
50,000 Associates Corp. of North America, Sr. Note, 6.25%, 3/15/1999 50,259
TOTAL 590,499
FOREST PRODUCTS--3.0%
25,000 Pope & Talbot, Inc., 8.375%, 6/1/2013 25,700
500,000 Repap Wisconsin, Inc., 2nd Priority Sr. Secd. Note, 9.875%, 545,625
5/1/2006
TOTAL 571,325
INDUSTRIAL PRODUCTS & EQUIPMENT--5.1%
350,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 366,188
10/1/1999
295,000 Joy Technologies, Inc., Sr. Note, 10.25%, 9/1/2003 320,075
250,000 Southdown, Inc., Sr. Sub. Note, 10.00%, 3/1/2006 278,125
TOTAL 964,388
</TABLE>

FEDERATED TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
CORPORATE BONDS--CONTINUED
INSURANCE--5.8%
$ 250,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 $ 264,707
250,000 Conseco, Inc., Sr. Note, 10.50%, 12/15/2004 299,600
150,000 Delphi Financial Group, Inc., 9.31%, 3/25/2027 162,924
110,000 (a)Life Re Capital Trust I, 8.72%, 6/15/2027 114,192
250,000 SunAmerica, Inc., Sr. Note, 9.00%, 1/15/1999 259,533
TOTAL 1,100,956
LEISURE & ENTERTAINMENT--0.8%
150,000 Paramount Communications, Inc., Sr. Deb., 8.25%, 8/1/2022 151,665
OIL & GAS--2.7%
400,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 414,000
100,000 Husky Oil Ltd., Sr. Note, 7.125%, 11/15/2006 102,007
TOTAL 516,007
PRINTING & PUBLISHING--2.7%
500,000 Valassis Communication, Inc., Sr. Sub. Note, 9.375%, 3/15/1999 518,825
RETAILERS--2.0%
100,000 Eckerd Corp., Sr. Sub. Note, 9.25%, 2/15/2004 108,143
250,000 Penney (J.C.) Co., Inc., Deb., 7.65%, 8/15/2016 264,265
TOTAL 372,408
SURFACE TRANSPORTATION--2.4%
400,000 Trans Ocean Container Corp., Sr. Sub. Note, 12.25%, 7/1/2004 464,120
TOTAL CORPORATE BONDS (IDENTIFIED COST 7,257,165
$7,158,444)
(B)MORTGAGE BACKED SECURITIES--20.9%
704,863 Federal Home Loan Mortgage Corp., Pool D28594, 7.50%, 12/1/2022 721,822
491,208 Federal Home Loan Mortgage Corp., Pool E00484, 6.50%, 5/1/2012 487,985
245,072 Federal Home Loan Mortgage Corp., Pool E66587, 6.50%, 3/1/2012 243,464
504,956 Federal Home Loan Mortgage Corp., Pool E66943, 6.50%, 5/1/2012 501,644
485,962 Federal National Mortgage Association, Pool 267905, 7.00%, 487,633
2/1/2024
499,307 Federal National Mortgage Association, Pool 394064, 7.50%, 507,576
7/1/2027
997,090 GNMA, Pool 452179, 7.50%, 6/15/2027 1,014,230
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST 3,964,354
$3,913,741)
MUNICIPAL SECURITIES--0.7%
125,000 Harvard University, Revenue Bonds, 8.125%, 4/15/2007 139,653
(identified cost $133,869)
PRINCIPAL AMOUNT VALUE
U.S. TREASURY--36.2%
U.S. TREASURY BONDS--7.9%
$ 1,600,000 6.00%, 2/15/2026 $ 1,504,096
U.S. TREASURY NOTES--28.3%
5,325,000 6.25%, 2/15/2003 5,378,516
TOTAL U.S. TREASURY (IDENTIFIED COST 6,882,612
$6,771,494)
(C)REPURCHASE AGREEMENT--2.1%
400,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 400,000
10/1/1997 (at amortized cost)
TOTAL INVESTMENTS (IDENTIFIED COST $ 18,643,784
$18,377,548)(D)
</TABLE>
(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities law. At September 30, 1997, these securities amounted
to $361,510 which represents 1.9% of net assets. (b) Because of monthly
principal payments, the average lives of the Mortgage Backed Securities are less
than the indicated periods. (c) 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. (d) The cost of
investments for federal tax purposes amounts to $18,377,548. The net unrealized
appreciation of investments on a federal tax basis amounts to $266,236 which is
comprised of $269,662 appreciation and $3,426 depreciation at September 30,
1997. Note: The categories of investments are shown as a percentage of net
assets ($18,988,769) at September 30, 1997.

The following acronym is used throughout this portfolio: GNMA --Government
National Mortgage Association (See Notes which are an integral part of the
Financial Statements)
STATEMENT OF ASSETS AND LIABILITIES
FEDERATED TOTAL RETURN BOND FUND

SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $ 18,643,784
$18,377,548)
Cash 7,359
Income receivable 241,480
Receivable for shares sold 332,105
Deferred organizational costs 9,499
Total assets 19,234,227
LIABILITIES:
Payable for investments purchased $ 104,203
Payable for shares redeemed 33,135
Income distribution payable 93,409
Accrued expenses 14,711
Total liabilities 245,458
Net Assets for 1,839,240 shares outstanding $ 18,988,769
NET ASSETS CONSIST OF:
Paid in capital $ 18,795,167
Net unrealized appreciation of investments 266,236
Accumulated net realized loss on investments (72,573)
Distributions in excess of net investment income (61)
Total Net Assets $ 18,988,769
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$16,699,722 1,617,506 shares outstanding $10.32
INSTITUTIONAL SERVICE SHARES:
$2,289,047 221,734 shares outstanding $10.32
</TABLE>

(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED TOTAL RETURN BOND FUND

YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 599,075
EXPENSES:
Investment advisory fee $ 33,489
Administrative personnel and services fee 154,935
Custodian fees 5,794
Transfer and dividend disbursing agent fees and expenses 58,068
Directors'/Trustees' fees 10,320
Legal fees 7,733
Portfolio accounting fees 58,372
Distribution services fee--Institutional Service Shares 897
Shareholder services fee--Institutional Service Shares 897
Share registration costs 25,599
Printing and postage 8,853
Taxes 25
Miscellaneous 5,296
Total expenses 370,278
Waivers and reimbursements--
Waiver of investment advisory fee $ (33,489)
Waiver of distribution services fee--Institutional Service (717)
Shares
Reimbursement of other operating expenses by Adviser (334,143)
Total waivers and reimbursements (368,349)
Net expenses 1,929
Net investment income 597,146
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 53,760
Net change in unrealized appreciation of investments 266,236
Net realized and unrealized gain on investments 319,996
Change in net assets resulting from operations $ 917,142
</TABLE>

(See Notes which are an integral part of the Financial Statements) STATEMENT OF
CHANGES IN NET ASSETS
FEDERATED TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 597,146
Net realized gain (loss) on investments ($72,573 net loss, as 53,760
computed for federal tax purposes)
Net change in unrealized appreciation of investments 266,236
Change in net assets resulting from operations 917,142
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (573,166)
Institutional Service Shares (24,041)
Change in net assets resulting from distributions to (597,207)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 27,197,758
Net asset value of shares issued to shareholders in payment of 15,827
distributions declared
Cost of shares redeemed (13,645,266)
Change in net assets resulting from share transactions 13,568,319
Change in net assets 13,888,254
NET ASSETS:
Beginning of period 5,100,515
End of period (including undistributed net investment income of $ 18,988,769
$(61))
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Total Return
Bond Fund (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return. 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 Municipal bonds
are valued by an independent pricing service, taking into consideration yield,
liquidity, risk, credit quality, coupon, maturity, type of issue, and any other
factors or market data the pricing service deems relevant. U.S. government
securities, listed corporate bonds, other fixed-income securities, asset-backed
securities, unlisted securities and private placement 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 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. 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
September 30, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $72,573, 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
2005 ($72,573). 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. 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
over a period not to exceed five years from the Fund's commencement date.
RESTRICTED SECURITIES Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense either
upon demand by the Fund or in connection with another registered offering of the
securities. Many restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may be
determined to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary market
or, if no market prices are available, at the fair value as determined by the
Fund's pricing committee. Additional information on each restricted security
held at September 30, 1997 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Hutchison Whampoa Finance 7/25/1997 $248,233
Life Re Capital Trust I 9/17/1997 $112,578
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. CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
Institutional Shares 1,000,000,000
Institutional Service Shares1,000,000,000
Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 2,441,867 $ 24,817,916
Shares issued to shareholders in payment of distributions declared 1,355 13,891
Shares redeemed (1,335,737) (13,538,732)
Net change resulting from Institutional Share transactions 1,107,485 $ 11,293,075
</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1997(A)
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
<S> <C> <C>
Shares sold 231,935 $ 2,379,842
Shares issued to shareholders in payment of distributions declared 189 1,936
Shares redeemed (10,420) (106,534)
Net change resulting from Institutional Service Share transactions 221,704 $ 2,275,244
Net change resulting from share transactions 1,329,189 $ 13,568,319
</TABLE>

(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.

REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of Federated Total Return Bond Fund:

We have audited the accompanying statement of assets and liabilities of
Federated Total Return Bond Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. We conducted
our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. In our
opinion, the financial statements and financial highlights referred to above
present fairly, in all material respects, the financial position of Federated
Total Return Bond Fund at September 30, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles. ERNST &YOUNG LLP
Pittsburgh, Pennsylvania November 14, 1997

APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS 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 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 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. CI--The rating CI is reserved for income bonds on which no
interest is being paid. D--Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized. MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND
RATINGS 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 some time 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 INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS 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 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 in
imminent default in payment of interest or principal. DDD, DD, and D--Bonds are
in default on interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their ultimate recovery value
in liquidation or reorganization of the obligor. DDD represents the highest
potential for recovery on these bonds, and D represents the lowest potential for
recovery. NR--NR indicates that Fitch does not rate the specific issue. Plus (+)
or Minus (-): Plus or minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA category. DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA---High credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions. A+, A, A---Protection factors
are average but adequate. However, risk factors are more variable and greater in
periods of economic stress. BBB+, BBB, BBB---Below-average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk during economic cycles. BB+, BB, BB---Below investment grade but deemed
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category. B+, B, B---Below
investment grade and possessing risk that obligation will not be met when due.
Financial protection factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists for frequent
changes in the rating within this category or into a higher or lower rating
grade. CCC--Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments. DP--Preferred stock with dividend arrearages. MOODY'S
INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS Prime-1--Issuers rated Prime-1
(or related supporting institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics: * Leading market positions in well
established industries. * High rates of return on funds employed. * Conservative
capitalization structure with moderate reliance on debt and ample asset
protection. * Broad margins in earning coverage of fixed financial charges and
high internal cash generation. * Well established access to a range of financial
markets and assured sources of alternate liquidity. Prime-2--Issuers rated
Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. STANDARD AND
POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS A-1--This designation indicates
that the degree of safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation. A-2--Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1. FITCH INVESTORS SERVICE, INC. COMMERCIAL
PAPER RATING DEFINITIONS Fitch-1--(Highest Grade) Commercial paper assigned this
rating is regarded as having the strongest degree of assurance for timely
payment. Fitch-2--(Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.

FEDERATED TOTAL RETURN BOND FUND Federated Investors Funds 5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Shares
PROSPECTUS

NOVEMBER 30, 1997

A Diversified Portfolio of Federated Total Return Series, Inc. an Open-End,
Management Investment Company

[Graphic]
FEDERATED INVESTORS
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q101
G01721-01-IS (11/97)

[Graphic]

Federated Total Return Bond Fund
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Total Return Bond Fund (formerly,
Federated Government Total Return Fund) (the "Fund") offered by this prospectus
represent interests in a diversified investment portfolio of Federated Total
Return Series, Inc. (the "Corporation"), an open-end, management investment
company (a mutual fund). The investment objective of the Fund is to provide
total return. The Fund pursues this investment objective by seeking value among
most sectors of fixed income securities, focusing on investment grade debt
securities. 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the
information you should read and know before you invest in Institutional Service
Shares of the Fund. Keep this prospectus for future reference.

TABLE OF CONTENTS

Summary of Fund Expenses 1 Financial Highlights--Institutional Service Shares 2
General Information 3 Investment Information 3 Investment Objective 3
Investment Policies 3 Investment Limitations 12 Hub and Spoke(R) Option 12 Net
Asset Value 12 Investing in Institutional Service Shares 12 Share Purchases 12
Minimum Investment Required 13 What Shares Cost 13 Exchanging Securities for
Fund Shares 13 Confirmations and Account Statements 13 Dividends and
Distributions 13 Redeeming Institutional Service Shares 14 Telephone Redemption
14 Written Requests 14 Accounts with Low Balances 14 Fund Information 14
Management of the Fund 14 Distribution of Institutional Service Shares 16
Administration of the Fund 16 Shareholder Information 16 Voting Rights 16 Tax
Information 17 Federal Income Tax 17 State and Local Taxes 17 Performance
Information 17 Other Classes of Shares 17 Financial Highlights--Institutional
Shares 18 Financial Statements 19 Report of Ernst & Young LLP, Independent
Auditors 29 Appendix 30
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(1) 0.00%
12b-1 Fee(2) 0.05%
Total Other Expenses (after expense reimbursement) 0.60%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.65%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%. (2) The 12b-1 fee has
been reduced to reflect the voluntary waiver of a portion of the 12b-1 fee. The
distributor can terminate the voluntary waiver at any time at its sole
discretion. The maximum 12b-1 fee is 0.25%. (3) The total operating expenses in
the table above are based on expenses expected during the fiscal year ending
September 30, 1998. The total operating expenses were 0.31% for the fiscal year
ended September 30, 1997 and would have been 4.90% absent the voluntary waivers
of the management fee and a portion of the 12b-1 fee and the voluntary
reimbursement of certain other operating expenses. The purpose of this table is
to assist an investor in understanding the various costs and expenses that a
shareholder of Institutional Service Shares of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in Institutional Service Shares" and "Fund
Information." Wire-transferred redemptions of less than $5,000 may be subject to
additional fees. LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC
EQUIVALENT OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period.
<S> <C>
1 year $ 7
3 years $21
5 years $36
10 years $81
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.69
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.01
LESS DISTRIBUTIONS
Distributions from net investment income (0.69)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.22%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.31%
Net investment income 6.71%
Expense waiver/reimbursement(c) 4.59%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $2,289
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997. (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) GENERAL
INFORMATION The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." and the name of the Fund was changed from "Insight U.S. Government
Fund" to "Federated Government Total Return Fund." On May 15 1996, the name of
the Fund was changed from "Federated Government Total Return Fund" to "Federated
Total Return Bond Fund." The Articles of Incorporation permit the Corporation to
offer separate portfolios and classes of shares. As of the date of this
prospectus, the Board of Directors (the "Directors") has established two classes
of shares for Federated Total Return Bond Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to Institutional Service
Shares of Federated Total Return Bond Fund. Institutional Service Shares
("Shares") of the Fund are designed primarily for retail and private banking
customers of financial institutions as a convenient means of accumulating an
interst in a professionally managed, diversified portfolio investing primarily
in investment grade debt securities. A minimum initial investment of $25,000
over a 90-day period is required. Shares are sold and redeemed at net asset
value without a sales charge imposed by the Fund. INVESTMENT INFORMATION
INVESTMENT OBJECTIVE The investment objective of the Fund is to provide total
return. The investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus. INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of investment grade debt securities. The Fund may also invest in
convertible securities. The Fund may also invest in derivative instruments of
such securities (including instruments with demand features or credit
enhancement and stripped mortgage-backed securities), as well as money market
instruments and cash. The securities in which the Fund invests principally are:
* asset-backed securities;
* domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest;
* obligations issued or guaranteed as to payment of principal and
interest by the U.S. government, or its agencies or instrumentalities;
* mortgage-backed securities;
* municipal securities;
* commercial paper which matures in 270 days or less; * time deposits
(including savings deposits and certificates of deposit)
and bankers' acceptances in commercial or savings banks whose accounts are
insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal
Deposit Insurance Corporation ("FDIC"), including certificates of deposit
issued by and other time deposits in foreign branches of FDIC insured banks
or which have at least $100 million in capital; and
* repurchase agreements collateralized by eligible investments. CORPORATE AND
FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS The Fund invests in corporate and
foreign government/agency debt obligations, including bonds, notes, medium term
notes, and debentures, which may have floating or fixed rates of interest. The
prices of fixed income securities fluctuate inversely to the direction of
interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities. Increasing rate securities, which
currently do not make up a significant share of the market in corporate debt
securities, are generally offered at an initial interest rate which is at or
above prevailing market rates. Interest rates are reset periodically (most
commonly every 90 days) at different levels on a predetermined scale. These
levels of interest are ordinarily set at progressively higher increments over
time. Some increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer the
option to convert the increasing rate of interest to a fixed rate under such
terms, conditions, and limitations as are described in each issue's prospectus.
FIXED RATE DEBT OBLIGATIONS
The Fund will also invest in fixed rate securities, including fixed rate
securities with short-term characteristics. Fixed-rate securities with
short-term characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the securities may
make them callable within a short period of time. A fixed-rate security with
short-term characteristics would include a fixed-income security priced close to
call or redemption price or a fixed-income security approaching maturity, where
the expectation of call or redemption is high. Fixed-rate securities tend to
exhibit more price volatility during times of rising or falling interest rates
than securities with floating rates of interest. This is because floating rate
securities, as described above, behave like short-term instruments in that the
rate of interest they pay is subject to periodic adjustments based on a
designated interest rate index. Fixed-rate securities pay a fixed rate of
interest and are more sensitive to fluctuating interest rates. In periods of
rising interest rates, the value of a fixed-rate security is likely to fall.
Fixed-rate securities with short-term characteristics are not subject to the
same price volatility as fixed-rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to price
volatility. VARIABLE RATE DEMAND NOTES Variable rate demand notes are long-term
debt instruments that have variable or floating interest rates and provide the
Fund with the right to tender the security for repurchase at its stated
principal amount plus accrued interest. Such securities typically bear interest
at a rate that is intended to cause the securities to trade at par. The interest
rate may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on a published interest rate or interest rate
index. Many variable rate demand notes allow the Fund to demand the repurchase
of the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features." U.S. GOVERNMENT
SECURITIES The Fund may invest in U.S. government securities, which generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and obligations (including mortgage-backed securities, bonds,
notes and discount notes) issued or guaranteed by the following U.S. government
agencies or instrumentalities: Farm Credit System, including the National Bank
for Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association; Government National Mortgage Association;
and Student Loan Marketing Association. These securities are backed by: the full
faith and credit of the U.S. Treasury; the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality issuing the
obligations. Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Federal National Mortgage Association; Student Loan Marketing
Association; and Federal Home Loan Mortgage Corporation. MORTGAGE-BACKED
SECURITIES Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. There are currently four basic types of mortgage-backed
securities: (i) those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; (iii) those issued by private issuers that
represent an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government. The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and/or principal. The interest
portion of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities. COLLATERALIZED
MORTGAGE OBLIGATIONS ("CMOS") CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities. CMOs may have
fixed or floating rates of interest. The Fund may invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") REMICs are
offerings of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as amended.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee. INVESTMENT RISKS
OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Mortgage-backed and asset-backed
securities generally pay back principal and interest over the life of the
security. At the time the Fund reinvests the payments and any unscheduled
prepayments of principal are received, the Fund may receive a rate of interest
which is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities. While mortgage-backed securities generally entail less
risk of a decline during periods of rapidly rising interest rates,
mortgage-backed securities may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may result in
some loss of a holder's principal investment to the extent of the premium paid.
Conversely, if mortgage-backed securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal would
increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. FOREIGN SECURITIES The Fund may invest in foreign securities.
Foreign securities do not include American Depository Receipts, but do include
foreign securities not publicly traded in the United States. Investments in
foreign securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities. RISKS The risks associated with investments in foreign securities
relate to political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are not
limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability, ability to obtain or enforce court judgments
abroad and adverse diplomatic developments. Moreover, individual foreign
economies may differ favorably or unfavorably from the domestic economy in such
respects as growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries. CURRENCY RISKS Foreign securities may be denominated
in foreign currencies. Therefore, the value in U.S. dollars of the Fund's assets
and income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holdings of foreign currencies to U.S. dollars daily. When the Fund converts
its holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices at which
they buy and sell currencies. The Fund will engage in foreign currency exchange
transactions in connection with its investments in foreign securities. The Fund
will conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies. FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. When the Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency, it may want to establish the
U.S. dollar cost or proceeds, as the case may be. By entering into a forward
contract in U.S. dollars for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction, the Fund attempts to
protect itself against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the U.S. dollar and
such foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships. The Fund will not
enter into forward foreign currency exchange contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency or denominated in a currency or
currencies that the adviser believes will reflect a high degree of correlation
with the currency with regard to price movements. The Fund generally will not
enter into forward foreign currency exchange contracts with a term longer than
one year. STRIPPED MORTGAGE-BACKED SECURITIES

The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased--the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.

BANK INSTRUMENTS
The Fund only invests in bank instruments either issued by an institution that
has capital, surplus and undivided profits over $100 million or is insured by
the BIF or the SAIF. Bank instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs") and Eurodollar
Time Deposits ("ETDs"). The banks issuing these instruments are not necessarily
subject to the same regulatory requirements that apply to domestic banks, such
as reserve requirements, loan requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping and the public availability of
information.
CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Fund) payable upon demand by either party. The
notice period for demand typically ranges from one to seven days, and the party
may demand full or partial payment. Revolving credit facilities are borrowing
arrangements in which the lender agrees to make loans up to a maximum amount
upon demand by the borrower during a specified term. As the borrower repays the
loan, an amount equal to the repayment may be borrowed again during the term of
the facility. The Fund generally acquires a participation interest in a
revolving credit facility from a bank or other financial institution. The terms
of the participation require the Fund to make a pro rata share of all loans
extended to the borrower and entitles the Fund to a pro rata share of all
payments made by the borrower. Demand notes and revolving facilities usually
provide for floating or variable rates of interest. CREDIT ENHANCEMENT Certain
of the Fund's acceptable investments may have been credit enhanced by a
guaranty, letter of credit or insurance. The Fund typically evaluates the credit
quality and ratings of credit-enhanced securities based upon the financial
condition and ratings of the party providing the credit enhancement (the "credit
enhancer"), rather than the issuer. Generally, the Fund will treat
credit-enhanced securities as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances applicable
regulations may require the Fund to treat the securities as having been issued
by both the issuer and the credit enhancer. The bankruptcy, receivership or
default of the credit enhancer will adversely affect the quality and
marketability of the underlying security. DEMAND FEATURES The Fund may acquire
securities that are subject to puts and standby commitments ("demand features")
to purchase the securities at their principal amount (usually with accrued
interest) within a fixed period following a demand by the Fund. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities or by another third party, and may not be transferred separately
from the underlying security. The Fund uses these arrangements to provide the
Fund with liquidity and not to protect against changes in the market value of
the underlying securities. The bankruptcy, receivership or default by the issuer
of the demand feature, or a default on the underlying security or other event
that terminates the demand feature before its exercise, will adversely affect
the liquidity of the underlying security. Demand features that are exercisable
even after a payment default on the underlying security are treated as a form of
credit enhancement. INTEREST RATE SWAPS As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps, and other types of swap agreements such as caps, collars, and
floors. Depending on how they are used, swap agreements may increase or decrease
the overall volatility of the Fund's investments, its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements to reduce its exposure
through offsetting transactions. When the Fund enters into a swap agreement,
assets of the Fund equal to the value of the swap agreement will be segregated
by the Fund. FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES The
Fund may purchase and sell financial and foreign currency futures contracts to
hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time. The Fund may also write (sell) or
purchase put and call options on financial and foreign currency futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call or put option on a futures
contract, it is undertaking the obligation of selling or purchasing,
respectively, a futures contract at a fixed price at any time during a specified
period if the option is exercised. Conversely, as purchaser of a call or put
option on a futures contract, the Fund is entitled (but not obligated) to buy or
sell, respectively, a futures contract at the fixed price during the life of the
option. The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses futures and options on futures as hedging devices, there is a risk that the
prices of the instruments subject to the futures contracts may not correlate
perfectly with the prices of the instruments in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio's holdings to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the Fund may
lose money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary market
on an exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market. HIGH-YIELD DEBT
OBLIGATIONS The Fund may invest up to but not including 35% of its total assets
in debt securities that are not investment-grade but are rated BB or lower by an
NRSRO (or, if unrated, determined by the adviser to be of comparable quality).
Some of these securities may involve equity characteristics. The Fund may invest
in equity securities, including unit offerings which combine fixed rate
securities and common stock or common stock equivalents such as warrants, rights
and options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.

RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds. The
Fund's investment adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objective, policies and limitations. TOTAL RETURN The "total return"
sought by the Fund will consist of interest and dividends from underlying
securities, capital appreciation reflected in unrealized increases in value of
portfolio securities (realized by the shareholder only upon selling Shares) or
realized from the purchase and sale of securities, and successful use of futures
and options, or gains from favorable changes in foreign currency exchange rates.
Generally, over the long term, the total return obtained by a portfolio
investing primarily in fixed-income securities is not expected to be as great as
that obtained by a portfolio that invests primarily in equity securities. At the
same time, the market risk and price volatility of a fixed-income portfolio is
expected to be less than that of an equity portfolio. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed-upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned at all times. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticpate that portfolio turnover
will result in adverse tax consequences. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs.

INVESTMENT LIMITATIONS The Fund will not:
* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set
date) or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or
* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.
HUB AND SPOKE(R) OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund. The initial shareholder of the Fund (who is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment. In making its determination, the Directors will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. Although it is expected that the
Directors will not approve an arrangement that is likely to result in higher
costs, no assurance is given that costs will remain the same or be materially
reduced if this investment structure is implemented. NET ASSET VALUE The Fund's
net asset value per Share fluctuates. The net asset value for Shares is
determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled. INVESTING IN INSTITUTIONAL SERVICE SHARES SHARE PURCHASES Shares are
sold at their net asset value, without a sales charge, next determined after an
order is received on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail. To purchase Shares,
open an account by calling Federated Securities Corp. Information needed to
establish the account will be taken over the telephone. The Fund reserves the
right to reject any purchase request. BY WIRE To purchase Shares by Federal
Reserve wire, call the Fund before 4:00 p.m. (Eastern time) to place an order.
The order is considered received immediately. Payment by federal funds must be
received before 3:00 p.m. (Eastern time) on the next business day following the
order. Federal funds should be wired as follows: Federated Shareholder Services
Company, c/o State Street Bank and Trust Company, Boston, Massachusetts;
Attention: EDGEWIRE; For Credit to: Federated Total Return Bond
Fund--Institutional Service Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement. BY MAIL

To purchase Shares by mail, send a check made payable to Federated Total Return
Bond Fund--Institutional Service Shares to: Federated Shareholder Services
Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are considered
received when payment by check is converted by State Street Bank and Trust
Company ("State Street Bank") into federal funds. This is normally the next
business day after State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED
The minimum initial investment in the Fund is $25,000 plus any non-affiliated
bank or broker's fee. However, an account may be opened with a smaller amount as
long as the $25,000 minimum is reached within 90 days. An institutional
investor's minimum investment will be calculated by combining all accounts it
maintains with the Fund. Accounts established through a non-affiliated bank or
broker may be subject to a smaller minimum investment. WHAT SHARES COST Shares
are sold at their net asset value next determined after an order is received.
There is no sales charge imposed by the Fund. Investors who purchase Shares
through a financial intermediary may be charged a service fee by that financial
intermediary.

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

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset value
of Fund Shares on the day the securities are valued. One Share of the Fund will
be issued for the equivalent amount of securities accepted. Any interest earned
on the securities prior to the exchange will be considered in valuing the
securities. All interest, dividends, subscription or other rights attached to
the securities become the property of the Fund, along with the securities. If an
exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
Shares, a gain or loss may be realized by the investor. CONFIRMATIONS AND
ACCOUNT STATEMENTS

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

The written request should state: Federated Total Return Bond
Fund--Institutional Service Shares; the account name as registered with the
Fund; the account number; and the number of Shares to be redeemed or the dollar
amount requested. All owners of the account must sign the request exactly as the
Shares are registered. Normally, a check for the proceeds is mailed within one
business day, but in no event more than seven days, after the receipt of a
proper written redemption request. Dividends are paid up to and including the
day that a redemption request is processed. Shareholders requesting a redemption
of any amount to be sent to an address other than that on record with the Fund,
or a redemption payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company or savings
association whose deposits are insured by an organization which is administered
by the Federal Deposit Insurance Corporation; a member firm of a domestic stock
exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed
by a notary public. ACCOUNTS WITH LOW BALANCES Due to the high cost of
maintaining accounts with low balances, the Fund may redeem Shares in any
account, and pay the proceeds to the shareholder, if the account balance falls
below a required minimum value of $25,000 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement. FUND INFORMATION

MANAGEMENT OF THE FUND

PORTFOLIO MANAGER'S BACKGROUND

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

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of 0.25% of the average
daily net asset value of Institutional Service Shares of the Fund. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers.

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

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS
In addition to payments made pursuant to the Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:

SHAREHOLDER INFORMATION
VOTING RIGHTS

As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote. TAX INFORMATION FEDERAL INCOME TAX The
Fund will pay no federal income tax because it expects to meet requirements of
the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund. Unless otherwise exempt, shareholders are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains no matter how long the shareholders have held their shares.
Information on the tax status of dividends and distributions is provided
annually. STATE AND LOCAL TAXES Shares are exempt from personal property taxes
imposed by counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws. PERFORMANCE INFORMATION From time
to time, the Fund advertises its total return and yield. Total return represents
the change, over a specified period of time, in the value of an investment in
the Fund after reinvesting all income and capital gains distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage. The yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a 30-day period by the maximum offering price per share of the
Fund on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Shares are sold without any sales charge or
other similar non-recurring charges. Total return and yield will be calculated
separately for Institutional Service Shares and Institutional Shares. From time
to time, advertisements for the Fund's Institutional Service Shares may refer to
ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Service Shares performance to certain
indices. OTHER CLASSES OF SHARES The Fund also offers another class of shares
called Institutional Shares which are sold at net asset value to accounts for
financial institutions and are subject to a minimum initial investment of
$100,000 over a 90-day period. Institutional Shares are distributed with no
12b-1 Plan. Institutional Shares and Institutional Service Shares are subject to
certain of the same expenses. Expense differences, however, between
Institutional Shares and Institutional Service Shares may affect the performance
of each class. To obtain more information and a prospectus for Institutional
Shares, investors may call 1-800-341-7400. FINANCIAL HIGHLIGHTS--INSTITUTIONAL
SHARES (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
page 29.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.72
Net realized and unrealized gain on investments 0.32
Total from investment operations 1.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.72)
NET ASSET VALUE, END OF PERIOD $10.32
TOTAL RETURN(B) 10.52%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.01%
Net investment income 7.15%
Expense waiver/reimbursement(c) 4.39%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $16,700
Portfolio turnover 101%
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997. (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)
PORTFOLIO OF INVESTMENTS
FEDERATED TOTAL RETURN BOND FUND

FEDERATED TOTAL RETURN BOND FUND

(See Notes which are an integral part of the Financial Statements)
STATEMENT OF OPERATIONS
FEDERATED TOTAL RETURN BOND FUND

(See Notes which are an integral part of the Financial Statements) STATEMENT OF
CHANGES IN NET ASSETS
FEDERATED TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 597,146
Net realized gain (loss) on investments ($72,573 net loss, as 53,760
computed for federal tax purposes)
Net change in unrealized appreciation of investments 266,236
Change in net assets resulting from operations 917,142
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (573,166)
Institutional Service Shares (24,041)
Change in net assets resulting from distributions to (597,207)
shareholders
SHARE TRANSACTIONS--
Proceeds from sale of shares 27,197,758
Net asset value of shares issued to shareholders in payment of 15,827
distributions declared
Cost of shares redeemed (13,645,266)
Change in net assets resulting from share transactions 13,568,319
Change in net assets 13,888,254
NET ASSETS:
Beginning of period 5,100,515
End of period (including undistributed net investment income of $ 18,988,769
$(61))
</TABLE>
(See Notes which are an integral part of the Financial Statements)
NOTES TO FINANCIAL STATEMENTS
FEDERATED TOTAL RETURN BOND FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Total Return
Bond Fund (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return. 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 Municipal bonds
are valued by an independent pricing service, taking into consideration yield,
liquidity, risk, credit quality, coupon, maturity, type of issue, and any other
factors or market data the pricing service deems relevant. U.S. government
securities, listed corporate bonds, other fixed-income securities, asset-backed
securities and unlisted securities and private placement 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 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. 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
September 30, 1997, the Fund, for federal tax purposes, had a capital loss
carryforward of $72,573, 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
2005 ($72,573). 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. 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
over a period not to exceed five years from the Fund's commencement date.
RESTRICTED SECURITIES Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted securities has
agreed to register such securities for resale, at the issuer's expense either
upon demand by the Fund or in connection with another registered offering of the
securities. Many restricted securities may be resold in the secondary market in
transactions exempt from registration. Such restricted securities may be
determined to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's restricted
securities are valued at the price provided by dealers in the secondary market
or, if no market prices are available, at the fair value as determined by the
Fund's pricing committee. Additional information on each restricted security
held at September 30, 1997 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
Hutchison Whampoa Finance 7/25/1997 $248,233
Life Re Capital Trust I 9/17/1997 $112,578
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. CAPITAL STOCK
At September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF
PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
Transactions in capital stock were as follows:

INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT
ADVISORY FEE Federated Management, the Fund's investment adviser (the
"Adviser"), receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. The Adviser may voluntarily choose
to waive any portion of its fee and/or reimburse certain operating expenses of
the Fund. The Adviser can modify or terminate this voluntary waiver and/or
reimbursement 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 Institutional Service
Shares to finance activities intended to result in the sale of the Fund's
Institutional Service Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.25% of the average daily net assets of the
Institutional Service Shares annually, to compensate FSC. The distributor may
voluntarily choose to waive any portion of its fee. The distributor 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 for the period. The fee paid to FSS is
used to finance certain services for shareholders and to maintain shareholder
accounts. For the period ended September 30, 1997, the Institutional Shares did
not incur a shareholder services fee. 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. INVESTMENT TRANSACTIONS Purchases
and sales of investments, excluding short-term securities, for the period ended
September 30, 1997, were as follows: PURCHASES $ 25,588,747 SALES $ 8,132,262
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Trustees and
Shareholders of Federated Total Return Bond Fund: We have audited the
accompanying statement of assets and liabilities of Federated Total Return Bond
Fund, including the portfolio of investments, as of September 30, 1997, and the
related statement of operations, statement of changes in net assets, and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. We conducted our audit in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1997, by correspondence with the custodian
and brokers or other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements and
financial highlights referred to above present fairly, in all material respects,
the financial position of Federated Total Return Bond Fund at September 30,
1997, the results of its operations, the changes in its net assets, and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles. ERNST &YOUNG LLP Pittsburgh, Pennsylvania
November 14, 1997

5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
Federated Total Return Bond Fund
(A Portfolio of
Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS

NOVEMBER 30, 1997

A Diversified Portfolio of Federated Total Return Series, Inc. an Open-End,
Management Investment Company

[Graphic]

FEDERATED TOTAL RETURN BOND FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
prospectus(es) of Federated Total Return Bond Fund (formerly, Federated
Government Total Return Fund) (the "Fund"), a portfolio of Federated Total
Return Series, Inc. (the "Corporation") dated November 30, 1997. This
Statement is not a prospectus. You may request a copy of a prospectus or a
paper copy of this Statement, if you have received it electronically, free
of charge by calling 1-800-341-7400.

FEDERATED TOTAL RETURN BOND FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000

Statement dated November 30, 1997
[GRAPHIC OMITTED]

Cusip 31428Q101
Cusip 31428Q507
G01722-02 (11/97)

<PAGE>

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOs") 1
Real Estate Mortgage Investment Conduits ("REMICs") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Foreign Bank Instruments 3
Futures and Options Transactions 3
Medium Term Notes and Deposit Notes 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Portfolio Turnover 7

INVESTMENT LIMITATIONS 8
- -------------------------------------------------------------

FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT 10
- -------------------------------------------------------------
Director Liability 14

INVESTMENT ADVISORY SERVICES 15
- -------------------------------------------------------------
Adviser to the Fund 15
Advisory Fees 15

OTHER SERVICES 15
- -------------------------------------------------------------
Fund Administration 15
Custodian and Portfolio Accountant 15

BROKERAGE TRANSACTIONS 15
- -------------------------------------------------------------

PURCHASING SHARES 16
- -------------------------------------------------------------
Distribution Plan (Institutional Service Shares only) and
Shareholder Services 16

DETERMINING NET ASSET VALUE 16
Determining Market Value of Securities16
Valuing Municipal Bonds 17
Use of Amortized Cost 17

REDEEMING SHARES 17
- -------------------------------------------------------
Redemption In Kind 17

TAX STATUS 17
- -------------------------------------------------------
The Fund's Tax Status 17
Shareholders' Tax Status 18

TOTAL RETURN 18
- -------------------------------------------------------

YIELD 18
- -------------------------------------------------------

PERFORMANCE COMPARISONS 18
- -------------------------------------------------------
Economic and Market Information 19

ABOUT FEDERATED INVESTORS 19
- -------------------------------------------------------

<PAGE>

GENERAL INFORMATION ABOUT THE FUND
- -------------------------------------------------------

The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." and the name of the Fund was changed from "Insight U.S. Government
Fund" to "Federated Government Total Return Fund." ." On May 15, 1996, the name
of the Fund was changed from "Federated Government Total Return Fund" to
"Federated Total Return Bond Fund." The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares.

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

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. The investment
policies stated below may be changed by the Board of Directors ("Directors")
without shareholder approval. Shareholders will be notified before any material
change in the investment policies becomes effective.

TYPES OF INVESTMENTS

The Fund invests primarily in a diversified portfolio of debt securities. Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in domestic investment grade debt securities.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")

The ARMS in which the Fund invests include, but are not limited to, securities
issued by Government National Mortgage Association, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation. Unlike conventional
bonds, ARMS pay back principal over the life of the ARMS rather than at
maturity. Thus, a holder of the ARMS, such as the Fund, would receive monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing payments on the underlying mortgages. At the
time that a holder of the ARMS reinvests the payments and any unscheduled
prepayments of principal that it receives, the holder may receive a rate of
interest which is actually lower than the rate of interest paid on the existing
ARMS. As a consequence, ARMS may be a less effective means of "locking in"
long-term interest rates than other types of fixed income securities. ARMS may
also be collateralized by whole loans or private pass-through securities.

Like other fixed income securities, the market value of ARMS will generally vary
inversely with changes in market interest rates. Thus, the market value of ARMS
generally declines when interest rates rise and generally rises when interest
rates decline.

While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities)
because, as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a premium, mortgage
foreclosures and unscheduled principal payments may result in some loss of a
holder's principal investment to the extent of the premium paid. Conversely, if
ARMS are purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")

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

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

<PAGE>

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

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

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")

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

INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS

Some of the securities purchased by the Fund may represent an interest solely in
the principal repayments or solely in the interest payments on mortgage-backed
securities (stripped mortgage-backed securities or "SMBSs"). SMBSs are usually
structured with two classes and receive different proportions of the interest
and principal distributions on the pool of underlying mortgage-backed
securities. Due to the possibility of prepayments on the underlying mortgages,
SMBSs may be more interest-rate sensitive than other securities purchased by the
Fund. If prevailing interest rates fall below the level at which SMBSs were
issued, there may be substantial prepayments on the underlying mortgages,
leading to the relatively early prepayments of principal-only SMBSs (the
principal-only or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class). Because the
yield to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities, it is possible that the Fund might not recover its original
investment on interest-only SMBSs if there are substantial prepayments on the
underlying mortgages. The Fund's inability to fully recoup its investments in
these securities as a result of a rapid rate of principal prepayments may occur
even if the securities are rated by an NRSRO. Therefore, interest-only SMBSs
generally increase in value as interest rates rise and decrease in value as
interest rates fall, counter to changes in value experienced by most fixed
income securities.

PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES

Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those issued
by Government National Mortgage Association as well as those issued by
non-government related entities. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools. The market for such
mortgage-related securities has expanded considerably since its inception. The
size of the primary issuance market and the active participation in the
secondary market by securities dealers and other investors makes
government-related and non-government related pools highly liquid.

RESETS OF INTEREST

<PAGE>

To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.

CAPS AND FLOORS

The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.

CONVERTIBLE SECURITIES

DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.

PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.

FOREIGN BANK INSTRUMENTS

Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information. These factors will be carefully considered
by the Fund's adviser in selecting investments for the Fund.

FUTURES AND OPTIONS TRANSACTIONS

The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income. The Fund currently does not intend to
invest more than 5% of its total assets in options transactions.

<PAGE>

FINANCIAL FUTURES CONTRACTS

A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future. In the fixed
income securities market, price moves inversely to interest rates. A rise
in rates means a drop in price. Conversely, a drop in rates means a rise
in price. In order to hedge its holdings of fixed income securities
against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would agree to purchase securities in the future at a
predetermined price (i.e., "go long") to hedge against a decline in market
interest rates.

PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS

The Fund may purchase listed put options on financial futures contracts.

The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option, the
related futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.

Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and exercise
the option. The Fund would then deliver the futures contract in return for
payment of the strike price. If the Fund neither closes out nor exercises
an option, the option will expire on the date provided in the option
contract, and the premium paid for the contract will be lost.

CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS

In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.

Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then offset the decrease in value of the
hedged securities.

The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures contracts. If
this limitation is exceeded at any time, the Fund will take prompt action
to close out a sufficient number of open contracts to bring its open
futures and options positions within this limitation.

<PAGE>

"MARGIN" IN FUTURES TRANSACTIONS

A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking
to market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market its open
futures positions.

The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.

PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES

The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.

WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES

The Fund may also write covered call options to generate income. As writer
of a call option, the Fund has the obligation upon exercise of the option
during the option period to deliver the underlying security upon payment
of the exercise price. The Fund may only sell call options either on
securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).

MEDIUM TERM NOTES AND DEPOSIT NOTES

Medium term notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.

WEIGHTED AVERAGE PORTFOLIO MATURITY

The Fund will determine its dollar-weighted average portfolio maturity by
assigning a "weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity to each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-backed
securites as having a maturity equal to their estimated weighted-average
maturity and (b) variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of the principal prepayments
weighted by the period until such prepayments are expected to be received.

Fixed rate securities hedged with interest rate swaps or caps will be treated as
floating or variable rate securities based upon the interest rate index of the
swap or cap; floating and variable rate securities hedged with interest rate
swaps or floors will be treated as having a maturity equal to the term of the
swap or floor. In the event that the Fund holds an interest rate swap, cap or
floor that is not hedging another portfolio security, the swap, cap or floor
will be treated as having a maturity equal to its term and a weight equal to its
notional principal amount of such term.

<PAGE>

WEIGHTED AVERAGE PORTFOLIO DURATION

Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as the probable amount
and sequence of principal prepayments.

The duration of interest rate agreements, such as interest rates swaps, caps and
floors, is calculated in the same manner as other securities. However, certain
interest rate agreements have negative durations, which the Fund may use to
reduce its weighted average portfolio duration.

Mathematically, duration is measured as follows:
Duration = PVCF1(1) + PVCF2(2) +
PVCF3(3) + ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received n = remaining number of
periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

LENDING OF PORTFOLIO SECURITIES

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

<PAGE>

RESTRICTED AND ILLIQUID SECURITIES

The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive safe harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors. The
Directors consider the following criteria in determining the liquidity of
certain restricted securities:

o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace trades.

REPURCHASE AGREEMENTS

The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that a defaulting seller files for bankruptcy or
becomes insolvent, disposition of securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. 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 guidelines established by the Directors.

REVERSE REPURCHASE AGREEMENTS

The Fund may also enter into reverse repurchase agreements. A reverse repurchase
transaction is similar to borrowing cash. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future, the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.

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

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.

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 period from October 1, 1996 (date of
initial public investment) to September 30, 1997, the Fund's portfolio turnover
rate was 101%.

<PAGE>

INVESTMENT LIMITATIONS

The following limitations are fundamental [except that no investment limitation
of the Fund shall prevent the Fund from investing substantially all of its
assets (except for assets which are not considered "investment securities" under
the Investment Company Act of 1940, or assets exempted by the Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:

SELLING SHORT OR BUYING ON MARGIN

The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
futures contracts or related options transactions is not considered the
purchase of a security on margin.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities, except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the Fund by enabling the
Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings in excess of 5% of its
total assets are outstanding.

PLEDGING ASSETS

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: margin
deposits for the purchase and sale of financial futures contracts and
related options, and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.

DIVERSIFICATION OF INVESTMENTS

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

INVESTING IN REAL ESTATE

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

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may engage
in transactions involving financial futures contracts or options on
financial futures contracts.

UNDERWRITING

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

<PAGE>

LENDING CASH OR SECURITIES

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

CONCENTRATION OF INVESTMENTS

The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities).

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

The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors without
shareholder approval [except that no investment limitation of the Fund shall
prevent the Fund from investing substantially all of its assets (except for
assets which are not considered "investment securities" under the Investment
Company Act of 1940, or assets exempted by the Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in these limitations become effective.

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, interest rate swaps,
non-negotiable fixed time deposits with maturities over seven days, and
certain restricted securities not determined by the Directors to be
liquid.

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

The Fund does not expect to borrow money, pledge securities or engage in reverse
repurchase agreements during the coming fiscal year.

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
or savings associations having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."

<PAGE>

FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.

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

Chairman and Director

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

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934

Director

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

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

Director

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

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

Director

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

<PAGE>

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

Executive Vice President and Director

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

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

Director

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

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

Director

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

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

Director

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

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

Director

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

<PAGE>

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

Director

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

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

Director

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

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

Director

Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.

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

President

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

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

Executive Vice President

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

<PAGE>

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

Executive Vice President , Secretary and Treasurer

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

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

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

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

FUND OWNERSHIP
Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.

As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Anbee & Company, Aurora, IL
owned 87,777 (5.02%); Union Planters National Bank, Memphis, TN owned 225,764
(12.91%); Onedun, Dundee, IL owned 113, 019 (6.46%); Sunbank and Co., Sunbury,
PA owned 246,474 (14.09%); Grand Old Co., Zanesville, OH owned 268,281 (15.34%);
Onedun, Dundee, IL owned 88,807 (5.08%); and First Mar & Co., Marquette, MI
owned 263,274 (15.06%). As of October 28, 1997, the following shareholder of
record owned 5% or more of the outstanding Institutional Service Shares of the
Fund: Anbee & Company, Aurora, IL owned 208,177 (91.14%).

DIRECTORS' COMPENSATION
AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +

John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund
Complex

Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex

John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
and Director

James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex

Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

</TABLE>

* Information is furnished for the fiscal year ended September 30, 1997 and
the Corporation was comprised of four portfolios.

+The information is provided for the last calendar year.
DIRECTOR LIABILITY

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

<PAGE>

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

The Adviser shall not be liable to the Fund or any 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.

ADVISORY FEES

For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. For the period from October 1, 1996
(date of initial public investment) to September 30, 1997, the Adviser earned
fees of $33,489, all of which was voluntarily waived.

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from October 1, 1996 (date of initial public
investment) to September 30, 1997, the administrator earned fees of $154,935.

CUSTODIAN AND PORTFOLIO ACCOUNTANT

State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Federated Services Company, Pittsburgh,
Pennsylvania, provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments. The fee paid for this service is
based upon the level of the Fund's average net assets for the period plus
out-of-pocket expenses.

TRANSFER AGENT

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

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Directorss. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or by affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the period from
October 1, 1996 (date of initial public investment) to September 30, 1997, the
Fund paid no commissions on brokerage transactions.

<PAGE>

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

PURCHASING SHARES

Except under certain circumstances described in the prospectus, shares are sold
at their net asset value on days the New York Stock Exchange is open for
business. The procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."

DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES

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

For the period from October 1, 1996 (date of initial public investment) to
September 30, 1997, the Fund paid $897, of which $717 was voluntarily waived for
Institutional Service Shares under the Distribution Plan. In addition, for the
period from October 1, 1996 (date of initial public investment) to September 30,
1997, the Fund paid $897 in shareholder service fees for Institutional Service
Shares. For the same period, the Fund paid no shareholder services fees for
Institutional Shares.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's securities, other than options, are determined as
follows:

o as provided by an independent pricing service;

o for short-term obligations, according to the mean bid and asked prices,
as furnished by an independent pricing service, or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost unless the Directors determine this is not
fair value; or

o at fair value as determined in good faith by the Directors.

<PAGE>

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider: yield,
quality, coupon rate, maturity, type of issue, trading characteristics, and
other market data.

The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Directors determine in good faith
that another method of valuing option positions is necessary.

VALUING MUNICIPAL BONDS

The Directors use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.

USE OF AMORTIZED COST

The Directors have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Directors.

REDEEMING SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Although State Street Bank does not charge
for telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.

REDEMPTION IN KIND

The Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, under which a Fund is obligated to redeem shares for any
one shareholder solely in cash only up to the lesser of $250,000 or 1% of the
Fund's net asset value during any 90-day period.

Any redemption beyond this amount will also be in cash unless the Directors
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way that net asset value is determined. The portfolio instruments
will be selected in a manner that the Directors deem fair and equitable.

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

TAX STATUS

THE FUND'S TAX STATUS

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

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

o invest in securities within certain statutory limits; and

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

<PAGE>

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations.

CAPITAL GAINS

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.

TOTAL RETURN

The Fund's average annual total return for the one-year period ended September
30, 1997 were 10.52% and 10.22% for Institutional Shares and Institutional
Service Shares, respectively.

The average annual total return for the Fund 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 net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, adjusted over the period by any additional
shares, assuming the monthly reinvestment of all dividends and distributions.

YIELD

The Fund's yields for the thirty-day period ended September 30, 1997 were 7.02%
and 6.72%, for Institutional Shares and Institutional Service Shares,
respectively.

The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.

PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:

o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

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

o changes in the Fund expenses; and

o various other factors.

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

Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance.

<PAGE>

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

o RUSSELL ACTIVE SECTOR ROTATION ACCOUNTS UNIVERSE includes portfolios that
change interest rate exposure relative to the Lehman Brothers Aggregate
Bond Index or other broad market indexes, with changes in portfolio
interest rate sensitivity limited to approximately plus or minus 20% index
duration. Durations have typically been 3.5 to 6 years. Primary emphasis is
on selecting undervalued sectors or issues. Includes separate accounts,
pooled funds, or mutual funds managed by investment advisors, banks or
insurance companies.

o 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 offering price over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
"Intermediate Investment Grade Debt " category in advertising and sales
literature.

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

o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an
unmanaged index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.

o LEHMAN BROTHERS AGGREGATE BOND INDEX is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indices are rebalanced monthly by market capitalization.

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

ECONOMIC AND MARKET INFORMATION

ABOUT FEDERATED INVESTORS

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

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

<PAGE>

In the corporate bond sector, as of December 31, 1996, Federated Investors
managed 12 money market funds and 17 bond funds with assets approximating $17.2
billion and $4.0 billion, respectively. Federated's corporate bond decision
making--based on intensive, diligent credit analysis--is backed by over 21 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 $200 billion.

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

MUTUAL FUND MARKET

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

INSTITUTIONAL CLIENTS

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

BANK MARKETING

Other institutional clients include close relationships with more than
1,600 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their
clients' portfolios. The marketing effort to trust clients is headed by
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 2,000 broker/dealer and bank broker/dealer
relationships across the country--supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several
surveys performed by DALBAR, Inc. DALBAR is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Federated Securities Corp.

* Source: Investment Company Institute.

Federated Total Return Bond Fund

MANAGEMENT DISCUSSION AND ANALYSIS
Federated Total Return Bond Fund represents a high-quality, fixed-income
portfolio combining various fixed-income asset classes. The fund primarily
invests in U.S. Treasury, government agency, and high-quality corporate debt
securities. The fund may also allocate a percentage of assets in the high-yield
corporate and international bond sectors.

While exhibiting significant directional volatility from month to month, the
past year was very positive from the perspective of high-quality, total return,
fixed-income investors. For the one-year period ended September 30, 1997,
interest rates fell across the entire maturity spectrum, initially rising in the
first six months and falling in the latter six months. While the economic
expansion continued to move forward, market participants appeared to have
lowered inflationary expectations which created a significant fixed-income rally
through the summer months.

Relative to sector performance, investors were compensated for exposure to the
"spread" products, with the mortgage, investment-grade corporate bond, and
high-yield corporate bond sectors all outperforming comparable maturity Treasury
securities. During the fiscal year ended September 30, 1997, the fund
consistently overweighted the corporate sector while maintaining a duration
posture that was generally neutral to just slightly defensive of the Lehman
Brothers Aggregate Bond Index.* In short, a specific security selection strategy
was favored over an interest rate anticipation strategy.

The sector and security selection strategy over the past fiscal year placed the
fund in a position to add value resulting from the incremental income and
relative price performance of corporate securities versus the Lehman Brothers
Aggregate Bond Index. The advantage was slightly offset from the negative
interest rate exposure due to a slightly defensive duration target. For the
fiscal year ended September 30, 1997, the fund produced a 10.52% total return
for Institutional Shares and 10.22% for Institutional Service Shares,** relative
to a 9.71% total return for the Lehman Brothers Aggregate Bond Index. No
significant portfolio strategy changes are anticipated in the near-term other
than a gradual upgrading into more Treasury and mortgage securities.

* This index is unmanaged.
** 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 thant their original
cost.

Federated Total Return Bond Fund
Institutional Shares
GROWTH OF $100,000 INVESTED IN FEDERATED TOTAL RETURN BOND FUND (INSTITUTIONAL
SHARES) The graph below illustrates the hypothetical investment of $100,000* in
the Federated Total Return Bond Fund (Institutional Shares) (the "Fund") from
October 1, 1996 (start of performance) to September 30, 1997, compared to the
Lehman Brothers Aggregate Bond Index (LBABI).+

GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FTRBF1

CUMULATIVE TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Start of Performance (10/1/96) 10.52%

This report must be preceded or accompanied by the Fund's prospectus dated
November 30, 1997, and, together with financial statements contained therein,
constitutes the Fund's annual report.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBABI has been adjusted to reflect reinvestment of dividends
on securities in the index.

+ The LBABI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The index is
unmanaged.

Federated Total Return Bond Fund
Institutional Service Shares
GROWTH OF $25,000 INVESTED IN FEDERATED TOTAL RETURN BOND FUND (INSTITUTIONAL
SERVICE SHARES) The graph below illustrates the hypothetical investment of
$25,000* in the Federated Total Return Bond Fund (Institutional Service Shares)
(the "Fund") from October 1, 1996 (start of performance) to September 30, 1997,
compared to the Lehman Brothers Aggregate Bond Index (LBABI).+

GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FTRBF2

CUMULATIVE TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Start of Performance (10/1/96) 10.22%

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED. This report must be
preceded or accompanied by the Fund's prospectus dated November 30, 1997, and,
together with financial statements contained therein, constitutes the Fund's
annual report.
* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBABI has been adjusted to reflect reinvestment of dividends
on securities in the index.
+ The LBABI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance.
The index is unmanaged.

[Graphic]
FEDERATED INVESTORS

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

1-800-341-7400

www.federatedinvestors.com
Cusip 31428Q101
Cusip 31428Q507
G01721-04 (11/97)

FEDERATED LIMITED DURATION FUND

(A Portfolio of Federated Total Return Inc.)

Institutional Shares
PROSPECTUS
The Institutional Shares of Federated Limited Duration Fund (the "Fund") offered
by this prospectus represent interests in a diversified investment portfolio of
Federated Total Return Series, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).

The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by seeking value among most sectors of fixed
income securities.

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 BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated November 30, 1997

TABLE OF CONTENTS

Summary of Fund Expenses 1
Financial Highlights -- Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Hub and Spoke [registered trademark] Option 12
Net Asset Value 12
Investing in Institutional Shares 12
Share Purchases 12
Minimum Investment Required 12
What Shares Cost 13
Exchanging Securities for Fund Shares 13
Confirmations and Account Statement 13
Dividends and Distributions 13
Redeeming Institutional Shares 13
Telephone Redemption 13
Written Requests 14
Accounts with Low Balances 14
Fund Information 14
Management of the Fund 14
Distribution of Institutional Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 16
Performance Information 16
Other Classes of Shares 17
Financial Highlights -- Institutional Service Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
Appendix 31

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
Management Fee (after waiver)(1) 0.00%
12b-1 Fee None
Total Other Expenses (after expense reimbursement) 0.35%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses (after waivers and expense reimbursement)(3) 0.35%
</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time at
its sole discretion. The maximum management fee is 0.40%. (2) Institutional
Shares has no present intention of paying or accruing the shareholder services
fee during the fiscal year ending September 30, 1998. If Institutional Shares
were paying or accruing the shareholder services fee, Institutional Shares would
be able to pay up to 0.25% of its average daily net assets for the shareholder
services fee. See "Fund Information." (3) The total operating expenses in the
table above are based on expenses expected during the fiscal year ending
September 30, 1998. The total operating expenses were 0.00% for the fiscal year
ended September 30, 1997 and would have been 8.74% absent the voluntary waiver
of the management fee and the voluntary reimbursement of certain other operating
expenses. * Total operating expenses are estimated based on average expenses
expected to be incurred during the period ending September 30, 1998. During the
course of this period, expenses may be more or less than the average amount
shown. The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Shares of the
fund will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Institutional Shares" and
"Fund Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.

EXAMPLE
- -----------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of eachtime period.
<S> <C>
1 year $ 4
3 years $11
5 years $20
10 years $44
</TABLE>

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

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout the period) Reference is made to the Report
of Ernst & Young LLP, Independent Auditors on page 30.

YEAR ENDED
SEPTEMBER 30,
1997(a)
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------
Net investment income 0.66
- -------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.14
- ------------------------------------------------------------------------------------- -------
Total from investment operations 0.80
- ------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------
Distributions from net investment income (0.65)
- -------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.67)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.27%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.00%
- --------------------------------------------------------------------------------------
Net investment income 6.47%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 8.74%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,589
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(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)

GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." On May 14, 1997, the Board of Directors (the "Directors") approved the
Fund's name change from Federated Total Return Limited Duration Fund to
Federated Limited Duration Fund. The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares. As of the date
of this prospectus, the Board of Directors (the "Directors") has established two
classes of shares for Federated Limited Duration Fund: Institutional Shares and
Institutional Service Shares. This prospectus relates only to the Institutional
Shares of Federated Limited Duration Fund. Institutional Shares ("Shares") of
the Fund are sold primarily to accounts for which financial institutions act in
a fiduciary or agency capacity as a convenient means of accumulating an interest
in a professionally managed, diversified portfolio of fixed income securities. A
minimum initial investment of $100,000 over a 90-day period is required. Shares
are sold and redeemed at net asset value without a sales charge imposed by the
Fund.

INVESTMENT INFORMATION
Investment Objective
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES The Fund pursues its investment objective by investing
primarily in a diversified portfolio of fixed income securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. The Fund's weighted-average portfolio
duration will at all times be limited to three years or less. (See the section
entitled "Average Portfolio Duration" in this Prospectus.) Unless indicated
otherwise, the investment policies may be changed by the Directors without the
approval of shareholders. Shareholders will be notified before any material
change in these investment policies becomes effective. ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of corporate debt obligations, U.S. and foreign government
obligations, and mortgage-backed and asset-backed securities. The Fund may also
invest in convertible securities. The Fund may also invest in derivative
instruments of such securities (including instruments with demand features or
credit enhancement and stripped mortgage-backed securities), as well as money
market instruments and cash. The securities in which the Fund invests
principally are: * domestic (i.e., issued in the United States) and foreign
issues of corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/ortheir instrumentalities having floating
or fixed rates of interest; * obligations issued or guaranteed as to payment of
principal and interest by the U.S. government, or its agencies or
instrumentalities; * mortgage-backed securities; * asset-backed securities; *
municipal securities; * commercial paper which matures in 270 days or less; *
time deposits (including savings deposits and certificates of deposit) and
bankers' acceptances in commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF"), both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit issued by and other time
deposits in foreign branches of FDIC insured banks or who have at least $100
million in capital; and * repurchase agreements collateralized by eligible
investments.

CORPORATE AND FOREIGN GOVERNMENT/AGENCY
DEBT OBLIGATIONS
The Fund invests in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.
FLOATING RATE DEBT OBLIGATIONS
The Fund expects to invest in floating rate debt obligations, including
increasing rate securities. Floating rate securities are generally offered at an
initial interest rate which is at or above prevailing market rates. The interest
rate paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the six-month
Treasury bill rate, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a bank, the commercial paper rates, or the
longer-term rates on U.S. Treasury securities. Increasing rate securities, which
currently do not make up a significant share of the market in corporate debt
securities, are generally offered at an initial interest rate which is at or
above prevailing market rates. Interest rates are reset periodically (most
commonly every 90 days) at different levels on a predetermined scale. These
levels of interest are ordinarily set at progressively higher increments over
time. Some increasing rate securities may, by agreement, revert to a fixed rate
status. These securities may also contain features which allow the issuer the
option to convert the increasing rate of interest to a fixed rate under such
terms, conditions, and limitations as are described in each issue's prospectus.

FIXED RATE DEBT OBLIGATIONS The Fund will also invest in fixed rate securities,
including fixed rate securities with short-term characteristics. Fixed rate
securities with short-term characteristics are long-term debt obligations but
are treated in the market as having short maturities because call features of
the securities may make them callable within a short period of time. A fixed
rate security with short-term characteristics would include a fixed income
security priced close to call or redemption price or a fixed income security
approaching maturity, where the expectation of call or redemption is high. Fixed
rate securities tend to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates of interest. This is
because floating rate securities, as described above, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities pay
a fixed rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates, the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term characteristics are not
subject to the same price volatility as fixed rate securities without such
characteristics. Therefore, they behave more like floating rate securities with
respect to price volatility. VARIABLE RATE DEMAND NOTES Variable rate demand
notes are long-term debt instruments that have variable or floating interest
rates and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities typically
bear interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals (ranging
from daily to annually), and is normally based on a published interest rate or
interest rate index. Many variable rate demand notes allow the Fund to demand
the repurchase of the security on not more than seven days prior notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. See "Demand Features." U.S.
GOVERNMENT SECURITIES The Fund may invest in U.S. government securities, which
generally include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes, and bonds) and obligations (including mortgage-backed securities,
bonds, notes and discount notes) issued or guaranteed by the following U.S.
government agencies or instrumentalities: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Farmers Home Administration; Federal Home Loan Banks; Federal Home Loan Mortgage
Corporation; Federal National Mortgage Association; Government National Mortgage
Association; and Student Loan Marketing Association. These securities are backed
by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow
an amount limited to a specific line of credit from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. Examples of agencies and instrumentalities which are
permissible investments which may not always receive financial support from the
U.S. government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Federal National Mortgage Association; Student Loan Marketing
Association; and Federal Home Loan Mortgage Corporation. MORTGAGE-BACKED
SECURITIES Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. There are currently four basic types of mortgage-backed
securities: (i) those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; (iii) those issued by private issuers that
represent an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government. The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and/or principal. The interest
portion of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities. COLLATERALIZED
MORTGAGE OBLIGATIONS ("CMOS") CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities. CMOs may have
fixed or floating rates of interest. The Fund may invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") REMICs are
offerings of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as amended.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset- backed bonds. The securities are issued by
non-governmental entities and carry no direct or indirect government guarantee.
INVESTMENT RISKS OF MORTGAGE-BACKED AND

ASSET-BACKED SECURITIES

Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Fund reinvests the
payments and any unscheduled prepayments of principal are received, the Fund may
receive a rate of interest which is actually lower than the rate of interest
paid on these securities ("prepayment risks"). Mortgage-backed and asset-backed
securities are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium. Prepayment risks on mortgage-backed securities tend to increase during
periods of declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset- backed securities. While mortgage-backed securities generally entail less
risk of a decline during periods of rapidly rising interest rates,
mortgage-backed securities may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may result in
some loss of a holder's principal investment to the extent of the premium paid.
Conversely, if mortgage-backed securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal would
increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. FOREIGN SECURITIES The Fund may invest in foreign securities.
Foreign securities do not include American Depository Receipts, but do include
foreign securities not publicly traded in the United States. Investments in
foreign securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities. RISKS The risks associated with investments in foreign securities
relate to political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are not
limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability, ability to obtain or enforce court judgments
abroad and adverse diplomatic developments. Moreover, individual foreign
economies may differ favorably or unfavorably from the domestic economy in such
respects as growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries. CURRENCY RISKS Foreign securities may be denominated
in foreign currencies. Therefore, the value in U.S. dollars of the Fund's assets
and income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holdings of foreign currencies to U.S. dollars daily. When the Fund converts
its holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices at which
they buy and sell currencies. The Fund will engage in foreign currency exchange
transactions in connection with its investments in foreign securities. The Fund
will conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies. FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. When the Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency, it may want to establish the
U.S. dollar cost or proceeds, as the case may be. By entering into a forward
contract in U.S. dollars for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction, the Fund attempts to
protect itself against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the U.S. dollar and
such foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships. The Fund will not
enter into forward foreign currency exchange contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency or denominated in a currency or
currencies that the adviser believes will reflect a high degree of correlation
with the currency with regard to price movements. The Fund generally will not
enter into forward foreign currency exchange contracts with a term longer than
one year. STRIPPED MORTGAGE-BACKED SECURITIES

The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased -- the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.

MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment. The two principal
classifications of municipal securities are "general obligation" and "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith and credit and taxing power for the payment of principal and interest.
Interest on and principal of revenue bonds, however, are payable only from the
revenue generated by the facility financed by the bond or other specified
sources of revenue. Revenue bonds do not represent a pledge of credit or create
any debt of or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as revenue
bonds. CONVERTIBLE SECURITIES Convertible securities include a spectrum of
securities which can be exchanged for or converted into common stock.
Convertible securities may include, but are not limited to: convertible bonds or
debentures; convertible preferred stock; units consisting of usable bonds and
warrants; or securities which can or otherwise limit returns to the convertible
security holder, such as DECS (Dividend Enhanced Convertible Stock, or Debt
Exchangeable for Common Stock when issued as a debt security.), LYONS (Liquid
Yield Option Notes which are corporate bonds that are purchased at prices below
par with no coupons and are convertible into stock), PERCS (Preferred Equity
Redemption Cumulative Stock which are an equity issue that pays a high cash
dividend, has a cap price and mandatory conversion to common stock at maturity),
and PRIDES (Preferred Redeemable Increased Dividend Securities, which are
essentially the same as DECS; the difference is little more than who initially
underwrites the issue.).

FINANCIAL AND FOREIGN CURRENCY FUTURES AND OPTIONS ON FUTURES The
Fund may purchase and sell financial and foreign currency futures contracts to
hedge all or a portion of its portfolio against changes in interest rates.
Financial futures contracts call for the delivery of particular debt instruments
at a certain time in the future, while foreign currency futures contracts call
for the delivery of either U.S. or foreign currency at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time. The Fund may also write (sell) or
purchase put and call options on financial and foreign currency futures
contracts as a hedge to attempt to protect securities in its portfolio against
decreases in value. When the Fund writes a call or put option on a futures
contract, it is undertaking the obligation of selling or purchasing,
respectively, a futures contract at a fixed price at any time during a specified
period if the option is exercised. Conversely, as purchaser of a call or put
option on a futures contract, the Fund is entitled (but not obligated) to buy or
sell, respectively, a futures contract at the fixed price during the life of the
option. The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses futures and options on futures as hedging devices, there is a risk that the
prices of the instruments subject to the futures contracts may not correlate
perfectly with the prices of the instruments in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio's holdings to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the Fund may
lose money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary market
on an exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market. HIGH-YIELD DEBT
OBLIGATIONS The Fund may invest up to but not including 35% of its total assets
in debt securities that are not investment-grade but are rated BB or lower by an
NRSRO (or, if unrated, determined by the adviser to be of comparable quality).
Some of these securities may involve equity characteristics. The Fund may invest
in equity securities, including unit offerings which combine fixed rate
securities and common stock or common stock equivalents such as warrants, rights
and options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.

The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower-rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administration and accounting services. The Fund's adviser the High- Yield Bond
Portfolio will provide the Fund broad diversity and exposure to all aspects of
the high-yield bond sector of the market while at the same time providing
greater liquidity than if high-yield debt obligations were purchased separately
for the Fund. The Fund will be deemed to own a pro rata portion of each
investment of the High-Yield Bond Portfolio.

RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds. The
Fund's investment adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objective, policies and limitations. AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of lower
expected market volatility, and a lower average duration during periods of
higher expected market volatility. In any event, the Fund's dollar-weighted
average duration will not exceed three years. TOTAL RETURN The "total return"
sought by the Fund will consist of interest and dividends from underlying
securities, capital appreciation reflected in unrealized increases in value of
portfolio securities (realized by the shareholder only upon selling shares) or
realized from the purchase and sale of securities, and successful use of futures
and options, or gains from favorable changes in foreign currency exchange rates.
Generally, over the long term, the total return obtained by a portfolio
investing primarily in fixed income securities is not expected to be as great as
that obtained by a portfolio that invests primarily in equity securities. At the
same time, the market risk and price volatility of a fixed income portfolio is
expected to be less than that of an equity portfolio. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned at all times.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. The Fund may dispose of a commitment prior to
settlement if the adviser deems it appropriate to do so. In addition, the Fund
may enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.

PORTFOLIO TURNOVER
Securities in the Fund's portfolio will be sold whenever the Fund's investment
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The adviser to the Fund does not anticipate that portfolio turnover
will result in adverse tax consequnces. Any such trading will increase the
Fund's portfolio turnover rate and transaction costs.

INVESTMENT LIMITATIONS The Fund will not:

* borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge its assets to secure such borrowings; or *
with respect to 75% of its total assets, invest more than 5% of the value of its
total assets in securities of any one issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder approval.

HUB AND SPOKE [REGISTERED TRADEMARK] OPTION

If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund. The initial shareholder of the Fund (who is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment. In making its determination, the Directors will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. Although it is expected that the
Directors will not approve an arrangement that is likely to result in higher
costs, no assurance is given that costs will remain the same or be materially
reduced if this investment structure is implemented. NET ASSET VALUE The Fund's
net asset value per Share fluctuates. The net asset value for Shares is
determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled. INVESTING IN INSTITUTIONAL SHARES SHARE PURCHASES Shares are sold
at their net asset value, without a sales charge, next determined after an order
is received on days on which the New York Stock Exchange is open for business.
Shares may be purchased either by wire or mail. To purchase shares of the Fund,
open an account by calling Federated Securities Corp. Information needed to
establish the account will be taken over the telephone. The Fund reserves the
right to reject any purchase request. BY WIRE

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

BY MAIL

To purchase shares of the Fund by mail, send a check made payable to Federated
Limited Duration Fund -- Institutional Shares to: Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are
considered received when payment by check is converted by State Street Bank and
Trust Company ("State Street Bank") into federal funds. This is normally the
next business day after State Street Bank receives the check.

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

EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund Shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the adviser that the securities to be exchanged are acceptable. Any
securities exchanged must meet the investment objective and policies of the Fund
and must have a readily ascertainable market value. The market value of any
securities exchanged in an initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund. The Fund acquires the exchanged
securities for investment and not for resale. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. The basis of
the exchange will depend on the net asset value of Fund shares on the day the
securities are valued. One share of the Fund will be issued for the equivalent
amount of securities accepted. Any interest earned on the securities prior to
the exchange will be considered in valuing the securities. All interest,
dividends, subscription or other rights attached to the securities become the
property of the Fund, along with the securities. If an exchange is permitted, it
will be treated as a sale for federal income tax purposes. Depending upon the
cost basis of the securities exchanged for Fund shares, a gain or loss may be
realized by the investor.

CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. The Fund will not issue share certificates.

The written request should state: Federated Limited Duration Fund --
Institutional Shares; the account name as registered with the Fund; the account
number; and the number of shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the Shares are
registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed. Shareholders requesting a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company or savings
association whose deposits are insured by an organization which is administered
by the Federal Deposit Insurance Corporation; a member firm of a domestic stock
exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed
by a notary public.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, and pay the proceeds to the shareholder, if the
account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. this requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
FUND INFORMATION

MANAGEMENT OF THE FUND

ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to 0.40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The Adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion.

ADVISER'S BACKGROUND
Federated Management, a Delaware business trust organized on April 11, 1989, is
a registered investment adviser under the Investment Advisers Act of 1940. It is
a subsidiary of Federated Investors. All of the Class A (voting) shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors. Federated Management and other subsidiaries of Federated
Investors serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide administrative
services to a number of investment companies. With over $110 billion invested
across more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1996, Federated Investors is one of the largest
mutual fund investment managers in the United States. With more than 2,000
employees, Federated continues to be led by the management who founded the
company in 1955. Federated funds are presently at work in and through 4,500
financial institutions nationwide. Both the Corporation and the adviser have
adopted strict codes of ethics governing the conduct of all employees who manage
the Fund and its portfolio securities. These codes recognize that such persons
owe a fiduciary duty to the Fund's shareholders and must place the interests of
shareholders ahead of the employees' own interests. Among other things, the
codes: require preclearance and periodic reporting of personal securities
transactions; prohibit personal transactions in securities being purchased or
sold, or being considered for purchase or sale, by the Fund; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are subject to
review by the Directors and could result in severe penalties. PORTFOLIO
MANAGER'S BACKGROUND

Randall S. Bauer has been a portfolio manager of the Fund since
inception. Mr. Bauer joined Federated Investors in 1989 and has been a
Vice President of the Fund's investment adviser and Federated Research
Corp. since 1994. Mr. Bauer was an Assistant Vice President of the
Fund's investment adviser and Federated Research Corp. from 1989 to 1993.
Mr. Bauer is a Chartered Financial Analyst and received his M.B.A. in
Finance from Pennsylvania State University.
Robert K. Kinsey has been a portfolio manager of the Fund since May
1997. Mr. Kinsey joined Federated in 1995 as a Vice President of a
Federated advisory subsidiary. He has been a Vice President of the
Fund's adviser and Federated Research Corp. since March, 1997. From 1992
to 1995, he served as a Portfolio Manager for Harris Investment
Management Co., Inc. Mr. Kinsey received his M.B.A. in Finance from
U.C.L.A.
Mark E. Durbiano has been the portfolio manager for the high yield
corporate bonds asset category of the Fund since inception. Mr. Durbiano
joined Federated Investors in 1982 and has been a Senior Vice President
of the Fund's adviser and Federated Research Corp. since January 1996.
Mr. Durbiano was a Vice President of the Fund's adviser and Federated
Research Corp. from 1988 through 1995. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University
of Pittsburgh.

DISTRIBUTION OF INSTITUTIONAL SHARES
Federated Securities Corp. is the principal distributor for shares of
the Fund. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated
Investors.

SHAREHOLDER SERVICES

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to .25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

In addition to payments made pursuant to the Shareholder Services Agreement,
Federated Securities Corp. and Federated Shareholder Services, from their own
assets, may pay financial institutions supplemental fees for the performance of
substantial sales services, distribution-related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's investment adviser or its
affiliates. ADMINISTRATION OF THE FUND ADMINISTRATIVE SERVICES Federated
Services Company, a subsidiary of Federated Investors, provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company provides
these at an annual rate which relates to the average aggregate daily net assets
of all funds advised by subsidiaries of Federated Investors ("Federated Funds")
as specified below:

AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
FEE FEDERATED FUNDS
- ------- ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose to voluntarily waive a portion of
its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS

Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 267,780 (94.49%) of the
Institutional Service Shares; and Sunbank & Co., who was the record owner of
250,872 (31.31%) and First Mar & Co., who was the record owner of 234,049
(29.21%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.

As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.
Directors may be removed by a majority vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the request of shareholders owning at least 10% of the Corporation's outstanding
shares of all series entitled to vote. TAX INFORMATION FEDERAL INCOME TAX The
Fund will pay no federal income tax because it expects to meet requirements of
the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund. Unless otherwise exempt, shareholders are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains no matter how long the shareholders have held their shares.
Information on the tax status of dividends and distributions is provided
annually. STATE AND LOCAL TAXES Shares are exempt from personal property taxes
imposed by counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws. PERFORMANCE INFORMATION From time
to time, the Fund advertises its total return and yield. Total return represents
the change, over a specified period of time, in the value of an investment in
the Fund after reinvesting all income and capital gains distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage. The yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Shares are sold without any sales charge or
other similar non-recurring charges. Total return and yield will be calculated
separately for Institutional Shares and Institutional Service Shares. From time
to time, advertisements for the Fund's Institutional Shares may refer to
ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.
OTHER CLASSES OF SHARES The Fund also offers another class of shares called
Institutional Service Shares which are sold at net asset value to accounts for
financial institutions and are subject to a minimum initial investment of
$25,000 over a 90-day period. Institutional Service Shares are distributed under
a 12b-1 Plan adopted by the Fund. Institutional Service Shares and Institutional
Shares are subject to certain of the same expenses. Expense differences,
however, between Institutional Service Shares and Institutional Shares may
affect the performance of each class. To obtain more information and a
prospectus for Institutional Service Shares, investors may call 1-800-341-7400.

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES (For a share outstanding
throughout the period) Reference is made to the Report of Ernst & Young LLP,
Independent Auditors on page 30. <TABLE> <CAPTION>

YEAR ENDED
SEPTEMBER 30,
1997(a)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------
Net investment income 0.63
- --------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 0.15
- -------------------------------------------------------------------------------------- -------
Total from investment operations 0.78
- -------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------------------------------
Distributions from net investment income (0.63)
- --------------------------------------------------------------------------------------
Distributions from net realized gain on investments and foreign currency transactions (0.02)
- -------------------------------------------------------------------------------------- -------
Total distributions (0.65)
- -------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.13
- -------------------------------------------------------------------------------------- -------
TOTAL RETURN(b) 8.10%
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------------------------------
Expenses 0.29%
- --------------------------------------------------------------------------------------
Net investment income 6.31%
- --------------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.52%
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2,724
- --------------------------------------------------------------------------------------
Portfolio turnover 109%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from October 1, 1996 (start of
performance) to September 30, 1997.
(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)

PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997

PRINCIPAL
AMOUNT VALUE
- --------- -------------------------------------------------------------------------------- ----------
(a)ASSET-BACKED SECURITIES -- 32.8%
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Automobile -- 13.5%
- ------------------------------------------------------------------------------------------------
$ 200,000 AFG Receivables Trust 1997-B, Class C, 7.00%, 2/15/2003 $ 199,876
-------------------------------------------------------------------------------
128,795 Daimler-Benz Auto Grantor Trust 1995-A, Class A, 5.85%, 5/15/2002 129,224
-------------------------------------------------------------------------------
328,508 Honda Auto Receivables Grantor Trust 1995-A, Class A, 6.20%, 12/15/2000 329,740
-------------------------------------------------------------------------------
525,182 Olympic Automobile Receivables Trust 1994-A, Class CTF, 5.70%, 1/15/2001 526,153
-------------------------------------------------------------------------------
50,000 Team Fleet Financing Corp. Series 1997-1, Class B, 7.80%, 5/15/2003 51,53
-------------------------------------------------------------------------------
150,000 Yamaha Motor Master Trust 1995-1, Class A, 6.20%, 5/15/2003 150,329
------------------------------------------------------------------------------- ------------
Total 1,386,861
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 10.9%
- ------------------------------------------------------------------------------------------------
150,000 Banco Nacional de Mexico S.A., Credit Card Merchant Voucher Receivables Master
Trust Series 1996-A, Class A1, 6.25%, 12/1/2003 148,887
-------------------------------------------------------------------------------
250,000 Circuit City Credit Card Master Trust 1995-1 , Class A, 6.375%, 8/15/2005 251,393
-------------------------------------------------------------------------------
250,000 Dayton Hudson Credit Card Master Trust 1995-1 , Class A, 6.10%, 2/25/2002 251,035
-------------------------------------------------------------------------------
65,000 Discover Card Trust 1993-A, Class B, 6.80%, 8/16/2000 65,470
-------------------------------------------------------------------------------
200,000 Household Affinity Credit Card Master Trust 1993-1, Class B, 5.30%, 9/15/2000 198,038
-------------------------------------------------------------------------------
200,000 Spiegel Master Trust 1994-B, Class A, 8.15%, 6/15/2004 208,962
------------------------------------------------------------------------------- ------------
Total 1,123,785
------------------------------------------------------------------------------- ------------
HOME EQUITY LOAN -- 3.0%
- ------------------------------------------------------------------------------------------------
208,973 Advanta Home Equity Loan Trust 1992-1, Class A, 7.88%, 9/25/2008 214,357
-------------------------------------------------------------------------------
95,000 TMS Home Equity Trust 1996-B, Class A7, 7.55%, 8/15/2020 98,263
------------------------------------------------------------------------------- ------------
Total 312,620
------------------------------------------------------------------------------- ------------
MANUFACTURED HOUSING -- 3.4%
- ------------------------------------------------------------------------------------------------
200,000 Associates Manufactured Housing Certificates 1996-2, Class A-2, 6.05%,
6/15/2027 200,428
-------------------------------------------------------------------------------
150,000 Green Tree Financial Corp. 1994-1, Class A3, 6.90%, 4/15/2019 151,481
------------------------------------------------------------------------------- ------------
Total 351,909
------------------------------------------------------------------------------- ------------
OTHER -- 2.0%
- -----------------------------------------------------------------------------------------------
200,000 Centerior Energy Receivables Master Trust 1996-1, Class A, 7.20%, 4/15/2002 206,572
------------------------------------------------------------------------------- ------------
Total Asset-Backed Securities (identified cost $3,354,709) 3,381,747
------------------------------------------------------------------------------- ------------
CORPORATE BONDS -- 19.1%
- ------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Raytheon Co., Note, 6.45%, 8/15/2002 199,908
------------------------------------------------------------------------------- ------------
AUTOMOBILE -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Arvin Industries, Inc., Note, 6.875%, 2/15/2001 201,404
------------------------------------------------------------------------------- ------------
CABLE TELEVISION -- 3.0%
- ------------------------------------------------------------------------------------------------
200,000 TKR Cable, Inc., 10.50%, 10/30/2007 223,392
-------------------------------------------------------------------------------
100,000 Videotron Holdings PLC, Sr. Disc. Note, 0/11.00%, 8/15/2005 86,000
------------------------------------------------------------------------------- ------------
Total 309,392
------------------------------------------------------------------------------- ------------
FINANCIAL SERVICES -- 2.6%
- ------------------------------------------------------------------------------------------------
250,000 AIM Management Group, 9.00%, 11/15/2003 270,120
------------------------------------------------------------------------------- ------------
HOTELS, MOTELS, INNS & CASINOS -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 La Quinta Inns, Inc. , Sr. Sub. Note, 9.25%, 5/15/2003 105,250
------------------------------------------------------------------------------- ------------
INDUSTRIAL PRODUCTS & EQUIPMENT -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Figgie International Holdings, Inc., Sr. Note, 9.875%, 10/1/1999 104,625
------------------------------------------------------------------------------- ------------
INSURANCE -- 2.4%
- -----------------------------------------------------------------------------------------------
250,000 (b)HSB Group, Inc., 6.66%, 7/15/2027 250,242
------------------------------------------------------------------------------- ------------
OIL & GAS -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Clark Refining & Marketing Inc., Sr. Note, 10.50%, 12/1/2001 77,625
------------------------------------------------------------------------------- ------------
PRINTING & PUBLISHING -- 0.8%
- ------------------------------------------------------------------------------------------------
75,000 Valassis Communication, Inc., Sr. Note, 9.55%, 12/1/2003 83,128
------------------------------------------------------------------------------- ------------
RETAILERS -- 0.5%
- ------------------------------------------------------------------------------------------------
50,000 Shopko Stores, Inc., 8.50%, 3/15/2002 53,630
------------------------------------------------------------------------------- ------------
SOVEREIGN -- 2.0%
- ------------------------------------------------------------------------------------------------
200,000 Korea Development Bank, Bond, 7.125%, 9/17/2001 201,728
------------------------------------------------------------------------------- ------------
UTILITIES -- 1.0%
- ------------------------------------------------------------------------------------------------
100,000 Pennsylvania Power & Light Co., 9.25%, 10/1/2019 107,654
------------------------------------------------------------------------------- ------------
Total Corporate Bonds (identified cost $1,945,495) 1,964,706
------------------------------------------------------------------------------- ------------
(a)COLLATERALIZED MORTGAGE Obligations -- 13.0%
- ------------------------------------------------------------------------------------------------
217,660 (b)C-BASS ABS, LLC, (Series 1997-1), Class A-1, 7.05%, 2/1/2017 218,342
-------------------------------------------------------------------------------
95,884 (b)GE Capital Mortgage Services, Inc., (Series 1994-3), Class B4, 6.50%,
1/25/2024 67,359
-------------------------------------------------------------------------------
388,993 (b)Greenwich Capital Acceptance, Inc. Subordinate Mortgage Securities Trust,
(Series 1996-A), Class B, 7.5916%, 6/15/2019 377,930
-------------------------------------------------------------------------------
100,000 (b)K Mart CMBS Financing, Inc., (Series 1997-1), Class D, 6.475%, 3/1/2007 100,188
-------------------------------------------------------------------------------
252,471 Residential Accredit Loans, Inc., (Series 1996-QS8), Class A3, 7.05%, 12/25/2026 254,816
-------------------------------------------------------------------------------
250,000 Residential Accredit Loans, Inc., (Series1997-QS2), Class A3, 7.25%, 3/31/2027 252,699
-------------------------------------------------------------------------------
4,402,889 Vendee Mortgage Trust 1995-1C , (Series 1995-1C), Class 3IO, 0.2925%, 2/15/2025 70,182
------------------------------------------------------------------------------- ------------
Total Collateralized Mortgage Obligations (identified cost $1,336,562) 1,341,516
------------------------------------------------------------------------------- ------------
Government/Agencies -- 23.0%
- ------------------------------------------------------------------------------------------------
(a)Government Agency -- 20.6%
- ------------------------------------------------------------------------------------------------
500,000 Federal National Mortgage Association, 6.34%, 7/28/2000 501,780
-------------------------------------------------------------------------------
477,551 Government National Mortgage Association, ARM, 7.00%, 1/20/2022 492,369
-------------------------------------------------------------------------------
450,450 Government National Mortgage Association, 8.50%, 8/15/2026 471,986
-------------------------------------------------------------------------------
585,722 Government National Mortgage Association, 11.00%, 9/15/2015 661,684
------------------------------------------------------------------------------- ------------
Total 2,127,819
------------------------------------------------------------------------------- ------------
STATE/PROVINCIAL -- 2.4%
- ------------------------------------------------------------------------------------------------
300,000 Ontario Hydro, 10.00%, 3/19/2001 250,063
------------------------------------------------------------------------------- ------------
Total Governments/Agencies (identified cost $2,371,643) 2,377,882
------------------------------------------------------------------------------- ------------
U.S. TREASURY -- 8.2%
- ------------------------------------------------------------------------------------------------
835,000 United States Treasury Note, 6.375%, 5/15/2000 (identified cost $839,988) 845,371
------------------------------------------------------------------------------- ------------
(c)REPURCHASE AGREEMENT -- 8.6%
- ------------------------------------------------------------------------------------------------
885,000 BT Securities Corporation, 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized
cost) 885,000
------------------------------------------------------------------------------- ------------
Total Investments (identified cost $10,733,404)(d) 10,796,222
------------------------------------------------------------------------------- ------------
</TABLE>
(a) Because of monthly principal payments, the average lives of the Asset-Backed
Securities, Collateralized Mortgage Obligations and certain Government
Agency Securities are less than the indicated
periods.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At September 30, 1997, these securities
amounted to $1,014,061 which represents 9.8% of net assets.
(c) 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.
(d) The cost of investments for federal tax purposes amounts to $10,733,404. The
net unrealized appreciation of investments on a federal tax basis amounts to
$62,818 which is comprised of $69,261 appreciation and $6,443 depreciation
at September 30, 1997.
Note: The categories of investments are shown as a percentage of net
assets ($10,313,382) at September 30, 1997.
The following acronyms are used throughout this portfolio: ARM - Adjustable Rate
Mortgage LLC - Limited Liability Corporation PLC - Public Limited Company (See
Notes which are an integral part of the Financial Statements)

STATEMENT OF ASSETS AND LIABILITIES
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $10,733,404) $ 10,796,222
- -----------------------------------------------------------------------------------------------
Income receivable 112,573
- -----------------------------------------------------------------------------------------------
Receivable for shares sold 663
- ----------------------------------------------------------------------------------------------- --------------
Total assets 10,909,458
- -----------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------
Payable for investments purchased $ 251,099
- ---------------------------------------------------------------
Income distribution payable 53,157
- ---------------------------------------------------------------
Net payable for foreign currency exchange contracts purchased 1,573
- ---------------------------------------------------------------
Payable to Bank 153,162
- ----------------------------------------------------------------
Accrued expenses 137,085
- ---------------------------------------------------------------- --------------
Total liabilities 596,076
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,017,958 shares outstanding $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------
Paid in capital $ 10,220,716
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and translation of assets and
liabilities in foreign currency 61,248
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and foreign currency transactions 18,340
- -----------------------------------------------------------------------------------------------
Undistributed net investment income 13,078
- ----------------------------------------------------------------------------------------------- --------------
Total Net Assets $ 10,313,382
- ----------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- -----------------------------------------------------------------------------------------------
$7,589,231 (divided by) 749,087 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
INSTITUTIONAL SERVICE SHARES:
- -----------------------------------------------------------------------------------------------
$2,724,151 (divided by) 268,871 shares outstanding $10.13
- ----------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)

STATEMENT OF OPERATIONS
FEDERATED LIMITED DURATION FUND
YEAR ENDED SEPTEMBER 30, 1997
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------------------------------------
Interest $ 398,708
- -------------------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------------------------------
Investment advisory fee $ 24,589
- -----------------------------------------------------------------------------------------------
Administrative personnel and services fee 155,000
- -----------------------------------------------------------------------------------------------
Custodian fees 14,978
- -----------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 121,972
- -----------------------------------------------------------------------------------------------
Legal fees 2,628
- -----------------------------------------------------------------------------------------------
Portfolio accounting fees 139,765
- -----------------------------------------------------------------------------------------------
Distribution services fee -- Institutional Service Shares 1,798
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 13,570
- -----------------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Service Shares 1,799
- -----------------------------------------------------------------------------------------------
Share registration costs 62,140
- -----------------------------------------------------------------------------------------------
Printing and postage 12,906
- -----------------------------------------------------------------------------------------------
Insurance premiums 10,044
- -----------------------------------------------------------------------------------------------
Miscellaneous 19,598
- ----------------------------------------------------------------------------------------------- ------------
Total expenses 580,787
- -----------------------------------------------------------------------------------------------
Waivers and reimbursements --
- --------------------------------------------------------------------------------
Waiver of investment advisory fee -- $ (22,579)
- --------------------------------------------------------------------------------
Waiver of distribution services fee -- Institutional Service Shares (1,442)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (13,570)
- --------------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Service Shares (44)
- --------------------------------------------------------------------------------
Reimbursement of other operating expenses (541,046)
- -------------------------------------------------------------------------------- ------------
Total waivers and reimbursements (578,681)
- ----------------------------------------------------------------------------------------------- ------------
Net expenses 2,106
- ------------------------------------------------------------------------------------------------------------- ------------
Net investment income 396,602
- ------------------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
- -----------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 41,450
- -------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation of assets
and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain on investments and foreign currency 102,698
- ------------------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ 499,300
- ------------------------------------------------------------------------------------------------------------- ------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)

STATEMENT OF CHANGES IN NET ASSETS
FEDERATED LIMITED DURATION FUND
YEAR ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------
OPERATIONS --
- ------------------------------------------------------------------------------------------------
Net investment income $ 396,602
- ------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions
($28,563 as computed for federal tax purposes) 41,450
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation
of assets and liabilities in foreign currency 61,248
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from operations 499,300
- ------------------------------------------------------------------------------------------------ ---------------
DISTRIBUTIONS TO SHAREHOLDERS --
- ------------------------------------------------------------------------------------------------
Distributions from net investment income
- ------------------------------------------------------------------------------------------------
Institutional Shares (351,005)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (45,407)
- ------------------------------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign
currency transactions
- ------------------------------------------------------------------------------------------------
Institutional Shares (10,211)
- ------------------------------------------------------------------------------------------------
Institutional Service Shares (11)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from distributions to shareholders (406,634)
- ------------------------------------------------------------------------------------------------ ---------------
SHARE TRANSACTIONS --
- ------------------------------------------------------------------------------------------------
Proceeds from sale of shares 21,728,448
- ------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of distributions declared 4,418
- ------------------------------------------------------------------------------------------------
Cost of shares redeemed (11,512,650)
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets resulting from share transactions 10,220,216
- ------------------------------------------------------------------------------------------------ ---------------
Change in net assets 10,312,882
- ------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------
Beginning of period 500
- ------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income of $13,078) $ 10,313,382
- ------------------------------------------------------------------------------------------------ ---------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)

NOTES TO FINANCIAL STATEMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Limited
Duration Fund (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return. 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, listed corporate bonds, other fixed income securities, asset-backed
securities, unlisted securities and private placement securities are generally
valued at the mean of the latest bid and asked price as furnished by an
independent pricing service. Short-term securities are valued at the prices
provided by an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be valued
at amortized cost, which approximates fair market value. With respect to
valuation of foreign securities, trading in foreign cities may be completed at
times which vary from the closing of the New York Stock Exchange. Therefore,
foreign securities are valued at the latest closing price on the exchange on
which they are traded prior to the closing of the New York Stock Exchange.
Foreign securities quoted in foreign currencies are translated into U.S. Dollars
at the foreign exchange rate in effect at noon, eastern time, on the day the
value of the foreign security is determined. 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 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. FEDERATED LIMITED DURATION
FUND Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions. The following reclassifications have been made to
the financial statements.
INCREASE (DECREASE)
- -------------------------------------------
ACCUMULATED UNDISTRIBUTED NET
NET REALIZED INVESTMENT
GAIN INCOME
- ------------ -----------------
($12,888) $12,888
Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.
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. Withholding taxes on foreign interest and dividends have been
provided for in accordance with the Fund's understanding of the applicable
country's tax rules and rates. 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. FOREIGN EXCHANGE CONTRACTS The Fund may enter into foreign
currency commitments for the delayed delivery of securities or foreign currency
exchange transactions. Purchase contracts are used to acquire exposure to
foreign currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon entering these
transactions from the potential inability of counter-parts to meet the terms of
their commitments and from unanticipated movements in security prices or foreign
exchange rates. The foreign currency transactions are adjusted by the daily
exchange rate of the underlying currency and any gains or losses are recorded
for financial statement purposes as unrealized until the settlement date. At
September 30, 1997, the Fund had outstanding foreign currency commitments as set
forth below:

IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)

<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 11/25/97 361,449 $262,359 $260,786 ($1,573)
</TABLE>

FEDERATED LIMITED DURATION FUND
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies ("FC") are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income and expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments. Reported net realized foreign exchange gains or losses arise from
sales of portfolio securities, sales and maturities of short-term securities,
sales of FCs, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's books,
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt
from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the
issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted
securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined
to be liquid under criteria established by the Directors. The Fund
will not incur any registration costs upon such resales. The Fund's
restricted securities are valued at the price provided by dealers in
the secondary market or, if no market prices are available, at the
fair value as determined by the Fund's pricing committee.
Additional information on each restricted security held at September
30, 1997 is as follows:
SECURITY ACQUISITION DATE ACQUISITION COST
- --------------------------------------------------------------------
C-BASS ABS, LLC 2/25/1997 $218,544
GE Capital Mortgage Services, Inc. 7/10/1997 67,119
Greenwich Capital Acceptance, Inc. 7/24/1997 378,296
HSB Group, Inc. 7/10/1997 247,413
K Mart CMBS Financing, Inc. 2/27/1997 100,000
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. CAPITAL STOCK At
September 30, 1997, par value shares ($0.001 per share) authorized were as
follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
CLASS NAME AUTHORIZED
- ------------------------------- -------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
FEDERATED LIMITED DURATION FUND Transactions in capital stock were as follows:
<TABLE>
<CAPTION>

YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
<S> <C> <C>
Institutional Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 1,888,493 $ 18,917,589
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 380 3,834
- -----------------------------------------------------------------------
Shares redeemed (1,139,806) (11,407,045)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Share transactions 749,067 $ 7,514,378
- ----------------------------------------------------------------------- ----------- -----------
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.
YEAR ENDED
SEPTEMBER 30, 1997(a)
-----------------------
Institutional Service Shares Shares Amount
- -----------------------------------------------------------------------
Shares sold 279,256 $ 2,810,859
- -----------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 58 584
- -----------------------------------------------------------------------
Shares redeemed (10,473) (105,605)
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from Institutional Service share transactions 268,841 $ 2,705,838
- ----------------------------------------------------------------------- ----------- -----------
Net change resulting from share transactions 1,017,908 $ 10,220,216
- ----------------------------------------------------------------------- ----------- -----------

</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Limited Duration Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Limited Duration Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. We conducted
our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. In our opinion, the
financial statements and financial highlights referred to above present fairly,
in all material respects, the financial position of Federated Limited Duration
Fund at September 30, 1997, the results of its operations, the changes in its
net assets and the financial highlights for the year then ended in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997

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
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 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.

CI -- The rating CI is reserved for income bonds on which no
interest is being paid.

D -- Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.

MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS

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 some time 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 INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS 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 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 in imminent default in payment of interest or principal.

DDD, DD, and D -- Bonds
are in default on interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their ultimate recovery value
in liquidation or reorganization of the obligor. DDD represents the highest
potential for recovery on these bonds, and D represents the lowest potential for
recovery. NR -- NR indicates that Fitch does not rate the specific issue.

PLUS(+) OR MINUS (-): Plus or minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.

DUFF & PHELPS CREDIT RATING
CO. AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt. AA+, AA, AA -- High credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions. A+, A, A -- Protection factors
are average but adequate. However, risk factors are more variable and greater in
periods of economic stress. BBB+, BBB, BBB- -- Below-average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk during economic cycles. BB+, BB, BB -- Below investment grade but deemed
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category. B+, B, B -- Below
investment grade and possessing risk that obligation will not be met when due.
Financial protection factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists for frequent
changes in the rating within this category or into a higher or lower rating
grade. CCC -- Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments. DD
- -- Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments. DP -- Preferred stock with dividend averages. MOODY'S
INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS Prime-1 -- Issuers rated
Prime-1 (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: * Leading market
positions in well established industries. * High rates of return on funds
employed. * Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
* Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
* Well established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2 -- Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained. STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS A-1 --
This designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-2 -- Capacity
for timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated A-1. FITCH
INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS Fitch-1 -- (Highest
Grade) Commercial paper assigned this rating is regarded as having the strongest
degree of assurance for timely payment. Fitch-2 -- (Very Good Grade) Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than the strongest issues.

[LOGO]
FEDERATED INVESTORS
FEDERATED LIMITED
DURATION FUND

(A portfolio of Federated Total Return Series, Inc.)

Institutional Shares
Prospectus

November 30, 1997

A Diversified Portfolio of
Federated Total Return Series, Inc.,
an Open-End, Management
Investment Company

FEDERATED LIMITED DURATION FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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 One Oxford Centre
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com

Cusip 31428Q408

G01744-01-IS (11/97)

FEDERATED LIMITED DURATION FUND

(A Portfolio of Federated Total Return Series, Inc.)

Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Limited Duration Fund (the "Fund")
offered by this prospectus represent interests in a diversified investment
portfolio of Federated Total Return Series, Inc. (the "Corporation"), an
open-end, management investment company (a mutual fund). The investment
objective of the Fund is to provide total return. The Fund pursues this
investment objective by seeking value among most sectors of fixed income
securities. 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the
information you should read and know before you invest in Institutional Service
Shares of the Fund. Keep this prospectus for future reference.

The Fund has also filed a Statement of Additional Information dated November 30,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact the Fund
at the address listed on the back of this prospectus. The Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).

Prospectus dated November 30, 1997

TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Service Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 11
Hub and Spoke(registered trademark) Option 12
Net Asset Value 12
Investing in Institutional Service Shares 12
Share Purchases 12
Minimum Investment Required 12
What Shares Cost 13
Exchanging Securities for Fund Shares 13
Confirmations and Account Statements 13
Dividends and Distributions 13
Redeeming Institutional Service Shares 13
Telephone Redemption 13
Written Requests 14
Accounts with Low Balances 14
Fund Information 14
Management of the Fund 14
Distrubution of Institutional Service Shares 15
Administration of the Fund 16
Shareholder Information 16
Voting Rights 16
Tax Information 16
Federal Income Tax 16
State and Local Taxes 17
Performance Information 17
Other Classes of Shares 17
Financial Highlights -- Institutional Shares 18
Financial Statements 19
Report of Ernst & Young LLP, Independent Auditors 30
Appendix 31

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) None Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)
None Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*

Management Fee (after waiver)(1) 0.00%
12b-1 Fee (after waiver)(2) 0.05%
Total Other Expenses (after expense reimbursement) 0.60%
Shareholder Services Fee 0.25%
Total Operating Expenses (after waivers and expense reimbursements)(3) 0.65%

</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.40%.
(2) The 12b-1 Fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.29% for the fiscal year ended September 30, 1997
and would have been 14.81% absent the voluntary waivers of the management
fee and a portion of the shareholder services fee and 12b-1 fee and the
voluntary reimbursement of certain other operating expenses.
* Total operating expenses are estimated based on average expenses expected to
be incurred during the period ending September 30, 1998. During the course
of this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Institutional Service
Shares of the fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Investing in
Institutional Service Shares" and "Fund Information." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees. LONG-TERM
SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM FRONT-END
SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
EXAMPLE
- --------------------------------------------------------------
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period. 1 year
$ 7 3 years $21 5 years $36 10 years $81 THE ABOVE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES (For a share outstanding
throughout the period) Reference is made to the Report of Ernst & Young LLP,
Independent Auditors on page 30.

GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. On March 21, 1995, the name of the Corporation was changed
from "Insight Institutional Series, Inc." to "Federated Total Return Series,
Inc." On May 14, 1997, the Board of Directors (the "Directors") approved the
Fund's name change from Federated Limited Duration Fund to Federated Limited
Duration Fund. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for Federated Limited Duration Fund: Institutional Service Shares and
Institutional Shares. This prospectus relates only to the Institutional Service
Shares of Federated Limited Duration Fund. Institutional Service Shares
("Shares") of the Fund are designed primarily for retail and private banking
customers of financial institutions as a convenient means of accumulating an
interest in a professionally managed, diversified portfolio investing primarily
in fixed income securities. A minimum initial investment of $25,000 over a
90-day period is required. Shares are sold and redeemed at net asset value
without a sales charge imposed by the Fund.

INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus.
INVESTMENT POLICIES The Fund pursues its investment objective by investing
primarily in a diversified portfolio of fixed income securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in domestic investment grade debt securities. Investment grade debt
securities are rated in the four highest rating categories by one or more
nationally recognized statistical rating organizations ("NRSROs") (AAA, AA, A or
BBB by Standard & Poor's Ratings Group ("Standard & Poor's"), Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps Rating Service Co. ("Duff & Phelps") or
Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's")), or which are
of comparable quality in the judgment of the adviser. Downgraded securities will
be evaluated on a case-by-case basis by the adviser. The adviser will determine
whether or not the security continues to be an acceptable investment. If not,
the security will be sold. The remainder of the Fund's assets may be invested in
any of the securities discussed below. The Fund's weighted-average portfolio
duration will at all times be limited to three years or less. (See the section
entitled "Average Portfolio Duration" in this Prospectus.) Unless indicated
otherwise, the investment policies may be changed by the Directors without the
approval of shareholders. Shareholders will be notified before any material
change in these investment policies becomes effective. ACCEPTABLE INVESTMENTS
The Fund invests in a professionally managed, diversified portfolio consisting
primarily of corporate debt obligations, U.S. and foreign government
obligations, and mortgage-backed and asset-backed securities. The Fund may also
invest in convertible securities. The Fund may also invest in derivative
instruments of such securities (including instruments with demand features or
credit enhancement and stripped mortgage-backed securities), as well as money
market instruments and cash. The securities in which the Fund invests
principally are: * domestic (i.e., issued in the United States) and foreign
issues of corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest; * obligations issued or guaranteed as to
payment of principal and interest by the U.S. government, or its agencies or
instrumentalities; * mortgage-backed securities; * asset-backed securities; *
municipal securities; * commercial paper which matures in 270 days or less; *
time deposits (including savings deposits and certificates of deposit) and
bankers' acceptances in commercial or savings banks whose accounts are insured
by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF"), both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit issued by and other time
deposits in foreign branches of FDIC insured banks or who have at least $100
million in capital; and * repurchase agreements collateralized by eligible
investments. CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS The Fund
invests in corporate and foreign government/agency debt obligations, including
bonds, notes, medium term notes, and debentures, which may have floating or
fixed rates of interest. The prices of fixed income securities fluctuate
inversely to the direction of interest rates. FLOATING RATE DEBT OBLIGATIONS The
Fund expects to invest in floating rate debt obligations, including increasing
rate securities. Floating rate securities are generally offered at an initial
interest rate which is at or above prevailing market rates. The interest rate
paid on these securities is then reset periodically (commonly every 90 days) to
an increment over some predetermined interest rate index. Commonly utilized
indices include the three-month Treasury bill rate, the six-month Treasury bill
rate, the one-month or three-month London Interbank Offered Rate (LIBOR), the
prime rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities. Increasing rate securities, which currently do not
make up a significant share of the market in corporate debt securities, are
generally offered at an initial interest rate which is at or above prevailing
market rates. Interest rates are reset periodically (most commonly every 90
days) at different levels on a predetermined scale. These levels of interest are
ordinarily set at progressively higher increments over time. Some increasing
rate securities may, by agreement, revert to a fixed rate status. These
securities may also contain features which allow the issuer the option to
convert the increasing rate of interest to a fixed rate under such terms,
conditions, and limitations as are described in each issue's prospectus. FIXED
RATE DEBT OBLIGATIONS The Fund will also invest in fixed rate securities,
including fixed rate securities with short-term characteristics. Fixed rate
securities with short-term characteristics are long-term debt obligations but
are treated in the market as having short maturities because call features of
the securities may make them callable within a short period of time. A fixed
rate security with short-term characteristics would include a fixed income
security priced close to call or redemption price or a fixed income security
approaching maturity, where the expectation of call or redemption is high. Fixed
rate securities tend to exhibit more price volatility during times of rising or
falling interest rates than securities with floating rates of interest. This is
because floating rate securities, as described above, behave like short-term
instruments in that the rate of interest they pay is subject to periodic
adjustments based on a designated interest rate index. Fixed rate securities pay
a fixed rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates, the value of a fixed rate security is
likely to fall. Fixed rate securities with short-term characteristics are not
subject to the same price volatility as fixed rate securities without such
characteristics. Therefore, they behave more like floating rate securities with
respect to price volatility. VARIABLE RATE DEMAND NOTES Variable rate demand
notes are long-term debt instruments that have variable or floating interest
rates and provide the Fund with the right to tender the security for repurchase
at its stated principal amount plus accrued interest. Such securities typically
bear interest at a rate that is intended to cause the securities to trade at
par. The interest rate may float or be adjusted at regular intervals (ranging
from daily to annually), and is normally based on a published interest rate or
interest rate index. Many variable rate demand notes allow the Fund to demand
the repurchase of the security on not more than seven days prior notice. Other
notes only permit the Fund to tender the security at the time of each interest
rate adjustment or at other fixed intervals. See "Demand Features." U.S.
GOVERNMENT SECURITIES The Fund may invest in U.S. government securities, which
generally include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes, and bonds) and obligations (including mortgage-backed securities,
bonds, notes and discount notes) issued or guaranteed by the following U.S.
government agencies or instrumentalities: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Farmers Home Administration; Federal Home Loan Banks; Federal Home Loan Mortgage
Corporation; Federal National Mortgage Association; Government National Mortgage
Association; and Student Loan Marketing Association. These securities are backed
by: the full faith and credit of the U.S. Treasury; the issuer's right to borrow
an amount limited to a specific line of credit from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. Examples of agencies and instrumentalities which are
permissible investments which may not always receive financial support from the
U.S. government are: Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives; Federal Home Loan
Banks; Federal National Mortgage Association; Student Loan Marketing
Association; and Federal Home Loan Mortgage Corporation. MORTGAGE-BACKED
SECURITIES Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. There are currently four basic types of mortgage-backed
securities: (i) those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as Government National Mortgage Association
("Ginnie Mae"), the Federal National Mortgage Association ("Fannie Mae") and
Federal Home Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; (iii) those issued by private issuers that
represent an interest in or are collateralized by whole loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement; and (iv) privately issued securities which are
collateralized by pools of mortgages in which each mortgage is guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
government. The privately issued mortgage-related securities provide for a
periodic payment consisting of both interest and/or principal. The interest
portion of these payments will be distributed by the Fund as income, and the
capital portion will be reinvested. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests include, but are not limited
to, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac and are
actively traded. The underlying mortgages which collateralize ARMS issued by
Ginnie Mae are fully guaranteed by the Federal Housing Administration or
Veterans Administration, while those collateralizing ARMS issued by Fannie Mae
or Freddie Mac are typically conventional residential mortgages conforming to
strict underwriting size and maturity constraints. ARMS may also be
collateralized by whole loans or private pass-through securities. COLLATERALIZED
MORTGAGE OBLIGATIONS ("CMOS") CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but may be
collateralized by whole loans or private pass-through securities. CMOs may have
fixed or floating rates of interest. The Fund may invest in certain CMOs which
are issued by private entities such as investment banking firms and companies
related to the construction industry. The CMOs in which the Fund may invest may
be: (i) securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) securities which are collateralized
by pools of mortgages in which payment of principal and interest is guaranteed
by the issuer and such guarantee is collateralized by U.S. government
securities; or (iii) other securities in which the proceeds of the issuance are
invested in mortgage-backed securities and payment of the principal and interest
is supported by the credit of an agency or instrumentality of the U.S.
government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") REMICs are
offerings of multiple class mortgage-backed securities which qualify and elect
treatment as such under provisions of the Internal Revenue Code, as amended.
Issuers of REMICs may take several forms, such as trusts, partnerships,
corporations, associations, or segregated pools of mortgages. Once REMIC status
is elected and obtained, the entity is not subject to federal income taxation.
Instead, income is passed through the entity and is taxed to the person or
persons who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests," some of which may offer adjustable rates of
interest, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured principally by real property. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee. INVESTMENT RISKS
OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Mortgage-backed and asset-backed
securities generally pay back principal and interest over the life of the
security. At the time the Fund reinvests the payments and any unscheduled
prepayments of principal are received, the Fund may receive a rate of interest
which is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on many types of
asset-backed securities. While mortgage-backed securities generally entail less
risk of a decline during periods of rapidly rising interest rates,
mortgage-backed securities may also have less potential for capital appreciation
than other similar investments (e.g., investments with comparable maturities)
because as interest rates decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal payments may result in
some loss of a holder's principal investment to the extent of the premium paid.
Conversely, if mortgage-backed securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal would
increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. Asset-backed securities present certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities backed
by motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. FOREIGN SECURITIES The Fund may invest in foreign securities.
Foreign securities do not include American Depository Receipts, but do include
foreign securities not publicly traded in the United States. Investments in
foreign securities involve special risks that differ from those associated with
investments in domestic securities. The Fund may invest more than 10% in foreign
securities. RISKS The risks associated with investments in foreign securities
relate to political and economic developments abroad, as well as those that
result from the differences between the regulation of domestic securities and
issuers and foreign securities and issuers. These risks may include, but are not
limited to, expropriation, confiscatory taxation, currency fluctuations,
withholding taxes on interest, limitations on the use or transfer of assets,
political or social instability, ability to obtain or enforce court judgments
abroad and adverse diplomatic developments. Moreover, individual foreign
economies may differ favorably or unfavorably from the domestic economy in such
respects as growth of gross national product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include: less publicly available
information about foreign issuers; credit risks associated with certain foreign
governments; the lack of uniform financial accounting standards applicable to
foreign issuers; less readily available market quotations on foreign issues; the
likelihood that securities of foreign issuers may be less liquid or more
volatile; generally higher foreign brokerage commissions; and unreliable mail
service between countries. CURRENCY RISKS Foreign securities may be denominated
in foreign currencies. Therefore, the value in U.S. dollars of the Fund's assets
and income may be affected by changes in exchange rates and regulations.
Although the Fund values its assets daily in U.S. dollars, it will not convert
its holdings of foreign currencies to U.S. dollars daily. When the Fund converts
its holdings to another currency, it may incur conversion costs. Foreign
exchange dealers realize a profit on the difference between the prices at which
they buy and sell currencies. The Fund will engage in foreign currency exchange
transactions in connection with its investments in foreign securities. The Fund
will conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies. FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. When the Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency, it may want to establish the
U.S. dollar cost or proceeds, as the case may be. By entering into a forward
contract in U.S. dollars for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction, the Fund attempts to
protect itself against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the U.S. dollar and
such foreign currency. However, this tends to limit potential gains which might
result from a positive change in such currency relationships. The Fund will not
enter into forward foreign currency exchange contracts or maintain a net
exposure in such contracts where the Fund would be obligated to deliver an
amount of foreign currency in excess of the value of the Fund's securities or
other assets denominated in that currency or denominated in a currency or
currencies that the adviser believes will reflect a high degree of correlation
with the currency with regard to price movements. The Fund generally will not
enter into forward foreign currency exchange contracts with a term longer than
one year. STRIPPED MORTGAGE-BACKED SECURITIES

The Fund may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are derivative multi-class securities which may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, such as savings associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing organizations. The market volatility of stripped
mortgage-backed securities tends to be greater than the market volatility of the
other types of mortgage-related securities in which the Fund invests.
Principal-only stripped mortgage-backed securities are used primarily to hedge
against interest rate risk to the capital assets of the Fund in a changing
interest rate environment. A principal-only investor is assured of receiving
cash flows in the amount of principal purchased -- the unknown is when the cash
flows will be received. Interest-only investments over the life of the
investment horizon may not receive cash flows in the amount of the original
investment.

MUNICIPAL SECURITIES
Municipal securities are generally issued to finance public works, such as
airports, bridges, highways, housing, hospitals, mass transportation projects,
schools, streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Municipal securities
include industrial development bonds issued by or on behalf of public
authorities to provide financing aid to acquire sites or construct and equip
facilities for privately or publicly owned corporations. The availability of
this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment. The two principal
classifications of municipal securities are "general obligation" and "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith and credit and taxing power for the payment of principal and interest.
Interest on and principal of revenue bonds, however, are payable only from the
revenue generated by the facility financed by the bond or other specified
sources of revenue. Revenue bonds do not represent a pledge of credit or create
any debt of or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as revenue
bonds. CONVERTIBLE SECURITIES Convertible securities include a spectrum of
securities which can be exchanged for or converted into common stock.
Convertible securities may include, but are not limited to: convertible bonds or
debentures; convertible preferred stock; units consisting of usable bonds and
warrants; or securities which can or otherwise limit returns to the convertible
security holder, such as DECS (Dividend Enhanced Convertible Stock, or Debt
Exchangeable for Common Stock when issued as a debt security.), LYONS (Liquid
Yield Option Notes which are corporate bonds that are purchased at prices below
par with no coupons and are convertible into stock), PERCS (Preferred Equity
Redemption Cumulative Stock which are an equity issue that pays a high cash
dividend, has a cap price and mandatory conversion to common stock at maturity),
and PRIDES (Preferred Redeemable Increased Dividend Securities, which are
essentially the same as DECS; the difference is little more than who initially
underwrites the issue.).

The Fund may also write (sell) or purchase put and call options on financial and
foreign currency futures contracts as a hedge to attempt to protect securities
in its portfolio against decreases in value. When the Fund writes a call or put
option on a futures contract, it is undertaking the obligation of selling or
purchasing, respectively, a futures contract at a fixed price at any time during
a specified period if the option is exercised. Conversely, as purchaser of a
call or put option on a futures contract, the Fund is entitled (but not
obligated) to buy or sell, respectively, a futures contract at the fixed price
during the life of the option.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses futures and options on futures as hedging devices, there is a risk that the
prices of the instruments subject to the futures contracts may not correlate
perfectly with the prices of the instruments in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio's holdings to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or extent of
market factors such as interest rate movements. In these events, the Fund may
lose money on the futures contract or option. It is not certain that a secondary
market for positions in futures contracts or for options will exist at all
times. Although the investment adviser will consider liquidity before entering
into options transactions, there is no assurance that a liquid secondary market
on an exchange or otherwise will exist for any particular futures contract or
option at any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market. HIGH-YIELD DEBT
OBLIGATIONS The Fund may invest up to but not including 35% of its total assets
in debt securities that are not investment-grade but are rated BB or lower by an
NRSRO (or, if unrated, determined by the adviser to be of comparable quality).
Some of these securities may involve equity characteristics. The Fund may invest
in equity securities, including unit offerings which combine fixed rate
securities and common stock or common stock equivalents such as warrants, rights
and options. Securities which are rated BB or lower by a nationally recognized
statistical rating organization are considered speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligations. These securities are commonly referred to as "junk bonds." A
description of the rating categories for the permissible investments are
contained in the Appendix to this Prospectus.

The Fund may invest in the High-Yield Bond Portfolio, a portfolio of Federated
Core Trust, as an efficient means of investing in high-yield debt obligations.
Federated Core Trust is a registered investment company advised by Federated
Research Corp., an affiliate of the Fund's adviser. The High-Yield Bond
Portfolio's investment objective is to seek high current income and its primary
investment policy is to invest in lower- rated, high-yield debt securities. The
High-Yield Bond Portfolio currently is not charged an advisory fee and is sold
without any sales charge. The High-Yield Bond Portfolio may incur expenses for
administrative and accounting services. The Fund's adviser anticipates that the
High-Yield Bond Portfolio will provide the Fund broad diversity and exposure to
all aspects of the high-yield bond sector of the market while at the same time
providing greater liquidity than if high-yield debt obligations were purchased
separately for the Fund. The Fund will be deemed to own a pro rata portion of
each investment of the High-Yield Bond Portfolio.

RISKS
Debt obligations that are not determined to be investment grade are high-yield,
high-risk bonds, typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a greater
extent than investment-grade bonds, lower-rated bonds tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds may be more
difficult to dispose of or to value than higher-rated, lower-yielding bonds. The
Fund's investment adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Fund will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that the Fund invests in securities that could be
characterized as derivatives, it will only do so in a manner consistent with its
investment objective, policies and limitations. AVERAGE PORTFOLIO DURATION
Although the Fund will not maintain a stable net asset value, the adviser will
seek to limit, to the extent consistent with the Fund's investment objective of
total return, the magnitude of fluctuations in the Fund's net asset value by
limiting the dollar-weighted average duration of the Fund's portfolio. Duration
is a commonly used measure of the potential volatility of the price of a debt
security, or the aggregate market value of a portfolio of debt securities, prior
to maturity. Securities with shorter durations generally have less volatile
prices than securities of comparable quality with longer durations. The Fund
should be expected to maintain a higher average duration during periods of lower
expected market volatility, and a lower average duration during periods of
higher expected market volatility. In any event, the Fund's dollar-weighted
average duration will not exceed three years. TOTAL RETURN The "total return"
sought by the Fund will consist of interest and dividends from underlying
securities, capital appreciation reflected in unrealized increases in value of
portfolio securities (realized by the shareholder only upon selling shares) or
realized from the purchase and sale of securities, and successful use of futures
and options, or gains from favorable changes in foreign currency exchange rates.
Generally, over the long term, the total return obtained by a portfolio
investing primarily in fixed income securities is not expected to be as great as
that obtained by a portfolio that invests primarily in equity securities. At the
same time, the market risk and price volatility of a fixed income portfolio is
expected to be less than that of an equity portfolio. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES. The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned at all times.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause the Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. The Fund may dispose of a commitment prior to
settlement if the adviser deems it appropriate to do so. In addition, the Fund
may enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. The Fund may realize short-term profits or
losses upon the sale of such commitments.

NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Institutional Shares may exceed that of Shares due to the
variance in daily net income realized by each class. Such variance will reflect
only accrued net income to which the shareholders of a particular class are
entitled.

INVESTING IN INSTITUTIONAL SERVICE SHARES

SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request. BY WIRE

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

BY MAIL

To purchase shares of the Fund by mail, send a check made payable to Federated
Total Return Limited Duration Fund -- Institutional Service Shares to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
Orders by mail are considered received when payment by check is converted by
State Street Bank & Trust Company ("State Street Bank") into federal funds. This
is normally the next business day after State Street Bank receives the check.

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

DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares of
the Fund on payment dates at net asset value, unless cash payments are requested
by shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds. Shares
earn dividends through the business day that proper redemption instructions are
received by State Street Bank. REDEEMING INSTITUTIONAL SERVICE SHARES The Fund
redeems Shares at their net asset value next determined after the Fund receives
the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request. TELEPHONE REDEMPTION Shareholders may redeem
their Shares by telephoning the Fund before 4:00 p.m. (Eastern time). The
proceeds will normally be wired the following business day, but in no event more
than seven days, to the shareholder's account at a domestic commercial bank that
is a member of the Federal Reserve System. Proceeds from redemption requests
received on holidays when wire transfers are restricted will be wired the
following business day. Questions about telephone redemptions on days when wire
transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified. An authorization
form permitting the Fund to accept telephone requests must first be completed.
Authorization forms and information on this service are available from Federated
Securities Corp. Telephone redemption instructions may be recorded. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 2266-8600. If
share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above. The
written request should state: Federated Limited Duration Fund -- Institutional
Service Shares; the account name as registered with the Fund; the account
number; and the number of Shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the Shares are
registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed. Shareholders requesting a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record must have their
signatures guaranteed by a commercial or savings bank, trust company or savings
association whose deposits are insured by an organization which is administered
by the Federal Deposit Insurance Corporation; a member firm of a domestic stock
exchange; or any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934. The Fund does not accept signatures guaranteed
by a notary public. ACCOUNTS WITH LOW BALANCES Due to the high cost of
maintaining accounts with low balances, the Fund may redeem Shares in any
account, and pay the proceeds to the shareholder, if the account balance falls
below a required minimum value of $25,000 due to shareholder redemptions. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Fund's net asset value. Before Shares are redeemed to close an
account, the shareholder is notified in writing and allowed 30 days to purchase
additional shares to meet the minimum requirement.

FUND INFORMATION

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. ADVISER'S BACKGROUND Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors. Federated Management and
other subsidiaries of Federated Investors serve as investment advisers to a
number of investment companies and private accounts. Certain other subsidiaries
also provide administrative services to a number of investment companies. With
over $110 billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1996, Federated Investors
is one of the largest mutual fund investment managers in the United States. With
more than 2,000 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,500 financial institutions nationwide. Both the Corporation and the
adviser have adopted strict codes of ethics governing the conduct of all
employees who manage the Fund and its portfolio securities. These codes
recognize that such persons owe a fiduciary duty to the Fund's shareholders and
must place the interests of shareholders ahead of the employees' own interests.
Among other things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in securities
being purchased or sold, or being considered for purchase or sale, by the Fund;
prohibit purchasing securities in initial public offerings; and prohibit taking
profits on securities held for less than sixty days. Violations of the codes are
subject to review by the Directors and could result in severe penalties.
PORTFOLIO MANAGER'S BACKGROUND

Randall S. Bauer has been a portfolio manager of the Fund since
inception. Mr. Bauer joined Federated Investors in 1989 and has been a
Vice President of the Fund's investment adviser and Federated Research
Corp. since 1994. Mr. Bauer was an Assistant Vice President of the Fund's
investment adviser and Federated Research Corp. from 1989 to 1993. Mr.
Bauer is a Chartered Financial Analyst and received his M.B.A. in Finance
from Pennsylvania State University.
Robert K. Kinsey has been a portfolio manager of the Fund since May 1997.
Mr. Kinsey joined Federated in 1995 as a Vice President of a Federated
advisory subsidiary. He has been a Vice President of the Fund's adviser
and Federated Research Corp. since March, 1997. From 1992 to 1995, he
served as a Portfolio Manager for Harris Investment Management Co., Inc.
Mr. Kinsey received his M.B.A. in Finance from U.C.L.A.
Mark E. Durbiano has been the portfolio manager for the high yield
corporate bonds asset category of the Fund since inception. Mr. Durbiano
joined Federated Investors in 1982 and has been a Senior Vice President
of the Fund's adviser and Federated Research Corp. since January 1996.
Mr. Durbiano was a Vice President of the Fund's adviser and Federated
Research Corp. from 1988 through 1995. Mr. Durbiano is a Chartered
Financial Analyst and received his M.B.A. in Finance from the University
of Pittsburgh.

DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES
Federated Securities Corp. is the principal distributor for Institutional
Service Shares. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment
companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), the distributor may be paid a fee
by the Fund in an amount computed at an annual rate of 0.25% of the average
daily net asset value of Institutional Service Shares of the Fund. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers.

The Plan is a compensation-type plan. As such, the Fund makes no payments to the
distributor except as described above. Therefore, the Fund does not pay for
unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Fund
under the Plan. In addition, the Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to .25% of the average
daily net asset value of Shares to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS In addition to payments made
pursuant to the Plan and Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or shareholder services.
The support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Fund' s investment adviser or its affiliates.

ADMINISTRATION OF THE FUND

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

AVERAGE AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE
FEE FEDERATED FUNDS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million

Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Anbee & Company, who was the record owner of 267,780 (94.49%) of the
Institutional Service Shares and Sunbank & Co., who was the record owner of
250,872 (31.31%) and First Mar & Co., who was the record owner of 234,049
(29.21%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.

PERFORMANCE INFORMATION
From time to time, the Fund advertises its total return and yield. Total return
represents the change, over a specified period of time, in the value of an
investment in the Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage. The yield of the Fund is calculated
by dividing the net investment income per share (as defined by the Securities
and Exchange Commission) earned by the Fund over a thirty-day period by the
maximum offering price per share of the Fund on the last day of the period. This
number is then annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders. Shares
are sold without any sales charge or other similar non-recurring charges. Total
return and yield will be calculated separately for Institutional Service Shares
and Institutional Shares. From time to time, advertisements for the Fund's
Institutional Service Shares may refer to ratings, rankings, and other
information in certain financial publications and/or compare the Fund's
Institutional Service Shares performance to certain indices.

OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Shares which
are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $100,000 over a 90-day period.
Institutional Shares are distributed with no 12b-1 Plan. Institutional Shares
and Institutional Service Shares are subject to certain of the same expenses.
Expense differences, however, between Institutional Shares and Institutional
Service Shares may affect the performance of each class. To obtain more
information and a prospectus for Institutional Shares, investors may call
1-800-341-7400.

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding throughout the period) Reference is made to the Report
of Ernst & Young LLP, Independent Auditors on page 30.

PORTFOLIO OF INVESTMENTS
FEDERATED LIMITED DURATION FUND
SEPTEMBER 30, 1997

IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)

<S> <C> <C> <C> <C> <C>
Contracts Sold:
Canadian Dollar 11/25/97 361,449 $262,359 $260,786 ($1,573)
</TABLE>

</TABLE>
(a) For the period from October 1, 1996 (start of performance) to September 30,
1997.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees of
Federated Limited Duration Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Limited Duration Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. We conducted
our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1997,
by correspondence with the custodian and brokers or other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. In our opinion, the
financial statements and financial highlights referred to above present fairly,
in all material respects, the financial position of Federated Limited Duration
Fund, September 30, 1997, the results of its operations, the changes in its net
assets, and the financial highlights for the year then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997

APPENDIX
STANDARD AND POOR'S RATINGS GROUP LONG-TERM DEBT RATINGS 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 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 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. CI -- The
rating CI is reserved for income bonds on which no interest is being paid. D --
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS 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 some time 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 INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS 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 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 in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery. NR -- NR indicates that Fitch does not rate
the specific issue. Plus (+) or Minus (-): Plus or minus signs are used with a
rating symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the AAA category. DUFF
& PHELPS CREDIT RATING CO. AAA -- Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-free U.S. Treasury debt. AA+,
AA, AA- -- High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions. A+, A,
A- -- Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress. BBB+, BBB, BBB- --
Below-average protection factors but still considered sufficient for prudent
investment. Considerable variability in risk during economic cycles. BB+, BB,
BB- -- Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category. B+, B, B- -- Below investment grade and
possessing risk that obligation will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles, industry conditions
and/or company fortunes. Potential exists for frequent changes in the rating
within this category or into a higher or lower rating grade. CCC -- Well below
investment-grade securities. Considerable uncertainty exists as to timely
payment of principal, interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments. DD -- Defaulted debt
obligations. Issuer failed to meet scheduled principal and/or interest payments.
DP -- Preferred stock with dividend averages. MOODY'S INVESTORS SERVICE, INC.
COMMERCIAL PAPER RATINGS Prime-1 -- Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: * Leading market positions in well established
industries. * High rates of return on funds employed. * Conservative
capitalization structure with moderate reliance on debt and ample asset
protection. * Broad margins in earning coverage of fixed financial charges and
high internal cash generation. * Well established access to a range of financial
markets and assured sources of alternate liquidity. Prime-2 -- Issuers rated
Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. STANDARD AND
POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS A-1 -- This designation indicates
that the degree of safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation. A-2 -- Capacity for timely payment on issues with
this designation is satisfactory. However, the relative degree of safety is not
as high as for issues designated A-1. FITCH INVESTORS SERVICE, INC. COMMERCIAL
PAPER RATING DEFINITIONS Fitch-1 -- (Highest Grade) Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment. Fitch-2 -- (Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.

[LOGO] FEDERATED INVESTORS
FEDERATED LIMITED DURATION FUND

(A portfolio of Federated Total Return Series, Inc.)

Institutional Service Shares

PROSPECTUS
NOVEMBER 30, 1997

A Diversified Portfolio of Federated Total Return Series, Inc.
an Open-End, Management Investment Company

FEDERATED LIMITED DURATION FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com

Cusip 31428Q309

G01744-02-SS (11/97)

[RECYCLE LOGO]

FEDERATED LIMITED DURATION FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
prospectus(es) of Federated Limited Duration Fund (the "Fund"), a portfolio
of Federated Total Return Series, Inc. (the "Corporation") dated November
30, 1997. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.

FEDERATED LIMITED DURATION FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000

Statement dated November 30, 1997
[GRAPHIC OMITTED]

Cusip 31428Q408
Cusip 31428Q309
G01744-03 (11/97)

<PAGE>

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOS") 1
Real Estate Mortgage Investment Conduits ("REMICS") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Convertible Securities 3
Foreign Bank Instruments 3
Futures and Options Transactions 3
Medium Term Notes and Deposit Notes 5
Weighted Average Portfolio Maturity 5
Weighted Average Portfolio Duration 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 6
Restricted and Illiquid Securities 7
Repurchase Agreements 7
Reverse Repurchase Agreements 7
Investing in Securities of Other Investment Companies 7
Portfolio Turnover 7

INVESTMENT LIMITATIONS 8

FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT 9
Fund Ownership 13
Directors' Compensation 14
Director Liability 14

INVESTMENT ADVISORY SERVICES 15
Adviser to the Fund 15
Advisory Fees 15

OTHER SERVICES 15
Fund Administration 15
Custodian and Portfolio Accountant 15
Transfer Agent 15
Independent Auditors 15

BROKERAGE TRANSACTIONS 15

PURCHASING SHARES 16

DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY)
AND SHAREHOLDER SERVICES 16
- -------------------------------------------------------

DETERMINING NET ASSET VALUE 17
- ------------------------------------------------------
Determining Market Value of Securities17
Valuing Municipal Bonds 17
Use of Amortized Cost 17

REDEEMING SHARES 17
- ------------------------------------------------------
Redemption in Kind 18

TAX STATUS 18
- ------------------------------------------------------
The Fund's Tax Status 18
Shareholders' Tax Status 18

TOTAL RETURN 18
- ------------------------------------------------------

YIELD 19
- ------------------------------------------------------

PERFORMANCE COMPARISONS 19
- ------------------------------------------------------
Economic and Market Information 20

ABOUT FEDERATED INVESTORS 20
- ------------------------------------------------------
Mutual Fund Market 20

<PAGE>

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio of Federated Total Return Series, Inc. (the
"Corporation"). The Corporation was incorporated under the laws of the State of
Maryland on October 11, 1993. On March 21, 1995, the name of the Corporation was
changed from "Insight Institutional Series, Inc." to "Federated Total Return
Series, Inc." On May 14, 1997 the Board of Directors ("Directors") approved the
Fund's name change from Federated Total Return Limited Duration Fund to
Federated Limited Duration Fund. The Articles of Incorporation permit the
Corporation to offer separate portfolios and classes of shares. Shares of the
Fund are offered in two classes, known as Institutional Shares and Institutional
Service Shares (individually and collectively referred to as "Shares," as the
context may require). This Statement of Additional Information relates to the
above-mentioned Shares of the Fund.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. The investment
policies stated below may be changed by the Directors without shareholder
approval. Shareholders will be notified before any material change in the
investment policies becomes effective.

TYPES OF INVESTMENTS

The Fund pursues its investment objective by investing primarily in a
diversified portfolio of fixed income securities. Under normal circumstances,
the Fund will invest at least 65% of the value of its total assets in domestic
investment grade debt securities. The Fund's weighted- average portfolio
duration will at all times be limited to three years or less.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")

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

<PAGE>

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

(3) The classes of securities are retired sequentially. All principal payments
are directed first to the shortest-maturity class (or A bond). When those
securities are completely retired, all principal payments are then directed to
the next shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off. Because the cash flow is distributed
sequentially instead of pro rata, as with pass-through securities, the cash
flows and average lives of CMOs are more predictable, and there is a period of
time during which the investors in the longer-maturity classes receive no
principal paydowns. The interest portion of these payments is distributed by the
Fund as income, and the capital portion is reinvested.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")

INTEREST-ONLY AND PRINCIPAL-ONLY INVESTMENTS

PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES

RESETS OF INTEREST

<PAGE>

To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, ARMS, which use indices that lag
changes in market rates should experience greater price volatility than
adjustable rate mortgage securities that closely mirror the market.

CAPS AND FLOORS

CONVERTIBLE SECURITIES

FOREIGN BANK INSTRUMENTS

Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Europaper are subject to
somewhat different risks than domestic obligations of domestic issuers. Examples
of these risks include international, economic and political developments,
foreign governmental restrictions that may adversely affect the payment of
principal or interest, foreign withholdings or other taxes on interest income,
difficulties in obtaining or enforcing a judgment against the issuing bank, and
the possible impact of interruptions of the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping and the
public availability of information.
These factors will be carefully considered by the Fund's adviser in selecting
investments for the Fund.

FUTURES AND OPTIONS TRANSACTIONS

<PAGE>

FINANCIAL FUTURES CONTRACTS

PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS

The Fund may purchase listed put options on financial futures contracts.

CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS

<PAGE>

"MARGIN" IN FUTURES TRANSACTIONS

The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.

PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES

WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES

MEDIUM TERM NOTES AND DEPOSIT NOTES

WEIGHTED AVERAGE PORTFOLIO MATURITY

The Fund will determine its dollar-weighted average portfolio maturity by
assigning a `weight" to each portfolio security based upon the pro rata market
value of such portfolio security in comparison to the market value of the entire
portfolio. The remaining maturity to each portfolio security is then multiplied
by its weight, and the results are added together to determine the weighted
average maturity of the portfolio. For purposes of calculating its
dollar-weighted average portfolio maturity, the Fund will treat (a) asset-backed
securites as having a maturity equal to their estimated weighted-average
maturity and (b) variable and floating rate instruments as having a remaining
maturity commensurate with the period remaining until the next scheduled
adjustment to the instrument's interest rate. The average maturity of
asset-backed securities will be calculated based upon assumptions established by
the investment adviser as to the probable amount of the principal prepayments
weighted by the period until such prepayments are expected to be received.

<PAGE>

WEIGHTED AVERAGE PORTFOLIO DURATION

Duration = PVCF1(1) + PVCF2(2) + PVCF3(3) + ... + PVCFn(n)

PVTCF PVTCF PVTCF PVTCF

where

</TABLE>

PVCTFt = the present value of the cash flow in period t discounted at
the prevailing yield-to-maturity

t = the period when the cash flow is received

n = remaining number of periods until maturity

PVTCF = total present value of the cash flow from the bond where the
present value is determined using the prevailing
yield-to-maturity.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

LENDING OF PORTFOLIO SECURITIES

<PAGE>

RESTRICTED AND ILLIQUID SECURITIES

The ability of the Directors to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non- exclusive safe harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities to the Directors. The
Directors consider the following criteria in determining the liquidity of
certain restricted securities:

o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace trades.

REPURCHASE AGREEMENTS

REVERSE REPURCHASE AGREEMENTS

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
PORTFOLIO TURNOVER

<PAGE>

INVESTMENT LIMITATIONS

The following limitations are fundamental [except that no investment limitation
of the Fund shall prevent the Fund from investing substantially all of its
assets (except for assets which are not considered "investment securities"under
the Investment Company Act of 1940, or assets exempted by the Securities and
Exchange Commission) in an open-end investment company with substantially the
same investment objectives]:

SELLING SHORT OR BUYING ON MARGIN

ISSUING SENIOR SECURITIES AND BORROWING MONEY

PLEDGING ASSETS

DIVERSIFICATION OF INVESTMENTS

INVESTING IN REAL ESTATE

INVESTING IN COMMODITIES

UNDERWRITING

<PAGE>

LENDING CASH OR SECURITIES

CONCENTRATION OF INVESTMENTS

The Fund will not invest 25% or more of the value of its total assets in
any one industry (other than securities issued by the U.S. government, its
agencies or instrumentalities).

INVESTING IN ILLIQUID SECURITIES

The Fund does not expect to borrow money, pledge securities or engage in reverse
repurchase agreements during the coming fiscal year.

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
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."

FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.

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

Chairman and Director

<PAGE>

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934

Director

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

Director

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

Director

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

Executive Vice President and Director

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

Director

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

<PAGE>

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

Director

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

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

Director

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

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

Director

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

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

Director

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

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

Director

<PAGE>

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

Director

Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.

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

President

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

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

Executive Vice President

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

Executive Vice President , Secretary and Treasurer

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

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

<PAGE>

FUND OWNERSHIP

Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.

As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Anbee & Company, Aurora, IL
owned 42,384 (5.29%); Sunbank and Co., Sunbury, PA owned 250,872 (31.31%); Grand
Old Co., Zanesville, OH owned 124,003 (15.48%); First Mar & Co., Marquette, MI
owned 234,049 (29.21%); and Soy Capital Bank & Trust, Decatur, IL owned 68,677
(8.57%). As of October 28, 1997 the following shareholders of record owned 5% or
more of the outstanding Institutional Service Shares of the Fund: Anbee &
Company, Aurora, IL owned 267,780 (94.49%).

<PAGE>

DIRECTORS' COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION* FROM FUND COMPLEX +

John F. Donahue, $ 0 $0 for the Corporation and
Chairman and Director 54 other investment companies in the Fund Complex

Thomas G. Bigley $1,004 $86,331 for the Corporation and
Director 54 other investment companies in the Fund Complex

John T. Conroy, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

William J. Copeland, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

J. Christopher Donahue, $ 0 $0 for the Corporation and
Executive Vice President 16 other investment companies in the Fund Complex
andDirector

James E. Dowd, $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

Lawrence D. Ellis, M.D., $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

Edward L. Flaherty, Jr., $1,105 $115,760 for the Corporation and
Director 54 other investment companies in the Fund Complex

Peter E. Madden, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

John E. Murray, Jr., $1,004 $104,898 for the Corporationand
Director 54 other investment companies in the Fund Complex

Wesley W. Posvar, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

Marjorie P. Smuts, $1,004 $104,898 for the Corporation and
Director 54 other investment companies in the Fund Complex

</TABLE>

*Information is furnished for the fiscal year ended September 30, 1997 and the
Corporation was comprised of four portfolios.

+The information is provided for the last calendar year.
DIRECTOR LIABILITY

<PAGE>

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

ADVISORY FEES

For its advisory services, Federated Management receives an annual investment
advisory fee as described in the prospectus. For the period from October 1, 1996
(start of performance) to September 30, 1997, the Fund's Adviser earned $24,589,
of which $22,579 was voluntarily waived.

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from October 1, 1996, (start of performance) to
September 30, 1997, the Fund incurred costs for administrative services of
$155,000, none of which was voluntarily waived.

CUSTODIAN AND PORTFOLIO ACCOUNTANT

TRANSFER AGENT

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.

BROKERAGE TRANSACTIONS

<PAGE>

Research services provided by brokers and dealers may be used by the adviser or
by affiliates in advising the Fund and other accounts. To the extent that
receipt of these services may supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the period from October 1, 1996 (start of
performance) to September 30, 1997, the Fund paid no brokerage commissions.

PURCHASING SHARES

DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations and addresses. By
adopting the Plan, the Directors expect that the Fund will be able to achieve a
more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales.

<PAGE>

For the period from October 1, 1996 (start of performance) to September 30,
1997, a payment in the amount of $1,798 were made to financial institutions by
Institutional Service Shares pursuant to the Distribution Plan, of which $1,442
was voluntarily waived. In addition, for the period from October 1, 1996 (start
of performance) to September 30, 1997, payments in the amount of $13,570 and
$1,799 were made pursuant to the Shareholder Services Agreement for
Institutional Shares and Institutional Service Shares, respectively, of which
$13,570 and $44, respectively, were voluntarily waived.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's securities, other than options, are determined as
follows:

o as provided by an independent pricing service;

o for short-term obligations, according to the mean bid and asked prices, as
furnished by an independent pricing service, or for short- term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost unless the Directors determine this is not fair value; or

o at fair value as determined in good faith by the Directors.

VALUING MUNICIPAL BONDS

USE OF AMORTIZED COST

REDEEMING SHARES

<PAGE>

REDEMPTION IN KIND

TAX STATUS

THE FUND'S TAX STATUS

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

o invest in securities within certain statutory limits; and

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

SHAREHOLDERS' TAX STATUS

CAPITAL GAINS

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held
the Fund shares.

TOTAL RETURN

The Fund's average annual total returns for the one-year period from ended
September 30, 1997, were 8.27% for Institutional Shares and 8.10% for
Institutional Service Shares.

<PAGE>

YIELD

The yield of the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the offering price per share of the Fund on the last
day of the period. This value is annualized using semi- annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by the Fund because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. To the extent that financial institutions
and broker/dealers charge fees in connection with services provided in
conjunction with an investment in the Fund, performance will be reduced for
those shareholders paying those fees.

The Fund's yields for the thirty-day period ended September 30, 1997, were 6.91%
for Institutional Shares and 6.60% for Institutional Service Shares.

PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:

o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

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

o changes in the Fund expenses; and

o various other factors.

o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking
short-term U.S. government securities between 1 and 2.99 years. The index
is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.

o MERRILL LYNCH 1-3 YEAR CORPORATE INDEX is a market capitalization weighted
index including fixed-coupon domestic investment grade corporate bonds with
at least $100 million par amount outstanding. Both interest and price return
are calculated daily based on an accrued schedule and trader pricing.
Quality range is BBB3-AAA. Maturities for all bonds are more than one year
and less than three years. Yankees, Canadians, and all Structured Notes are
excluded. Advertisements and other sales literature for the Fund may quote
total returns which are calculated on non-standardized base periods. These
total returns represent the historic change in the value of an investment in
the Fund based on monthly reinvestment of dividends over a specified period
of time.

oLEHMAN BROTHERS HIGH YIELD INDEX covers the universe of fixed rate, publicly
issued, noninvestment grade debt registered with the SEC. All bonds included
in the High Yield Index must be dollar-denominated and nonconvertible and
have at least one year remaining to maturity and an outstanding par value of
at least $100 million. Generally securities must be rated Ba1 or lower by
Moody's Investors Service, including defaulted issues. If no Moody's rating
is available, bonds must be rated BB+ or lower by S&P; and if no S&P rating
is available, bonds must be rated below investment grade by Fitch Investor's
Service. A small number of unrated bonds is included in the index; to be
eligible they must have previously held a high yield rating or have been
associated with a high yield issuer, and must trade accordingly.

<PAGE>

ECONOMIC AND MARKET INFORMATION

Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
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 $3.5 trillion to the more than 6,000 funds available.

ABOUT FEDERATED INVESTORS

In the government sector, as of December 31, 1996, Federated Investors managed 9
mortgage-backed, 5 government/agency and 17 government money market mutual
funds, with assets approximating $6.3 billion, $1.7 billion and $23.6 billion,
respectively. Federated trades approximately $309 million in U.S. government and
mortgage-backed securities daily and places $17 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
nearly $30 billion in government funds within these maturity ranges.

MUTUAL FUND MARKET

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

<PAGE>

INSTITUTIONAL CLIENTS

BANK MARKETING

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

* Source: Investment Company Institute.

FEDERATED LIMITED DURATION FUND

MANAGEMENT DISCUSSION & ANALYSIS
Federated Limited Duration Fund represents a high quality, fixed income
portfolio combining the various fixed income asset classes. The fund primarily
invests in U.S. Treasury, government agency, and high quality corporate debt
securities. The fund may also allocate a percentage of assets in the high-yield
corporate and international bond sectors. While fixed income markets exhibited
significant directional volatility from month to month, the past year was a
positive one for high quality total return fixed income investors. For the
one-year period ended September 30, 1997, interest rates fell across the entire
maturity spectrum, initially rising in the first half of the period, then
falling in the latter half. Though the current economic expansion continues to
move forward, market participants appear to have lowered inflationary
expectations. These lower expectations provided much of the impetus for the
rally which occurred through the summer. With regard to sector performance,
investors were compensated for exposure to "spread" products. Mortgage-backed,
asset-backed, and investment-grade and high-yield corporate bonds all
outperformed comparable maturity Treasury securities. During the fiscal year
ended September 30, 1997, the fund generally maintained its largest exposure in
corporate bonds, attempting within that sector to obtain outperformance on a
security specific basis. Significant allocations were also made to
mortgage-backed and asset-backed securities in order to derive the
aforementioned benefit of spread products. Treasury and agency securities,
though utilized in the portfolio, consistently received the lowest allocation.
The fund's duration posture was generally neutral to just slightly under that of
the Merrill Lynch 1-3 Year Corporate Bond Index.* In short, a specific security
selection strategy was favored over interest rate anticipation. For the fiscal
year ended September 30, 1997, the fund produced a 8.27% total return for
Institutional Shares and a 8.10% total return for Institutional Service Shares**
relative to a 6.89% total return for the Merrill Lynch 1-3 Year Treasury Index*
and a 7.77% total return for the Merrill Lynch 1-3 Year Corporate Bond Index.*
The fund was able to add value relative to its government benchmark due to the
incremental income and relative price performance of spread securities.
Value-added relative to the Merrill Lynch 1-3 Year Corporate Bond Index was
achieved through a combination of sector and specific security selection. These
advantages were offset somewhat by the slightly defensive duration target. No
significant strategy changes are anticipated in the near term aside from a
general portfolio upgrading should the current seven year economic expansion
show signs of waning. * This index is unmanaged. ** 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.

FEDERATED LIMITED DURATION FUND
(Institutional Shares)
GROWTH OF $100,000 INVESTED IN FEDERATED LIMITED DURATION FUND
(INSTITUTIONAL SHARES)

The graph below illustrates the hypothetical investment of $100,000* in the
Federated Limited Duration Fund (Institutional Shares) (the "Fund") from October
1, 1996 (start of performance) to September 30, 1997 compared to the Merrill
Lynch 1-3 Year Treasury Index (ML13TRI)+, Merrill Lynch 1-3 Year Corporate Index
(ML13CI)+ and the Lipper Short Investment Grade Debt Funds Average (LSIGDA)++.

GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FLDF1.

CUMULATIVE TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Start of Performance (10/01/96) 8.27%

This report must be preceded or accompanied by the Fund's prospectus dated
November 30, 1997, and, together with financial statements contained therein,
constitutes the Fund's annual report.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The ML13TRI, ML13CI and the LSIGDA have been adjusted to
reflect reinvestment of dividends on securities in the indices and the
average.
+ The ML13TRI and the ML13CI are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The indices are unmanaged.
++ The LSIGDA represents the average of the total returns reported by all of the
mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However,
these total returns are reported net of expenses or other fees that the SEC
requires to be reflected in a fund's performance.

FEDERATED LIMITED DURATION FUND
(Institutional Service Shares)
GROWTH OF $25,000 INVESTED IN FEDERATED LIMITED DURATION FUND
(INSTITUTIONAL SERVICE SHARES)

The graph below illustrates the hypothetical investment of $25,000* in the
Federated Limited Duration Fund (Institutional Service Shares) (the "Fund") from
October 1, 1996 (start of performance) to September 30, 1997 compared to the
Merrill Lynch 1-3 Year Treasury Index (ML13TRI)+, Merrill Lynch 1-3 Year
Corporate Index (ML13CI)+ and the Lipper Short Investment Grade Debt Funds
Average (LSIGDA)++.

GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX FLDF2.

CUMULATIVE TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Start of Performance (10/01/96) 8.10%

Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate so when shares are redeemed, they may be
worth more or less than original cost. Mutual funds are not obligations of or
guaranteed by any bank and are not federally insured.

This report must be preceded or accompanied by the Fund's prospectus dated
November 30, 1997, and, together with financial statements contained therein,
constitutes the Fund's annual report.

[GRAPHIC]
FEDERATED INVESTORS
Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com

Cusip 31428Q309
Cusip 31428Q408
G01744-04 (11/97)

[RECYCLE LOGO]
RECYCLED PAPER

FEDERATED GOVERNMENT FUND

(A Portfolio of Federated Total Return Series, Inc.)

Institutional Shares

PROSPECTUS

The Institutional Shares of Federated Government Fund (the "Fund") offered by
this prospectus represent interests in a diversified investment portfolio of
Federated Total Return Series, Inc. (the "Corporation"), an open-end, management
investment company (a mutual fund).

The investment objective of the Fund is to provide total return. The Fund
pursues this investment objective by investing primarily in a portfolio of U.S.
government securities.

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 BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

Prospectus dated November 30, 1997

TABLE OF CONTENTS

Summary of Fund Expenses 1
Financial Highlights -- Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Portfolio Turnover 8
Hub and Spoke [registered trademark] Option 8
Net Asset Value 9
Investing in Institutional Shares 9
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 9
Confirmations and Account Statements 10
Dividends and Distributions 10
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Fund Information 11
Management of the Fund 11
Distribution of Institutional Shares 12
Administration of the Fund 12
Shareholder Information 13
Voting Rights 13
Tax Information 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 14
Financial Highlights -- Institutional Service Shares 15
Financial Statements 16
Report of Ernst & Young LLP, Independent Auditors 23

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.06%
12b-1 Fee None
Total Other Expenses 0.24%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses(3) 0.30%

</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.40%.
(2) Institutional Shares has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending September 30, 1998.
If Institutional Shares were paying or accruing the shareholder services
fee, Institutional Shares would be able to pay up to 0.25% of its average
daily net assets for the shareholder services fee. See "Fund Information."
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.00% for the fiscal year ended September 30, 1997
and would have been 12.25% absent the voluntary waiver of the management fee
and the voluntary reimbursement of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Shares of the Fund will
bear, either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Fund Information". Wire-transferred redemptions
of less than $5,000 may be subject to additional fees.

<TABLE>
EXAMPLE
- ------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $ 3
3 years $10
5 years $17
10 years $38
</TABLE>

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

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES (FOR A SHARE
OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of Ernst &
Young LLP, Independent Auditors on page 23. <TABLE> <CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.25
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- -------------------------------------------------------------- -------
Total from investment operations 0.51
- -------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Distributions from net investment income (0.25)
- -------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- -------------------------------------------------------------- -------
TOTAL RETURN(B) 5.12%
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 0.00%*
- --------------------------------------------------------------
Net investment income 7.37%*
- --------------------------------------------------------------
Expense waiver/reimbursement(c) 12.25%*
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $5,145
- --------------------------------------------------------------
Portfolio turnover 9%
- --------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(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)

GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares of the Fund. Institutional
Shares ("Shares") of the Fund are sold primarily to accounts for which financial
institutions act in a fiduciary or agency capacity as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. government securities. A minimum initial investment of $100,000 over a
90-day period is required. Shares are sold and redeemed at net asset value
without a sales charge imposed by the Fund.

INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
"total return" sought by the Fund will consist of interest and dividends from
underlying securities, or capital appreciation reflected in unrealized increases
in value of portfolio securities (realized by the shareholder only upon selling
shares) or realized from the purchase and sale of securities, and successful use
of futures and options. Generally, over the long term, the total return obtained
by a portfolio investing primarily in fixed income securities is not expected to
be as great as that obtained by a portfolio that invests primarily in equity
securities. At the same time, the market risk and price volatility of a fixed
income portfolio is expected to be less than that of an equity portfolio.
INVESTMENT POLICIES The Fund pursues this investment objective by investing in
U.S. government securities, including mortgage-backed securities and non-U.S.
government mortgage-backed securities and asset-backed securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in securities that are issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The remainder of the Fund's assets may be
invested in any of the securities discussed below. Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective. ACCEPTABLE INVESTMENTS The securities in
which the Fund invests principally are: * direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes, and bonds; * notes, bonds,
discount notes and mortgage-backed securities issued or guaranteed by U.S.
government agencies and instrumentalities supported by the full faith and credit
of the United States; * notes, bonds, discount notes and mortgage-backed
securities of U.S. government agencies or instrumentalities which receive or
have access to federal funding; * notes, bonds, and discount notes of other U.S.
government instrumentalities supported only by the credit of the
instrumentalities; and * asset-backed securities and commercial mortgage
securities rated BBB or better by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's"), or Fitch Investors
Service, Inc. ("Fitch"), or which are of comparable quality in the judgment of
the adviser. The prices of fixed income securities fluctuate inversely to the
direction of interest rates. GOVERNMENT SECURITIES Some obligations issued or
guaranteed by agencies or instrumentalities of the U.S. government are backed by
the full faith and credit of the U.S. Treasury. No assurances can be given that
the U.S. government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. The instrumentalities are
supported by: * the issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury; * discretionary authority of the U.S.
government to purchase certain obligations of an agency or instrumentality; or *
the credit of the agency or instrumentality. MORTGAGE-BACKED SECURITIES The Fund
may purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security is an obligation of the issuer backed by a mortgage or
pool of mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations
("CMOs"), make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage-backed securities
are based on different types of mortgages including those on commercial real
estate or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if the
investment adviser determines they are consistent with the Fund's investment
objective and policies. The value of mortgage-backed securities may change due
to shifts in the market's perception of issuers. In addition, regulatory or tax
changes may adversely affect the mortgage securities market as a whole. Non-
government mortgage-backed securities may offer higher yields than those issued
by government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints. COLLATERALIZED MORTGAGE OBLIGATIONS CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or
Freddie Mac certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest. The
Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS
("REMICS") REMICs are offerings of multiple class mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates of interest, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property. STRIPPED
MORTGAGE-BACKED SECURITIES The Fund may invest in stripped mortgage-backed
securities. Stripped mortgage-backed securities are derivative multiclass
securities which may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans, such
as savings associations, mortgage banks, commercial banks, investment banks, and
special purpose subsidiaries of the foregoing organizations. The market
volatility of stripped mortgage-backed securities tends to be greater than the
market volatility of the other types of mortgage-related securities in which the
Fund invests. Principal-only stripped mortgage-backed securities are used
primarily to hedge against interest rate risk to the capital assets of the Fund
in a changing interest rate environment. Interest-only stripped mortgage-backed
securities yield to maturity is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities. It is possible that the Fund might not recover its original
investment on interest-only stripped mortgage-backed securities if there are
substantial prepayments on the underlying mortgages. Interest-only stripped
mortgage-backed securities generally increase in value as interest rates rise
and decrease in value as interest rates fall, counter to changes in value
experienced by most fixed income securities. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee. INVESTMENT RISKS
OF MORTGAGE-BACKED And Asset-Backed Securities Mortgage-backed and asset-backed
securities generally pay back principal and interest over the life of the
security. At the time the Fund reinvests the payments and any unscheduled
prepayments of principal received, the Fund may receive a rate of interest which
is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities. While mortgage-backed securities generally entail less risk of a
decline during periods of rising interest rates, mortgage-backed securities may
also have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such receivables to
retain possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. CREDIT ENHANCEMENT Certain of the Fund's acceptable investments may
have been credit- enhanced by a guaranty, letter of credit or insurance. The
Fund typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement (the "credit enhancer"), rather than the issuer.
Generally, the Fund will not treat credit-enhanced securities as having been
issued by the credit enhancer for diversification purposes. However, under
certain circumstances applicable regulations may require the Fund to treat the
securities as having been issued by both the issuer and the credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security. DEMAND FEATURES The
Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement. INTEREST RATE SWAPS As one
way of managing its exposure to different types of investments, the Fund may
enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield. Swap agreements are sophisticated
hedging instruments that typically involve a small investment of cash relative
to the magnitude of risks assumed. As a result, swaps can be highly volatile and
may have a considerable impact on the Fund's performance. Swap agreements are
subject to risks related to the counterparty's ability to perform, and may
decline in value if the counterparty's creditworthiness deteriorates. The Fund
may also suffer losses if it is unable to terminate outstanding swap agreements
to reduce its exposure through offsetting transactions. When the Fund enters
into a swap agreement, assets of the Fund equal to the value of the swap
agreement will be segregated by the Fund. FINANCIAL FUTURES AND OPTIONS ON
FUTURES The Fund may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future. The seller of the contract agrees to make delivery
of the type of instrument called for in the contract and the buyer agrees to
take delivery of the instrument at the specified future time. The Fund may also
write call options and purchase put options on financial futures contracts as a
hedge to attempt to protect securities in its portfolio against decreases in
value. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a fixed price at any
time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option. The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses financial futures and options on financial futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Fund's investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or option. It is not
certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, it will only do so in a manner
consistent with its investment objective, policies and limitations. LEVERAGE AND
BORROWING

The Fund is authorized to borrow money from banks or otherwise in an amount up
to 33 1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the bank or other borrowing. This
limitation may not be changed without the approval of shareholders. The Fund is
also authorized to borrow an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes such as clearance of portfolio
transactions and share repurchases. The Fund will only borrow when there is an
expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers. Borrowing by the Fund creates an opportunity for increased net
income but, at the same time, creates special risk considerations. For example,
leveraging may exaggerate changes in the net asset value of the Fund shares and
in the yield on the Fund's portfolio. Although the principal of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. Borrowing will create interest expenses for the Fund
which can exceed the income from the assets retained. To the extent the income
derived from securities purchased with borrowed funds exceeds the interest the
Fund will have to pay, the Fund's net income will be greater than if borrowing
were not used. Conversely, if the income from the assets retained with borrowed
funds is not sufficient to cover the cost of borrowing, the net income of the
Fund will be less than if borrowing were not used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. The
Fund may also borrow for emergency purposes, for the payment of dividends for
share repurchases or for the clearance of transactions. The Fund may also enter
into reverse repurchase agreements. These transactions are similar to borrowing
cash. In a reverse repurchase agreement, the Fund transfers possession of a
portfolio instrument in return for a percentage of the instrument's market value
in cash and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements may
enable the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but does not ensure this result. When effecting
reverse repurchase agreements, liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be purchased, are: segregated
on the Trust's records at the trade date; marked to market daily; and maintained
until the transaction is settled. The Fund may enter into "dollar rolls" in
which the Fund sells securities for delivery in the current month and
simultaneously contracts to purchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund foregoes principal and interest paid on the securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. A "covered
dollar roll" is a specific type of dollar roll for which there is an offsetting
cash position or a cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction. To the extent that
dollar rolls are not covered rolls, they will be included in the 33 1/3%
borrowing limit. The Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(i) the lender to act as a subcustodian if the lender is a bank or otherwise
qualifies as a custodian of investment company assets or (ii) a suitable
subcustodian. Because few or none of its assets will consist of margin
securities, the Fund does not expect to borrow on margin. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned. WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS The Fund may purchase U.S. government obligations on a when-issued
or delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. The
seller's failure to complete these transactions may cause the Fund to miss a
price yield considered to be advantageous. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. The Fund may dispose of
a commitment prior to settlement if the adviser deems it appropriate to do so.
In addition, the Fund may enter in transactions to sell its purchase commitments
to third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. The Fund may realize
short-term profits or losses upon the sale of such commitments. PORTFOLIO
TURNOVER The Fund does not attempt to set or meet any specific portfolio
turnover rate, since turnover is incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. High turnover rates may
result in higher brokerage commissions and capital gains. See "Tax Information"
in this prospectus.

HUB AND SPOKE [REGISTERED TRADEMARK] OPTION
If the Directors determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund. The initial shareholder of the Fund (which is an affiliate of Federated
Securities Corp.) voted to vest authority to use this investment structure in
the sole discretion of the Directors. No further approval of shareholders is
required. Shareholders will receive at least 30 days prior notice of any such
investment. In making its determination, the Directors will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. Although it is expected that the
Directors will not approve an arrangement that is likely to result in higher
costs, no assurance is given that costs will remain the same or be materially
reduced if this investment structure is implemented.

NET ASSET VALUE
The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by dividing the sum of the market value of all securities and all
other assets, less liabilities, by the number of Shares outstanding. The net
asset value for Shares may exceed that of Institutional Service Shares due to
the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.

INVESTING IN INSTITUTIONAL SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase shares of the Fund, open an account by calling Federated Securities
Corp. Information needed to establish the account will be taken over the
telephone. The Fund reserves the right to reject any purchase request. BY WIRE
To purchase Shares by Federal Reserve wire, call the Fund before 4:00 p.m.
(Eastern time) to place an order. The order is considered received immediately.
Payment by federal funds must be received before 3:00 p.m. (Eastern time) on the
next business day following the order. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust Company,
Boston, Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Government
Fund -- Institutional Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement. BY MAIL To purchase Shares by mail,
send a check made payable to Federated Government Fund -- Institutional Shares
to: Federated Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. Orders by mail are considered received when payment by check is
converted by State Street Bank and Trust Company ("State Street Bank") into
federal funds. This is normally the next business day after State Street Bank
receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial investment
in the Fund is $100,000 plus any non-affiliated bank or broker's fee. However,
an account may be opened with a smaller amount as long as the $100,000 minimum
is reached within 90 days. An institutional investor's minimum investment will
be calculated by combining all accounts it maintains with the Fund. Accounts
established through a non-affiliated bank or broker may be subject to a smaller
minimum investment. WHAT SHARES COST Shares are sold at their net asset value
next determined after an order is received. There is no sales charge imposed by
the Fund. Investors who purchase Shares through a financial intermediary may be
charged a service fee by that financial intermediary.

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

EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Shares. The Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the adviser that the securities to be exchanged are acceptable. Any
securities exchanged must meet the investment objective and policies of the
Fund, and must have a readily ascertainable market value. The market value of
any securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund. The Fund acquires the
exchanged securities for investment and not for resale. Securities accepted by
the Fund will be valued in the same manner as the Fund values its assets. The
basis of the exchange will depend on the net asset value of Shares on the day
the securities are valued. One Share will be issued for the equivalent amount of
securities accepted. Any interest earned on the securities prior to the exchange
will be considered in valuing the securities. All interest, dividends,
subscription or other rights attached to the securities become the property of
the Fund, along with the securities. If an exchange is permitted, it will be
treated as a sale for federal income tax purposes. Depending upon the cost basis
of the securities exchanged for Shares, a gain or loss may be realized by the
investor.

REDEEMING INSTITUTIONAL SHARES
The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request. TELEPHONE REDEMPTION Shareholders may redeem
their Shares by telephoning the Fund before 4:00 p.m. (Eastern time). The
proceeds will normally be wired the following business day, but in no event more
than seven days, to the shareholder's account at a domestic commercial bank that
is a member of the Federal Reserve System. Proceeds from redemption requests
received on holidays when wire transfers are restricted will be wired the
following business day. Questions about telephone redemptions on days when wire
transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified. An authorization
form permitting the Fund to accept telephone requests must first be completed.
Authorization forms and information on this service are available from Federated
Securities Corp. Telephone redemption instructions may be recorded. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above. The
written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public. ACCOUNTS WITH LOW
BALANCES Due to the high cost of maintaining accounts with low balances, the
Fund may redeem Shares in any account, and pay the proceeds to the shareholder,
if the account balance falls below a required minimum value of $100,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $100,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
may make payments up to 0.25% of the average daily net asset value of the
Institutional Shares, computed at an annual rate, to obtain certain personal
services for shareholders and to maintain shareholder accounts. From time to
time and for such periods as deemed appropriate, the amount stated above may be
reduced voluntarily. Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial institutions to perform shareholder services. Financial
institutions will receive fees based upon Shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees will be
paid will be determined from time to time by the Fund and Federated Shareholder
Services. Currently, Institutional Shares are accruing no shareholder services
fees. Shareholders will be notified if this changes.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS In addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services, or shareholder services. The
support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Fund's investment adviser or its affiliates. ADMINISTRATION OF
THE FUND ADMINISTRATIVE SERVICES Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Services Company provides these at an annual rate which relates to the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors as specified below:

MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
- ------------ ------------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million

SHAREHOLDER INFORMATION
VOTING RIGHTS

Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Federated Securities Corp., who was the record owner of 367,774
(72.08%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.

The Fund is not required to hold annual shareholder meetings. Shareholder
approval will be sought only for certain changes in the Fund's operation and for
the election of Directors under certain circumstances. Directors may be removed
by a majority vote of the shareholders at a special meeting. A special meeting
of shareholders shall be called by the Directors upon the request of
shareholders owning at least 10% of the Corporation's outstanding shares of all
series entitled to vote.

TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund. Unless otherwise exempt, shareholders are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains no matter how long the shareholders have held their shares.
Information on the tax status of dividends and distributions is provided
annually. STATE AND LOCAL TAXES Shares are exempt from personal property taxes
imposed by counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws. PERFORMANCE INFORMATION From time
to time, the Fund advertises its total return and yield. Total return represents
the change, over a specified period of time, in the value of an investment in
the Fund after reinvesting all income and capital gains distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage. The yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Shares are sold without any sales charge or
other similar nonrecurring charges. Total return and yield will be calculated
separately for Institutional Shares and Institutional Service Shares. From time
to time, advertisements for the Fund's Institutional Shares may refer to
ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Shares performance to certain indices.

OTHER CLASSES OF SHARES
The Fund also offers another class of shares called Institutional Service Shares
which are sold at net asset value to accounts for financial institutions and are
subject to a minimum initial investment of $25,000 over a 90-day period.
Institutional Service Shares are distributed under a 12b-1 Plan adopted by the
Fund and are also subject to shareholder services fees. Institutional Service
Shares and Institutional Shares are subject to certain of the same expenses.
Expense differences, however, between Institutional Service Shares and
Institutional Shares may affect the performance of each class. To obtain more
information and a prospectus for Institutional Service Shares, investors may
call 1-800-341-7400.

FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SERVICE SHARES (FOR A
SHARE OUTSTANDING THROUGHOUT THE PERIOD) Reference is made to the Report of
Ernst & Young LLP, Independent Auditors on page 23. <TABLE> <CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1997(A)
--------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------
Net investment income 0.24
- -----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.26
- ----------------------------------------------------------------------- -------
Total from investment operations 0.50
- ----------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------
Distributions from net investment income (0.24)
- ----------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $10.26
- ----------------------------------------------------------------------- -------
TOTAL RETURN(B) 5.07%
- -----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------
Expenses 0.00%*
- -----------------------------------------------------------------------
Net investment income 7.76%*
- -----------------------------------------------------------------------
Expense waiver/reimbursement(c) 14.14%*
- -----------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------
Net assets, end of period (000 omitted) $5
- -----------------------------------------------------------------------
Portfolio turnover 9%
- -----------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 31, 1997 (start of performance)
to September 30, 1997.
(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).

PORTFOLIO OF INVESTMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- ---------
<C> <S> <C>
MORTGAGE BACKED SECURITIES -- 94.9%
- -------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 49.2%
- -------------------------------------------------------------------------------------------------
$195,359 6.00%, 5/1/2011 $191,039
---------------------------------------------------------------------------------
636,559 6.50%, 4/1/2012 - 2/1/2024 627,169
---------------------------------------------------------------------------------
909,922 7.50%, 11/1/2025 927,839
---------------------------------------------------------------------------------
906,603 Series 180-2, 7.50%, 10/1/2026, (Interest Only) 272,180
---------------------------------------------------------------------------------
482,286 9.00%, 1/1/2025 514,088
--------------------------------------------------------------------------------- ----------
Total 2,532,315
--------------------------------------------------------------------------------- ----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 25.0%
- -------------------------------------------------------------------------------------------------
375,000 Series 1996-50-P, .000%, 11/25/2026, (Principal Only) 352,500
---------------------------------------------------------------------------------
595,270 8.00%, 12/1/2026 614,730
---------------------------------------------------------------------------------
307,689 8.50%, 12/1/2024 322,114
--------------------------------------------------------------------------------- ----------
Total 1,289,344
--------------------------------------------------------------------------------- ----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 20.7%
- -------------------------------------------------------------------------------------------------
1,064,442 7.00%, 10/15/2023 1,067,763
--------------------------------------------------------------------------------- ----------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST $4,742,863) 4,889,422
--------------------------------------------------------------------------------- ----------
U.S. TREASURY OBLIGATIONS -- 2.0%
- -------------------------------------------------------------------------------------------------
100,000 6.250%, 8/31/2002 (identified cost $99,930) 100,980
--------------------------------------------------------------------------------- ----------
(A)REPURCHASE AGREEMENT -- 3.7%
- -------------------------------------------------------------------------------------------------
190,000 BT Securities Corp., 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized cost) 190,000
--------------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $5,032,793)(B) $5,180,402
--------------------------------------------------------------------------------- ----------
</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 $5,036,716. The
net unrealized appreciation of investments on a federal tax basis amounts to
$143,686 which is comprised of $198,342 appreciation and $54,656
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,150,266) at September 30, 1997.
The following acronyms are used throughout this portfolio: REMIC - Real Estate
Mortgage Investment Conduit (See Notes which are an integral part of the
Financial Statements)

STATEMENT OF ASSETS AND LIABILITIES
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified cost $5,032,793 and tax
cost $5,036,716) $5,180,402
- ---------------------------------------------------------------------------------------------------------
Cash 4,379
- ---------------------------------------------------------------------------------------------------------
Income receivable 27,593
- --------------------------------------------------------------------------------------------------------- -----------
Total assets 5,212,374
- ---------------------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------
Income distribution payable $30,356
- ----------------------------------------------------------------------------------------- -----------
Accrued expenses 31,752
- ----------------------------------------------------------------------------------------- -----------
Total liabilities 62,108
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 501,787 shares outstanding $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------------
Paid in capital $5,018,233
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 147,609
- ---------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------- -----------
Total Net Assets $5,150,266
- --------------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------------
INSTITUTIONAL SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,144,898 [divided by] 501,264 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
INSTITUTIONAL SERVICE SHARES:
- ---------------------------------------------------------------------------------------------------------
$5,368 [divided by] 523 shares outstanding $10.26
- --------------------------------------------------------------------------------------------------------- -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)

STATEMENT OF OPERATIONS
FEDERATED GOVERNMENT FUND
PERIOD ENDED SEPTEMBER 30, 1997*
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------------
Interest $123,389
- -----------------------------------------------------------------------------------------
Investment advisory fee $6,692
- -----------------------------------------------------------------------------------------
Administrative personnel and services fee 51,000
- -----------------------------------------------------------------------------------------
Custodian fees 42
- -----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 10,800
- -----------------------------------------------------------------------------------------
Directors'/Trustees' fees 6,262
- -----------------------------------------------------------------------------------------
Portfolio accounting fees 12,857
- -----------------------------------------------------------------------------------------
Shareholder services fee -- Institutional Shares 4,182
- -----------------------------------------------------------------------------------------
Share registration costs 77,760
- -----------------------------------------------------------------------------------------
Printing and postage 13,200
- -----------------------------------------------------------------------------------------
Miscellaneous 22,200
- ----------------------------------------------------------------------------------------- --------
Total expenses 204,995
- -----------------------------------------------------------------------------------------
Waivers and reimbursement --
- -------------------------------------------------------------------------
Waiver of investment advisory fee ($6,692)
- -------------------------------------------------------------------------
Waiver of shareholder services fee -- Institutional Shares (4,182)
- -------------------------------------------------------------------------
Reimbursement of other operating expenses (194,121)
- ------------------------------------------------------------------------- --------
Total waivers and reimbursement (204,995)
- ----------------------------------------------------------------------------------------- --------
Net expenses 0
- -------------------------------------------------------------------------------------------------------- --------
Net investment income 123,389
- -------------------------------------------------------------------------------------------------------- --------
NET REALIZED UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------------
Net realized loss on investments (15,576)
- --------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments 147,609
- -------------------------------------------------------------------------------------------------------- --------
Net realized and unrealized gain on investments 132,033
- -------------------------------------------------------------------------------------------------------- --------
Change in net assets resulting from operations $255,422
- -------------------------------------------------------------------------------------------------------- --------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)

STATEMENT OF CHANGES IN NET ASSETS
FEDERATED GOVERNMENT FUND
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997*
--------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------
OPERATIONS --
- -----------------------------------------------------------------------------------------
Net investment income $123,389
- -----------------------------------------------------------------------------------------
Net realized loss on investments
($0 as computed for federal tax purposes) (15,576)
- -----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation 147,609
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations 255,422
- ----------------------------------------------------------------------------------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS --
- -----------------------------------------------------------------------------------------
Distributions from net investment income
- -----------------------------------------------------------------------------------------
Institutional Shares (123,380)
- -----------------------------------------------------------------------------------------
Institutional Service Shares (9)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from distributions to shareholders (123,389)
- ----------------------------------------------------------------------------------------- ------------
SHARE TRANSACTIONS --
- -----------------------------------------------------------------------------------------
Proceeds from sale of shares 10,633,387
- -----------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 278
- -----------------------------------------------------------------------------------------
Cost of shares redeemed (5,615,432)
- ----------------------------------------------------------------------------------------- ------------
Change in net assets resulting from share transactions 5,018,233
- ----------------------------------------------------------------------------------------- ------------
Change in net assets 5,150,266
- -----------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------
Beginning of period 0
- ----------------------------------------------------------------------------------------- ------------
End of period $5,150,266
- ----------------------------------------------------------------------------------------- ------------
</TABLE>
* For the period from May 31, 1997 (start of performance) to September 30, 1997.
(See Notes which are an integral part of the Financial Statements)

NOTES TO FINANCIAL STATEMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
ORGANIZATION
Federated Total Return Series, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The Corporation consists of four portfolios. The
financial statements included herein are only those of Federated Government Fund
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The Fund offers two classes of shares: Institutional Shares and
Institutional Service Shares. The investment objective of the Fund is to provide
total return.
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 sixty days or less at the time of purchase may be valued at
amortized cost, which approximates fair market value. REPURCHASE AGREEMENTS It
is the policy of the 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 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. 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.
Additionally, net capital losses of $11,653 attributable to security
transactions incurred after September 30, 1996 are treated as arising on the
first day of the Fund's next taxable year. WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS The Fund may engage in when-issued or delayed delivery
transactions. The Fund records when-issued securities on the trade date and
maintains security positions such that sufficient liquid assets will be
available to make payment for the securities purchased. Securities purchased on
a when-issued or delayed delivery basis are marked to market daily and begin
earning interest on the settlement date. USE OF ESTIMATES The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts of
assets, liabilities, expenses and revenues reported in the financial statements.
Actual results could differ from those estimated. OTHER Investment transactions
are accounted for on the trade date. CAPITAL STOCK At September 30, 1997, par
value shares ($ 0.001 per share) authorized were as follows:
NUMBER OF PAR VALUE
CAPITAL STOCK
SHARE CLASS NAME AUTHORIZED
- -------------------------------- ------------------------
Institutional Shares 1,000,000,000
Institutional Service Shares 1,000,000,000
----------------
Total shares authorized 2,000,000,000 Transactions in capital stock were as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,060,203 $10,628,087
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared 27 272
- ------------------------------------------------------------------------------
Shares redeemed (558,966) (5,615,428)
- ------------------------------------------------------------------------------ ---------- -----------
Net change resulting from Institutional Share transactions 501,264 $5,012,931
- ------------------------------------------------------------------------------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1997(A)
--------------------------
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT
- ------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 523 $5,300
- ------------------------------------------------------------------------------
Shares issued to shareholders in payment of distributions declared -- 6
- ------------------------------------------------------------------------------
Shares redeemed -- (4)
- ------------------------------------------------------------------------------
Net change resulting from Institutional Service Share transactions 523 5,302
- ------------------------------------------------------------------------------
Net change resulting from share transactions 501,787 $5,018,233
- ------------------------------------------------------------------------------
</TABLE>
(a) For the period from May 31, 1997 (start of performance) to September 30,
1997.
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"),
receives for its services an annual investment advisory fee equal to
0.40% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive any portion of its fee and/or reimburse
certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement 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
Institutional Service Shares to finance activities intended to result in the
sale of the Fund's Institutional Service Shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets of
the Institutional Service Shares, annually, to compensate FSC. FSC may
voluntarily choose to waive a portion of this 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's Institutional Shares for the
period. The fee paid to FSS is used to finance certain services for
shareholders and to maintain shareholder accounts. For the period ended
September 30, 1997, the Institutional Service Shares did not incur a
shareholder services fee. 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 Federated Services
Company ("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 Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for
the period ended September 30, 1997, were as follows:
PURCHASES $5,401,279
- -------------------------------------------- ----------
SALES $434,549
- -------------------------------------------- ----------

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Government Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Government Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets and the financial highlights for the period presented
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, by correspondence with the custodian and brokers or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Federated Government Fund at September 30, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
period presented therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997

[LOGO] FEDERATED INVESTORS

Federated Government Fund

(A portfolio of Federated Total Return Series, Inc.)
Institutional Shares

PROSPECTUS
NOVEMBER 30, 1997

A Diversified Portfolio of Federated Total Return Series, Inc.,
an Open-End, Management Investment Company

FEDERATED GOVERNMENT FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.federatedinvestors.com

Cusip 31428Q887

G01922-01-IS (11/97)

FEDERATED GOVERNMENT FUND
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares
PROSPECTUS
The Institutional Service Shares of Federated Government Fund (the "Fund")
offered by this prospectus represent interests in a diversified investment
portfolio of Federated Total Return Series, Inc. (the "Corporation"), an
open-end, management investment company (a mutual fund). The investment
objective of the Fund is to provide total return. The Fund pursues this
investment objective by investing primarily in a portfolio of U.S. government
securities. 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. This prospectus contains the
information you should read and know before you invest in Institutional Service
Shares of the Fund. Keep this prospectus for future reference.

Prospectus dated November 30, 1997

TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights -- Institutional Service Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Portfolio Turnover 8
Hub and Spoke [registered trademark] Option 8
Net Asset Value 9
Investing in Institutional Service Shares 9
Share Purchases 9
Minimum Investment Required 9
What Shares Cost 9
Exchanging Securities for Fund Shares 10
Confirmations and Account Statements 10
Dividends and Distributions 10
Redeeming Institutional Shares 10
Telephone Redemption 10
Written Requests 10
Accounts with Low Balances 11
Fund Information 11
Management of the Fund 11
Distribution of Institutional Service Shares 12
Administration of the Fund 13
Administrative Services 13
Shareholder Information 13
Voting Rights 13
Tax Information 13
Federal Income Tax 13
State and Local Taxes 13
Performance Information 13
Other Classes of Shares 14
Financial Highlights -- Institutional Shares 15
Financial Statements 16
Report of Ernst & Young LLP,
Independent Auditors 23

SUMMARY OF FUND EXPENSES
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.06%
12b-1 Fee (after waiver)(2) 0.05%
Total Other Expenses 0.49%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.60%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver
of a portion of the management fee. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.40%.
(2) The 12b-1 fee has been reduced to reflect the voluntary waiver of a portion
of the 12b-1 fee. The distributor can terminate the voluntary waiver at any
time at its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1998. The total
operating expenses were 0.00% for the fiscal year ended September 30, 1997
and would have been 14.14% absent the voluntary waivers of the management
fee, 12b-1 fee and shareholder services fee and the voluntary reimbursement
of certain other operating expenses.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Institutional Service Shares of the
Fund will bear, either directly or indirectly. For more complete descriptions
of the various costs and expenses, see "Fund Information". Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE
- -----------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period.
<S> <C>
1 year $6
3 years $19
5 years $33
10 years $75
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

GENERAL INFORMATION
The Corporation was incorporated under the laws of the State of Maryland on
October 11, 1993. The Articles of Incorporation permit the Corporation to offer
separate portfolios and classes of shares. As of the date of this prospectus,
the Board of Directors (the "Directors") has established two classes of shares
for the Fund: Institutional Service Shares and Institutional Shares. This
prospectus relates only to Institutional Service Shares of the Fund.
Institutional Service Shares ("Shares") of the Fund are designed primarily for
retail and private banking customers of financial institutions as a convenient
means of accumulating an interest in a professionally managed, diversified
portfolio investing primarily in U.S. government securities. A minimum initial
investment of $25,000 over a 90-day period is required. Shares are sold and
redeemed at net asset value without a sales charge imposed by the Fund.

INVESTMENT INFORMATION
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide total return. The investment
objective cannot be changed without approval of shareholders. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the investment policies described in this prospectus. The
"total return" sought by the Fund will consist of interest and dividends from
underlying securities, or capital appreciation reflected in unrealized increases
in value of portfolio securities (realized by the shareholder only upon selling
shares) or realized from the purchase and sale of securities, and successful use
of futures and options. Generally, over the long term, the total return obtained
by a portfolio investing primarily in fixed income securities is not expected to
be as great as that obtained by a portfolio that invests primarily in equity
securities. At the same time, the market risk and price volatility of a fixed
income portfolio is expected to be less than that of an equity portfolio.
INVESTMENT POLICIES The Fund pursues this investment objective by investing in
U.S. government securities, including mortgage-backed securities and non-U.S.
government mortgage-backed securities and asset-backed securities. Under normal
circumstances, the Fund will invest at least 65% of the value of its total
assets in securities that are issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The remainder of the Fund's assets may be
invested in any of the securities discussed below. Unless indicated otherwise,
the investment policies may be changed by the Directors without the approval of
shareholders. Shareholders will be notified before any material change in these
investment policies becomes effective. ACCEPTABLE INVESTMENTS The securities in
which the Fund invests principally are: * direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes, and bonds; * notes, bonds,
discount notes and mortgage-backed securities issued or guaranteed by U.S.
government agencies and instrumentalities supported by the full faith and credit
of the United States; * notes, bonds, discount notes and mortgage-backed
securities of U.S. government agencies or instrumentalities which receive or
have access to federal funding; * notes, bonds, and discount notes of other U.S.
government instrumentalities supported only by the credit of the
instrumentalities; and * asset-backed securities and commercial mortgage
securities rated BBB or better by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's"), or Fitch Investors
Service, Inc. ("Fitch"), or which are of comparable quality in the judgment of
the adviser. The prices of fixed income securities fluctuate inversely to the
direction of interest rates. GOVERNMENT SECURITIES Some obligations issued or
guaranteed by agencies or instrumentalities of the U.S. government are backed by
the full faith and credit of the U.S. Treasury. No assurances can be given that
the U.S. government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. The instrumentalities are
supported by: * the issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury; * discretionary authority of the U.S.
government to purchase certain obligations of an agency or instrumentality; or *
the credit of the agency or instrumentality. MORTGAGE-BACKED SECURITIES The Fund
may purchase mortgage-backed securities issued by government and non-government
entities such as banks, mortgage lenders, or other financial institutions. A
mortgage-backed security is an obligation of the issuer backed by a mortgage or
pool of mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations
("CMOs"), make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage-backed securities
are based on different types of mortgages including those on commercial real
estate or residential properties. Other types of mortgage-backed securities will
likely be developed in the future, and the Fund may invest in them if the
investment adviser determines they are consistent with the Fund's investment
objective and policies. The value of mortgage-backed securities may change due
to shifts in the market's perception of issuers. In addition, regulatory or tax
changes may adversely affect the mortgage securities market as a whole. Non-
government mortgage-backed securities may offer higher yields than those issued
by government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns. ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests generally are issued by
Ginnie Mae, Fannie Mae, and Freddie Mac and are actively traded. The underlying
mortgages which collateralize ARMS issued by Ginnie Mae are fully guaranteed by
the Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting size and
maturity constraints. COLLATERALIZED MORTGAGE OBLIGATIONS CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or
Freddie Mac certificates, but may be collateralized by whole loans or private
pass-through securities. CMOs may have fixed or floating rates of interest. The
Fund will invest only in CMOs that are rated A or better by a nationally
recognized statistical rating organization. The Fund may also invest in certain
CMOs which are issued by private entities such as investment banking firms and
companies related to the construction industry. The CMOs in which the Fund may
invest may be: (i) securities which are collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (ii) securities which are
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; (iii) collateralized by pools of mortgages in which
payment of principal and interest is dependent upon the underlying pool of
mortgages with no U.S. government guarantee; or (iv) other securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government. REAL ESTATE MORTGAGE INVESTMENT CONDUITS
("REMICS") REMICs are offerings of multiple class mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates of interest, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property. STRIPPED
MORTGAGE-BACKED SECURITIES The Fund may invest in stripped mortgage-backed
securities. Stripped mortgage-backed securities are derivative multiclass
securities which may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans, such
as savings associations, mortgage banks, commercial banks, investment banks, and
special purpose subsidiaries of the foregoing organizations. The market
volatility of stripped mortgage-backed securities tends to be greater than the
market volatility of the other types of mortgage-related securities in which the
Fund invests. Principal-only stripped mortgage-backed securities are used
primarily to hedge against interest rate risk to the capital assets of the Fund
in a changing interest rate environment. Interest-only stripped mortgage-backed
securities yield to maturity is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage-backed
securities. It is possible that the Fund might not recover its original
investment on interest-only stripped mortgage-backed securities if there are
substantial prepayments on the underlying mortgages. Interest-only stripped
mortgage-backed securities generally increase in value as interest rates rise
and decrease in value as interest rates fall, counter to changes in value
experienced by most fixed income securities. ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that generally are not
mortgage loans or interests in mortgage loans. The Fund may invest in
asset-backed securities including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations and credit
card receivables, equipment leases, manufactured housing (mobile home) leases,
or home equity loans. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-governmental
entities and carry no direct or indirect government guarantee. INVESTMENT RISKS
OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Mortgage-backed and asset-backed
securities generally pay back principal and interest over the life of the
security. At the time the Fund reinvests the payments and any unscheduled
prepayments of principal received, the Fund may receive a rate of interest which
is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities. While mortgage-backed securities generally entail less risk of a
decline during periods of rising interest rates, mortgage-backed securities may
also have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if mortgage-backed securities are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if
mortgage-backed securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled prepayment of principal would increase current
and total returns and would accelerate the recognition of income, which would be
taxed as ordinary income when distributed to shareholders. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such receivables to
retain possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
re-registered because the owner and obligor moves to another state, such
re-registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. CREDIT ENHANCEMENT Certain of the Fund's acceptable investments may
have been credit- enhanced by a guaranty, letter of credit or insurance. The
Fund typically evaluates the credit quality and ratings of credit-enhanced
securities based upon the financial condition and ratings of the party providing
the credit enhancement (the "credit enhancer"), rather than the issuer.
Generally, the Fund will not treat credit-enhanced securities as having been
issued by the credit enhancer for diversification purposes. However, under
certain circumstances applicable regulations may require the Fund to treat the
securities as having been issued by both the issuer and the credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security. DEMAND FEATURES The
Fund may acquire securities that are subject to puts and standby commitments
("demand features") to purchase the securities at their principal amount
(usually with accrued interest) within a fixed period following a demand by the
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. The Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security are treated as a form of credit enhancement. INTEREST RATE SWAPS As one
way of managing its exposure to different types of investments, the Fund may
enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, and floors. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of the Fund's
investments, its share price and yield. Swap agreements are sophisticated
hedging instruments that typically involve a small investment of cash relative
to the magnitude of risks assumed. As a result, swaps can be highly volatile and
may have a considerable impact on the Fund's performance. Swap agreements are
subject to risks related to the counterparty's ability to perform, and may
decline in value if the counterparty's creditworthiness deteriorates. The Fund
may also suffer losses if it is unable to terminate outstanding swap agreements
to reduce its exposure through offsetting transactions. When the Fund enters
into a swap agreement, assets of the Fund equal to the value of the swap
agreement will be segregated by the Fund. FINANCIAL FUTURES AND OPTIONS ON
FUTURES The Fund may purchase and sell financial futures contracts to hedge all
or a portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future. The seller of the contract agrees to make delivery
of the type of instrument called for in the contract and the buyer agrees to
take delivery of the instrument at the specified future time. The Fund may also
write call options and purchase put options on financial futures contracts as a
hedge to attempt to protect securities in its portfolio against decreases in
value. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a fixed price at any
time during a specified period if the option is exercised. Conversely, as
purchaser of a put option on a futures contract, the Fund is entitled (but not
obligated) to sell a futures contract at the fixed price during the life of the
option. The Fund may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases a
futures contract, an amount of cash and cash equivalents, equal to the
underlying commodity value of the futures contract (less any related margin
deposits), will be deposited in a segregated account with the Fund's custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. RISKS When the Fund
uses financial futures and options on financial futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in the
Fund's portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Fund's investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as interest rate movements. In these
events, the Fund may lose money on the futures contract or option. It is not
certain that a secondary market for positions in futures contracts or for
options will exist at all times. Although the investment adviser will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. The Fund's ability
to establish and close out futures and options positions depends on this
secondary market. DERIVATIVE CONTRACTS AND SECURITIES The term "derivative" has
traditionally been applied to certain contracts (including, futures, forward,
option and swap contracts) that "derive" their value from changes in the value
of an underlying security, currency, commodity or index. Certain types of
securities that incorporate the performance characteristics of these contracts
are also referred to as "derivatives." Some securities, such as stock rights,
warrants and convertible securities, although not typically referred to as
derivatives, contain options that may affect their value and performance.
Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The Fund
will only use derivative contracts for the purposes disclosed in the applicable
prospectus sections above. To the extent that the Fund invests in securities
that could be characterized as derivatives, it will only do so in a manner
consistent with its investment objective, policies and limitations. LEVERAGE AND
BORROWING The Fund is authorized to borrow money from banks or otherwise in an
amount up to 33 1/3% of the Fund's total assets (including the amount borrowed),
less all liabilities and indebtedness other than the bank or other borrowing.
This limitation may not be changed without the approval of shareholders. The
Fund is also authorized to borrow an additional 5% of its total assets without
regard to the foregoing limitation for temporary purposes such as clearance of
portfolio transactions and share repurchases. The Fund will only borrow when
there is an expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible gains or losses upon
liquidation. The Fund also may borrow in order to effect share purchases and
tender offers. Borrowing by the Fund creates an opportunity for increased net
income but, at the same time, creates special risk considerations. For example,
leveraging may exaggerate changes in the net asset value of the Fund shares and
in the yield on the Fund's portfolio. Although the principal of such borrowings
will be fixed, the Fund's assets may change in value during the time the
borrowing is outstanding. Borrowing will create interest expenses for the Fund
which can exceed the income from the assets retained. To the extent the income
derived from securities purchased with borrowed funds exceeds the interest the
Fund will have to pay, the Fund's net income will be greater than if borrowing
were not used. Conversely, if the income from the assets retained with borrowed
funds is not sufficient to cover the cost of borrowing, the net income of the
Fund will be less than if borrowing were not used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. The
Fund may also borrow for emergency purposes, for the payment of dividends for
share repurchases or for the clearance of transactions. The Fund may also enter
into reverse repurchase agreements. These transactions are similar to borrowing
cash. In a reverse repurchase agreement, the Fund transfers possession of a
portfolio instrument in return for a percentage of the instrument's market value
in cash and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements may
enable the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but does not ensure this result. When effecting
reverse repurchase agreements, liquid assets of the Fund, in a dollar amount
sufficient to make payment for the obligations to be purchased, are: segregated
on the Trust's records at the trade date; marked to market daily; and maintained
until the transaction is settled. The Fund may enter into "dollar rolls" in
which the Fund sells securities for delivery in the current month and
simultaneously contracts to purchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund foregoes principal and interest paid on the securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale. A "covered
dollar roll" is a specific type of dollar roll for which there is an offsetting
cash position or a cash equivalent security position which matures on or before
the forward settlement date of the dollar roll transaction. To the extent that
dollar rolls are not covered rolls, they will be included in the 33 1/3%
borrowing limit. The Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
(i) the lender to act as a subcustodian if the lender is a bank or otherwise
qualifies as a custodian of investment company assets or (ii) a suitable
subcustodian. Because few or none of its assets will consist of margin
securities, the Fund does not expect to borrow on margin. REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. RESTRICTED AND ILLIQUID
SECURITIES The Fund intends to invest in restricted securities. Restricted
securities are any securities in which the Fund may otherwise invest pursuant to
its investment objective and policies, but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in illiquid
securities, including certain restricted securities not determined by the
Directors to be liquid, interest rate swaps, non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice, to 15% of the value of its net assets. INVESTING IN SECURITIES OF OTHER
INVESTMENT COMPANIES The Fund may invest its assets in securities of other
investment companies as an efficient means of carrying out its investment
policies. It should be noted that investment companies incur certain expenses,
such as management fees, and, therefore, any investment by the Fund in shares of
other investment companies may be subject to such duplicate expenses. LENDING OF
PORTFOLIO SECURITIES In order to generate additional income, the Fund may lend
portfolio securities on a short-term or long-term basis, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy and will receive
collateral in the form of cash or U.S. government securities equal to at least
100% of the value of the securities loaned. WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS The Fund may purchase U.S. government obligations on a when-issued
or delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. The
seller's failure to complete these transactions may cause the Fund to miss a
price yield considered to be advantageous. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. The Fund may dispose of
a commitment prior to settlement if the adviser deems it appropriate to do so.
In addition, the Fund may enter in transactions to sell its purchase commitments
to third parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. The Fund may realize
short-term profits or losses upon the sale of such commitments. PORTFOLIO
TURNOVER The Fund does not attempt to set or meet any specific portfolio
turnover rate, since turnover is incidental to transactions undertaken in an
attempt to achieve the Fund's investment objective. High turnover rates may
result in higher brokerage commissions and capital gains. See "Tax Information"
in this prospectus. HUB AND SPOKE(REGISTERED TRADEMARK) OPTION If the Directors
determine it to be in the best interest of the Fund and its shareholders, the
Fund may in the future seek to achieve its investment objective by investing all
of its assets in another investment company having the same investment objective
and substantially the same investment policies and restrictions as those
applicable to the Fund. It is expected that any such investment company would be
managed in substantially the same manner as the Fund. The initial shareholder of
the Fund (which is an affiliate of Federated Securities Corp.) voted to vest
authority to use this investment structure in the sole discretion of the
Directors. No further approval of shareholders is required. Shareholders will
receive at least 30 days prior notice of any such investment. In making its
determination, the Directors will consider, among other things, the benefits to
shareholders and/or the opportunity to reduce costs and achieve operational
efficiencies. Although it is expected that the Directors will not approve an
arrangement that is likely to result in higher costs, no assurance is given that
costs will remain the same or be materially reduced if this investment structure
is implemented.

INVESTING IN INSTITUTIONAL SERVICE SHARES
SHARE PURCHASES
Shares are sold at their net asset value, without a sales charge, next
determined after an order is received on days on which the New York Stock
Exchange is open for business. Shares may be purchased either by wire or mail.
To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish the account will be taken over the telephone.
The Fund reserves the right to reject any purchase request. BY WIRE To purchase
Shares by Federal Reserve wire, call the Fund before 4:00 p.m. (Eastern time) to
place an order. The order is considered received immediately. Payment by federal
funds must be received before 3:00 p.m. (Eastern time) on the next business day
following the order. Federal funds should be wired as follows: Federated
Shareholder Services Company, c/o State Street Bank and Trust Company, Boston,
Massachusetts; Attention: EDGEWIRE; For Credit to: Federated Government Fund --
Institutional Service Shares; Fund Number (this number can be found on the
account statement or by contacting the Fund); Group Number or Order Number;
Nominee or Institution Name; ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire purchases
should be directed to your shareholder services representative at the telephone
number listed on your account statement. BY MAIL To purchase Shares by mail,
send a check made payable to Federated Government Fund -- Institutional Service
Shares to: Federated Shareholder Services Company, P.O. Box 8600, Boston,
Massachusetts 02266-8600. Orders by mail are considered received when payment by
check is converted by State Street Bank and Trust Company ("State Street Bank")
into federal funds. This is normally the next business day after State Street
Bank receives the check. MINIMUM INVESTMENT REQUIRED The minimum initial
investment in the Fund is $25,000 plus any non-affiliated bank or broker's fee.
However, an account may be opened with a smaller amount as long as the $25,000
minimum is reached within 90 days. An institutional investor's minimum
investment will be calculated by combining all accounts it maintains with the
Fund. Accounts established through a non-affiliated bank or broker may be
subject to a smaller minimum investment. WHAT SHARES COST Shares are sold at
their net asset value next determined after an order is received. There is no
sales charge imposed by the Fund. Investors who purchase Shares through a
financial intermediary may be charged a service fee by that financial
intermediary.

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

DIVIDENDS AND DISTRIBUTIONS
Dividends are declared daily and paid monthly. Distributions of any net realized
long-term capital gains will be made at least once every twelve months.
Dividends and distributions are automatically reinvested in additional Shares on
payment dates at net asset value, unless cash payments are requested by
shareholders on the application or by writing to Federated Securities Corp.
Dividends are declared just prior to determining net asset value. If an order
for Shares is placed on the preceding business day, Shares purchased by wire
begin earning dividends on the business day wire payment is received by State
Street Bank. If the order for Shares and payment by wire are received on the
same day, Shares begin earning dividends on the next business day. Shares
purchased by check begin earning dividends on the business day after the check
is converted, upon instruction of the transfer agent, into federal funds. Shares
earn dividends through the business day that proper redemption instructions are
received by State Street Bank. REDEEMING INSTITUTIONAL SERVICE SHARES The Fund
redeems Shares at their net asset value next determined after the Fund receives
the redemption request. Investors who redeem Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset value.
Redemption requests must be received in proper form and can be made by telephone
request or by written request. TELEPHONE REDEMPTION Shareholders may redeem
their Shares by telephoning the Fund before 4:00 p.m. (Eastern time). The
proceeds will normally be wired the following business day, but in no event more
than seven days, to the shareholder's account at a domestic commercial bank that
is a member of the Federal Reserve System. Proceeds from redemption requests
received on holidays when wire transfers are restricted will be wired the
following business day. Questions about telephone redemptions on days when wire
transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders will be promptly notified. An authorization
form permitting the Fund to accept telephone requests must first be completed.
Authorization forms and information on this service are available from Federated
Securities Corp. Telephone redemption instructions may be recorded. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption, such as "Written Requests," should be considered. WRITTEN REQUESTS
Shares may be redeemed in any amount by mailing a written request to: Federated
Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600.
If share certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above. The
written request should state: the Fund name and the class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. Normally, a check
for the proceeds is mailed within one business day, but in no event more than
seven days, after the receipt of a proper written redemption request. Dividends
are paid up to and including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public. ACCOUNTS WITH LOW
BALANCES Due to the high cost of maintaining accounts with low balances, the
Fund may redeem Shares in any account, and pay the proceeds to the shareholder,
if the account balance falls below a required minimum value of $25,000 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $25,000 because of changes in the Fund's net asset value.
Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

FUND INFORMATION
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Corporation's business affairs and for exercising all the
Corporation's powers except those reserved for the shareholders. The Executive
Committee of the Board of Directors handles the Directors' responsibilities
between meetings of the Directors.
INVESTMENT ADVISER
Investment decisions for the Fund are made by Federated Management, the Fund's
investment adviser, subject to direction by the Directors. The adviser
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the Fund.
ADVISORY FEES
The Fund's adviser receives an annual investment advisory fee equal to .40% of
the Fund's average daily net assets. Under the investment advisory contract,
which provides for voluntary waivers of expenses by the adviser, the adviser may
voluntarily waive some or all of its fee. The adviser can terminate this
voluntary waiver of some or all of its advisory fee at any time at its sole
discretion. ADVISER'S BACKGROUND Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors. Federated Management and
other subsidiaries of Federated Investors serve as investment advisers to a
number of investment companies and private accounts. Certain other subsidiaries
also provide administrative services to a number of investment companies. With
over $110 billion invested across over 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1996, Federated Investors
is one of the largest mutual fund investment managers in the United States. With
more than 2,000 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,500 financial institutions nationwide. Both the Corporation and the
adviser have adopted strict codes of ethics governing the conduct of all
employees who manage the Fund and its portfolio securities. These codes
recognize that such persons owe a fiduciary duty to the Fund's shareholders and
must place the interests of shareholders ahead of the employees' own interests.
Among other things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in securities
being purchased or sold, or being considered for purchase or sale, by the Fund;
prohibit purchasing securities in initial public offerings; and prohibit taking
profits on securities held for less than sixty days. Violations of the codes are
subject to review by the Directors and could result in severe penalties.
Kathleen M. Foody-Malus has been the Fund's portfolio manager since inception.
Ms. Foody-Malus joined Federated Investors in 1983 and has been a Vice President
of the Fund's investment adviser since 1993. Ms. Foody-Malus served as an
Assistant Vice President of the investment adviser from 1990 until 1992. Ms.
Foody-Malus received her M.B.A. in Accounting/Finance from the University of
Pittsburgh. Edward J. Tiedge has been the Fund's portfolio manager since
inception. Mr. Tiedge joined Federated Investors in 1993 and has been a Vice
President of the Fund's investment adviser since January 1996. He served as an
Assistant Vice President of the Fund's investment adviser in 1995, and an
Investment Analyst during 1993 and 1994. Mr. Tiedge served as Director of
Investments at Duquesne Light Company from 1990 to 1993. Mr. Tiedge is a
Chartered Financial Analyst and received his M.S.I.A. concentrating in Finance
from Carnegie Mellon University. Donald T. Ellenberger has been the Fund's
portfolio manager since inception. Mr. Ellenberger joined Federated Investors in
1996 as a Vice President of a Federated advisory subsidiary. He has been a Vice
President of the Fund's investment adviser since March, 1997. From 1986 to 1996,
he served as a Trader/Portfolio Manager for Mellon Bank, N.A. Mr. Ellenberger
received his M.B.A. in Finance from Stanford University. DISTRIBUTION OF
INSTITUTIONAL SERVICE SHARES Federated Securities Corp. is the principal
distributor for Institutional Service Shares. It is a Pennsylvania corporation
organized on November 14, 1969, and is the principal distributor for a number of
investment companies. Federated Securities Corp. is a subsidiary of Federated
Investors. DISTRIBUTION PLAN AND SHAREHOLDER SERVICES Under a distribution plan
adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940
(the "Plan"), the distributor may be paid a fee by the Fund in an amount
computed at an annual rate of .25% of the average daily net asset value of
Institutional Service Shares of the Fund. The distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales services or distribution-related
support services as agents for their clients or customers. The Plan is a
compensation-type plan. As such, the Fund makes no payments to the distributor
except as described above. Therefore, the Fund does not pay for unreimbursed
expenses of the distributor, including amounts expended by the distributor in
excess of amounts received by it from the Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
distributor's overhead expenses. However, the distributor may be able to recover
such amounts or may earn a profit from future payments made by the Fund under
the Plan. In addition, the Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to .25% of the average
daily net asset value of Shares to obtain certain personal services for
shareholders and to maintain shareholder accounts. From time to time and for
such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS In addition to payments made
pursuant to the Plan and Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may pay
financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or shareholder services.
The support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Fund' s investment adviser or its affiliates. ADMINISTRATION
OF THE FUND ADMINISTRATIVE SERVICES Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the Fund.
Federated Services Company provides these at an annual rate which relates to the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors as specified below:

MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
-------- ------------------------------
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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 choose voluntarily to waive a portion of
its fee.
SHAREHOLDER INFORMATION
VOTING RIGHTS

Each Share of the Fund is entitled to one vote at all meetings of shareholders.
All shares of all portfolios in the Corporation have equal voting rights except
that in matters affecting only a particular portfolio or class of shares, only
shares of that portfolio or class of shares are entitled to vote. As of October
28, 1997, Federated Securities Corp., who was the record owner of 367,774
(72.08%) of the Institutional Shares of the Fund, may for certain purposes be
deemed to control the Fund and be able to affect the outcome of certain matters
presented for a vote of shareholders.

TAX INFORMATION
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Corporation's other portfolios will not be combined for tax purposes with those
realized by the Fund. Unless otherwise exempt, shareholders are required to pay
federal income tax on any dividends and other distributions, including capital
gains distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-term
capital gains no matter how long the shareholders have held their shares.
Information on the tax status of dividends and distributions is provided
annually. STATE AND LOCAL TAXES Shares are exempt from personal property taxes
imposed by counties, municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws. PERFORMANCE INFORMATION From time
to time, the Fund advertises its total return and yield. Total return represents
the change, over a specified period of time, in the value of an investment in
the Fund after reinvesting all income and capital gains distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage. The yield of the Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This number is then annualized using
semi-annual compounding. The yield does not necessarily reflect income actually
earned by the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders. Shares are sold without any sales charge or
other similar non-recurring charges. Total return and yield will be calculated
separately for Institutional Service Shares and Institutional Shares. From time
to time, advertisements for the Fund's Institutional Service Shares may refer to
ratings, rankings, and other information in certain financial publications
and/or compare the Fund's Institutional Service Shares performance to certain
indices. OTHER CLASSES OF SHARES The Fund also offers another class of shares
called Institutional Shares which are sold at net asset value to accounts for
financial institutions and are subject to aminimum initial investment of
$100,000 over a 90-day period. Institutional Shares are distributed with no
12b-1 Plan and may be subject to shareholder services fees. Institutional Shares
and Institutional Service Shares are subject to certain of the same expenses.
Expense differences, however, between Institutional Shares and Institutional
Service Shares may affect the performance of each class. To obtain more
information and a prospectus for Institutional Shares, investors may call
1-800-341-7400.

PORTFOLIO OF INVESTMENTS
FEDERATED GOVERNMENT FUND
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- --------------------------------------------------------------------------------- ---------
<C> <S> <C>
MORTGAGE BACKED SECURITIES -- 94.9%
- -------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 49.2%
- -------------------------------------------------------------------------------------------------
$195,359 6.00%, 5/1/2011 $191,039
---------------------------------------------------------------------------------
636,559 6.50%, 4/1/2012 - 2/1/2024 627,169
---------------------------------------------------------------------------------
909,922 7.50%, 11/1/2025 927,839
---------------------------------------------------------------------------------
906,603 Series 180-2, 7.50%, 10/1/2026, (Interest Only) 272,180
---------------------------------------------------------------------------------
482,286 9.00%, 1/1/2025 514,088
--------------------------------------------------------------------------------- ----------
Total 2,532,315
--------------------------------------------------------------------------------- ----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 25.0%
- -------------------------------------------------------------------------------------------------
375,000 Series 1996-50-P, .000%, 11/25/2026, (Principal Only) 352,500
---------------------------------------------------------------------------------
595,270 8.00%, 12/1/2026 614,730
---------------------------------------------------------------------------------
307,689 8.50%, 12/1/2024 322,114
--------------------------------------------------------------------------------- ----------
Total 1,289,344
--------------------------------------------------------------------------------- ----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 20.7%
- -------------------------------------------------------------------------------------------------
1,064,442 7.00%, 10/15/2023 1,067,763
--------------------------------------------------------------------------------- ----------
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST $4,742,863) 4,889,422
--------------------------------------------------------------------------------- ----------
U.S. TREASURY OBLIGATIONS -- 2.0%
- -------------------------------------------------------------------------------------------------
100,000 6.250%, 8/31/2002 (identified cost $99,930) 100,980
--------------------------------------------------------------------------------- ----------
(A)REPURCHASE AGREEMENT -- 3.7%
- -------------------------------------------------------------------------------------------------
190,000 BT Securities Corp., 6.07%, dated 9/30/1997, due 10/1/1997 (at amortized cost) 190,000
--------------------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $5,032,793)(B) $5,180,402
--------------------------------------------------------------------------------- ----------
</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 $5,036,716. The
net unrealized appreciation of investments on a federal tax basis amounts to
$143,686 which is comprised of $198,342 appreciation and $54,656
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($5,150,266) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
Federated Government Fund:
We have audited the accompanying statement of assets and liabilities of
Federated Government Fund, including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statement of
changes in net assets, and the financial highlights for the period presented
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, by correspondence with the custodian and brokers or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Federated Government Fund at September 30, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
period presented therein, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
November 14, 1997

[LOGO] FEDERATED INVESTORS
FEDERATED
GOVERNMENT
FUND

(A portfolio of Federated Total Return Series, Inc.)

Institutional Service Shares

PROSPECTUS
NOVEMBER 30, 1997

A Diversified Portfolio of Federated Total Return Series, Inc., an Open-
End, Management Investment Company

FEDERATED
GOVERNMENT FUND

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

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER

Federated Management
Federated Investors Tower
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 PUBLIC ACCOUNTANTS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
Federated Investors Tower
Pittsburgh, PA 15222-3779
1-800-341-7400
www.federatedinvestors.com
Cusip 31428Q804

G01922-02-SS (11/97)

[RECYCLE LOGO]

FEDERATED GOVERNMENT FUND
(A PORTFOLIO OF FEDERATED TOTAL RETURN SERIES, INC.)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
prospectus(es) of Federated Government Fund (the "Fund"), a portfolio of
Federated Total Return Series, Inc. (the "Corporation") dated November 30,
1997. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.

FEDERATED GOVERNMENT FUND
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000

Statement dated November 30, 1997
[GRAPHIC OMITTED]

Cusip 31428Q887
Cusip 31428Q804
G01922-03(11/97)

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TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Adjustable Rate Mortgage Securities ("ARMS") 1
Collateralized Mortgage Obligations ("CMOs") 1
Real Estate Mortgage Investment Conduits ("REMICs") 2
Interest-Only and Principal-Only Investments 2
Privately Issued Mortgage-Related Securities 2
Resets of Interest 2
Caps and Floors 3
Futures and Options Transactions 3
Leveraging 4
Leverage Through Borrowing 4
Medium Term Notes and Deposit Notes 5
Average Life 5
Weighted Average Portfolio Duration 5
Lending of Portfolio Securities 6
When-Issued and Delayed Delivery Transactions 6
Repurchase Agreements 6
Reverse Repurchase Agreements 6
Investing in Securities of Other Investment Companies 6
Portfolio Turnover 6

INVESTMENT LIMITATIONS 7

FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT 8
Fund Ownership 11
Directors' Compensation 12
Director Liability 12

INVESTMENT ADVISORY SERVICES 13
Adviser to the Fund 13
Advisory Fees 13

BROKERAGE TRANSACTIONS 13

OTHER SERVICES 13
Fund Administration 13
Custodian and Portfolio Accountant 13
Transfer Agent 14
Independent Auditors 14

PURCHASING SHARES 14
Distribution Plan (Institutional
Service Shares only) and Shareholder Services 14

DETERMINING NET ASSET VALUE 14
Determining Market Value of Securities14
Use of Amortized Cost 15

REDEEMING SHARES 15
Redemption In Kind 15

TAX STATUS 15
The Fund's Tax Status 15
Shareholders' Tax Status 15

TOTAL RETURN 16

YIELD 16

PERFORMANCE COMPARISONS 16
Economic and Market Information 18

ABOUT FEDERATED INVESTORS 18
Mutual Fund Market 19

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GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio of Federated Total Return Series, Inc. The
Corporation was incorporated under the laws of the State of Maryland on October
11, 1993. On March 21, 1995, the name of the Corporation was changed from
"Insight Institutional Series, Inc." to "Federated Total Return Series, Inc."
The Articles of Incorporation permit the Corporation to offer separate
portfolios and classes of shares. Shares of the Fund are offered in two classes,
known as Institutional Shares and Institutional Service Shares (individually and
collectively referred to as "Shares," as the context may require). This
Statement of Additional Information relates to the above-mentioned Shares of the
Fund.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide total return. The
investment objective cannot be changed without approval of shareholders. The
investment policies stated below may be changed by the Board of Directors
("Directors") without shareholder approval. Shareholders will be notified before
any material change in the investment policies becomes effective.

TYPES OF INVESTMENTS

Under normal circumstances, the Fund will invest at least 65% of the value of
its total assets in securities that are issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund may also invest in the
securities described below and in the prospectus.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")

The ARMS in which the Fund invests generally will be issued by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. Unlike conventional bonds, ARMs pay back
principal over the life of the ARMS rather than at maturity. Thus, a holder of
the ARMS, such as the Fund, would receive monthly scheduled payments of
principal and interest, and may receive unscheduled principal payments
representing payments on the underlying mortgages. At the time that a holder of
the ARMS reinvests the payments and any unscheduled prepayments of principal
that it receives, the holder may receive a rate of interest which is actually
lower than the rate of interest paid on the existing ARMS. As a consequence,
ARMS may be a less effective means of "locking in" long-term interest rates than
other types of U.S. government securities. Like other U.S. government
securities, the market value of ARMS will generally vary inversely with changes
in market interest rates. Thus, the market value of ARMS generally declines when
interest rates rise and generally rises when interest rates decline. While ARMS
generally entail less risk of a decline during periods of rising rates, ARMS may
also have less potential for capital appreciation than other similar investments
(e.g., investments with comparable maturities) because, as interest rates
decline, the likelihood increases that mortgages will be prepaid. Furthermore,
if ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal payments may result in some loss of a holder's principal investment to
the extent of the premium paid. Conversely, if ARMS are purchased at a discount,
both a scheduled payment of principal and an unscheduled prepayment of principal
would increase current and total returns and would accelerate the recognition of
income, which would be taxed as ordinary income when distributed to
shareholders. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")

The following example illustrates how mortgage cash flows are prioritized in the
case of CMOs; most of the CMOs in which the Fund invests use the same basic
structure:
(1) Several classes of securities are issued against a pool of mortgage
collateral. The most common structure contains four classes of securities. The
first three (A, B, and C bonds) pay interest at their stated rates beginning
with the issue date, and the final class (Z bond) typically receives any excess
income from the underlying investments after payments are made to the other
classes and receives no principal or interest payments until the shorter
maturity classes have been retired, but then receives all remaining principal
and interest payments; (2) The cash flows from the underlying mortgages are
applied first to pay interest and then to retire securities; and

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The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are two main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
180-day Treasury Bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. To the extent that the
adjusted interest rate on the mortgage security reflects current market rates,
the market value of an adjustable rate mortgage security will tend to be less
sensitive to interest rate changes than a fixed rate debt security of the same
stated maturity. Hence, ARMS which use indices that lag changes in market rates
should experience greater price volatility than adjustable rate mortgage
securities that closely mirror the market.

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CAPS AND FLOORS

The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in which
the Fund invests will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down:
(1) per reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages. FUTURES AND OPTIONS TRANSACTIONS

The Fund may purchase listed put options on financial futures contracts.

Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. The Fund would
purchase put options on futures contracts to protect portfolio securities
against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures
contracts will also decrease in value and the option will increase in
value. In such an event, the Fund will normally close out its option by
selling an identical option. If the hedge is successful, the proceeds
received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option
plus the decrease in value of the hedged securities. Alternatively, the
Fund may exercise its put option. To do so, it would simultaneously enter
into a futures contract of the type underlying the option (for a price
less than the strike price of the option) and exercise the option. The
Fund would then deliver the futures contract in return for payment of the
strike price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and the
premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS

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In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise. Prior to the expiration of a call
written by the Fund, or exercise of it by the buyer, the Fund may close
out the option by buying an identical option. If the hedge is successful,
the cost of the second option will be less than the premium received by
the Fund for the initial option. The net premium income of the Fund will
then offset the decrease in value of the hedged securities. The Fund will
not maintain open positions in futures contracts it has sold or call
options it has written on futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or
loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this
limitation is exceeded at any time, the Fund will take prompt action to
close out a sufficient number of open contracts to bring its open futures
and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS

Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. A futures contract held by the Fund is valued daily
at the official settlement price of the exchange on which it is traded.
Each day the Fund pays or receives cash, called "variation margin," equal
to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the Fund
and the broker of the amount one would owe the other if the futures
contract expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures
contracts.

PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES

Leveraging exaggerates the effect on the net asset value of any increase or
decrease in the market value of the portfolio. Money borrowed for leveraging
will be limited to 33 1/3% of the value of the Fund's total assets. These
borrowings will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased; in certain cases, interest costs
may exceed the return received on the securities purchased. LEVERAGE THROUGH
BORROWING

For the borrowings for investment purposes, the Investment Company Act of 1940
requires the Fund to maintain continuous asset coverage (i.e., total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. If the required coverage should decline as a result of market
fluctuations or other reason, the Fund may be required to sell some of its
portfolio holdings within 3 days to reduce the debt and restore the 300%
coverage, even though it may be disadvantageous from an investment standpoint to
sell at that time. The Fund also may be

<PAGE>

required to maintain minimum average balances in connection with such borrowings
or to pay a commitment fee to maintain a line of credit; either of those
requirements would increase the cost of borrowings over the stated rate. To the
extent the Fund enters into a reverse repurchase agreement, the Fund will
maintain in a segregated custodial account cash or U.S. governement securities
or other high quality liquid debt securities at least equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest in certain
cases, in accordance with releases promulgated by the SEC.
The SEC views reverse repurchase transactions as collateralized borrowings by
the Fund.
MEDIUM TERM NOTES AND DEPOSIT NOTES

Medium Term Notes ("MTNs") and Deposit Notes are similar to corporate debt
obligations as described in the prospectus. MTNs and Deposit Notes trade like
commercial paper, but may have maturities from 9 months to ten years.

AVERAGE LIFE

Average Life, as applicable to asset-backed securities, is computed by
multiplying each principal repayment by the time of payment (months or years
from the evaluation date), summing these products, and dividing the sum by the
total amount of principal repaid. The weighted-average life is calculated by
multiplying the maturity of each security in a given pool by its remaining
balance, summing the products, and dividing the result by the total remaining
balance.

WEIGHTED AVERAGE PORTFOLIO DURATION

Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends upon three primary variables:
the security's coupon rate, maturity date and the level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities. Duration is calculated by dividing the sum of the
time-weighted present values of cash flows of a security or portfolio of
securities, including principal and interest payments, by the sum of the present
values of the cash flows. The duration of interest rate agreements, such as
interest rates swaps, caps and floors, is calculated in the same manner as other
securities. However, certain interest rate agreements have negative durations,
which the Fund may use to reduce its weighted average portfolio duration.
Mathematically, duration is measured as follows: Duration = PVCF1(1) + PVCF2(2)
+ PVCF3(3) + ... + PVCFn(n)
PVTCF PVTCF PVTCF PVTCF
where
PVCTFt= the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity. Certain debt
securities, such as mortgage-backed and asset-backed securities, may be subject
to prepayment at irregular intervals. The duration of these instruments will be
calculated based upon assumptions established by the investment adviser as the
probable amount and sequence of principal prepayments. Duration calculated in
this manner, commonly referred to as "effective duration," allows for changing
prepayment rates as interest rates change and expected future cash flows are
affected. The calculation of effective duration will depend upon the investment
adviser's assumed prepayment rate.

<PAGE>

LENDING OF PORTFOLIO SECURITIES

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the
extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. 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 guidelines established by the Directors. REVERSE
REPURCHASE AGREEMENTS

The Fund may also enter into reverse repurchase agreements. This transaction is
similar to borrowing cash. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time. When
effecting reverse repurchase agreements, liquid assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily and
maintained until the transaction is settled.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of affiliated money market funds as an
efficient means of managing the Fund's uninvested cash.
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. Portfolio securities will be sold when the
adviser believes it is appropriate, regardless of how long those securities have
been held. The adviser does not anticipate that the Fund's portfolio turnover
rate will exceed 100%. For the period from May 31, 1997 (start of performance)
to September 30, 1997, the Fund's portfolio turnover rate was 9%.

<PAGE>

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

BORROWING MONEY

The Fund will not borrow money, except to the extent permitted under the 1940
Act (which currently limits borrowings to no more than 33 1/3% of the value of
the Fund's total assets). For purposes of this investment restriction, the entry
into options, forward contracts, futures contracts, including those related to
indices, options on futures contracts or indices, and dollar roll transactions
shall not constitute borrowing.

CONCENTRATION OF INVESTMENTS

The Fund will not invest more than 25% of its total assets in securities of
issuers having their principal business activities in the same industry.

DIVERSIFICATION OF INVESTMENTS

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

PLEDGING ASSETS

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

LENDING CASH OR SECURITIES

The Fund will not lend any assets except portfolio securities. (This will
not prevent the purchase or holding of bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase agreements or
other transactions which are permitted by the Fund's investment objective and
policies or Articles of Incorporation).

ISSUING SENIOR SECURITIES

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

The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Directors without
shareholder approval [except that no investment limitation of the Fund shall
prevent the Fund from investing substantially all of its assets (except for
assets which are not considered "investment securities" under the Investment
Company Act of 1940, or assets exempted by the Securities and Exchange
Commission) in an open-end investment company with substantially the same
investment objectives]. Shareholders will be notified before any material
changes in this limitation become effective.

INVESTING IN RESTRICTED AND ILLIQUID SECURITIES

The Fund will not invest more than 15% of its net assets in illiquid securities,
including certain restricted securities (except for Section 4(2) commercial
paper and certain other restricted securities which meet the criteria for
liquidity as established by the Directors), non-negotiable time deposits, and
repurchase agreements providing for settlement in more than seven days after
notice. Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.

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FEDERATED TOTAL RETURN SERIES, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Total Return Series, Inc., and principal occupations.

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

Chairman and Director

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934

Director

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

Director

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

Director

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

Executive Vice President and Director

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

Director

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

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

Director

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

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

Director

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

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

Director

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

<PAGE>

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

Director

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

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

Director

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

Director

Public relations/Marketing/Conference Planning; Director or Trustee of the
Funds.

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

President

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

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

Executive Vice President

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

Executive Vice President , Secretary and Treasurer

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

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

FUND OWNERSHIP

Officers and Directors as a group own less than 1% of the Fund`s outstanding
shares.

As of October 28, 1997, the following shareholders of record owned 5% or more of
the outstanding Institutional Shares of the Fund: Colonial Trust Co., Pheonix,
AZ owned 62,790 (12.31%) and Federated Securities Corp., Pittsburgh, PA owned
367,774 (72.08%). No shareholders of record owned 5% or more of the outstanding
Institutional Service Shares of the Fund.