FEDERATED TOTAL RETURN SERIES INC, N-30D, 1998-12-03

FEDERATED TOTAL RETURN SERIES INC
N-30D, 1998-12-03

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Federated Mortgage Fund

(formerly, Federated Government Fund)

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

PROSPECTUS

The Institutional Shares of Federated Mortgage 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.

The Fund has also filed a Statement of Additional Information dated November 30,
1998, 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, 1998

TABLE OF CONTENTS

Summary of Fund Expenses 1

Financial Highlights - Institutional Shares 2

General Information 3

Year 2000 Statement 3

Investment Information 3

Investment Objective 3

Investment Policies 3

Portfolio Turnover 9

Hub and Spoke [Registered Trademark] Option 9

Net Asset Value 9

Investing in Institutional Shares 9

Share Purchases 9

Minimum Investment Required 9

What Shares Cost 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 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 Inside Back Cover

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 0.26%
Shareholder Services Fee(2) 0.00%
Total Operating Expenses(3) 0.26%
</TABLE>

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

(3) The total operating expenses would have been 7.48% absent the voluntary
waivers of the management fee and the 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 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.

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 $ 3
3 Years $ 8
5 Years $15
10 Years $33

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
FEDERATED MORTGAGE FUND

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
the inside back cover.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.95 0.25
Net realized and unrealized gain (loss) on investments (0.15) 0.26
Total from investment operations 0.80 0.51
LESS DISTRIBUTIONS
Distributions from net investment income (0.95) (0.25)
NET ASSET VALUE, END OF PERIOD $10.11 $10.26
TOTAL RETURN(B) 8.25% 5.12 %
RATIOS TO AVERAGE NET ASSETS
Expenses 0.26% 0.00%*
Net investment income 9.42% 7.37%*
Expense waiver/reimbursement(c) 7.22% 12.25%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $5,224 $5,145
Portfolio turnover 147% 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.

YEAR 2000 STATEMENT
Like other mutual funds and business organizations worldwide, the Fund's service
providers (among them, the adviser, distributor, administrator, and transfer
agent) must ensure that their computer systems are adjusted to properly process
and calculate date-related information from and after January 1, 2000. Many
software programs and, to a lesser extent, the computer hardware in use today
cannot distinguish the year 2000 from the year 1900. Such a design flaw could
have a negative impact in the handling of securities trades, pricing, and
accounting services. The Fund and its service providers are actively working on
necessary changes to computer systems to deal with the year 2000 issue and
believe that systems will be year 2000 compliant when required. Analysis
continues regarding the financial impact of instituting a year 2000 compliant
program on the Fund's operations.

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 mortgage-backed
securities. Under normal circumstances, the Fund will invest at least 65% of the
value of its total assets in mortgage-backed securities. Mortgage-backed
securities may be issued by agencies or instrumentalities of the U.S. government
or by private entities. 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 include:

* 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
("S&P"), or Fitch IBCA, Inc. ("Fitch"), or which are of comparable quality in
the judgment of the adviser.

* mortgage-backed securities issued by private entities (including commercial
and residential mortgage-backed securities, and home equity loan securities).

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, and manufactured housing (mobile home)
leases. 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,
including the securities of money market funds, 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 Mortgage
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 Mortgage
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, Jr. Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

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.

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 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.

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.

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, Inc. All of the Class A (voting) shares of
Federated Investors, Inc. are owned by a trust, the trustees of which are John
F. Donahue, Chairman and Director of Federated Investors, Inc., Mr. Donahue's
wife, and Mr.Donahue's son, J. Christopher Donahue, who is President and
Director of Federated Investors, Inc.

Federated Management and other subsidiaries of Federated Investors, Inc. 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 $120 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, Federated Investors, Inc. 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 approximately 4,000 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, Inc. or its
predecessor 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, Inc. or its predecessor 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, Inc. or its predecessor 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 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, Inc.

SHAREHOLDER SERVICES

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, Inc., 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, Inc.
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, Inc. 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 November
6, 1998, NFSC FEBO #141-294748, FMT Co. CUST. IRA Rollover FBO Paul E. Holland
and Floyd L. Braud/Vickie M. Braud, who were the record owners of 501 (32.74%)
and 997 (65.16%) respectively, 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 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

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
FEDERATED MORTGAGE FUND

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
the inside back cover.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.92 0.24
Net realized and unrealized gain (loss) on investments (0.15) 0.26
Total from investment operations 0.77 0.50
LESS DISTRIBUTIONS
Distributions from net investment income (0.92) (0.24 )
NET ASSET VALUE, END OF PERIOD $10.11 $10.26
TOTAL RETURN(B) 7.93% 5.07 %
RATIOS TO AVERAGE NET ASSETS
Expenses 0.48% 0.00%*
Net investment income 6.62% 7.76%*
Expense waiver/reimbursement(c) 8.52% 14.14%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $15 $5
Portfolio turnover 147% 9 %
</TABLE>

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

PORTFOLIO OF INVESTMENTS
FEDERATED MORTGAGE FUND

SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
MORTGAGE BACKED SECURITIES--95.1%
FEDERAL HOME LOAN MORTGAGE CORPORATION--25.4%
$ 250,000 Series 2031-BO, 2/20/2028, (Principal Only) $ 216,095
325,000 Series 2081-ED, 7.500%, 8/15/2028, (Interest Only) 59,007
1,024,581 7.500%, 6/1/2027 1,055,953
Total 1,331,055
FEDERAL NATIONAL MORTGAGE ASSOCIATION--37.1%
900,000 Series 98-46-SC, 2.844%, 5/18/2028, REMIC (Interest Only) 100,125
190,000 (a)6.000%, 10/1/2028 189,704
247,501 6.000%, 3/1/2028 247,036
600,395 6.500%, 2/1/2028 - 6/1/2028 610,716
765,505 8.000%, 12/1/2026 794,686
Total 1,942,267
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--32.6%
200,000 Series 97-17-PO, 12/20/2027 (Principal Only) 175,626
100,000 (a)6.000%, 10/1/2028 100,250
398,854 6.500%, 6/15/2028 407,206
927,788 7.000%, 10/15/2023 955,909
326,237 8.000%, 5/16/2027 (Interest Only) 69,733
Total 1,708,724
TOTAL MORTGAGE BACKED SECURITIES (IDENTIFIED COST $4,926,043) 4,982,046
U.S. TREASURY OBLIGATIONS--5.6%
200,000 9.000%, 11/15/2018 (IDENTIFIED COST $280,843) 294,914
</TABLE>

FEDERATED MORTGAGE FUND

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(B)REPURCHASE AGREEMENTS--3.7%
$ 95,000 Credit Suisse First Boston, Inc., 5.500%, dated 9/30/1998, due 10/
1/1998 $ 95,000
100,000 (c)Warburg Dillon Reed LLC, 5.510%, dated 9/11/1998, due 10/21/1998 100,000
TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) 195,000
TOTAL INVESTMENTS (IDENTIFIED COST $5,401,886)(D) $5,471,960
</TABLE>

(a) Indicates securities subject to dollar roll transactions. (b) The
repurchase agreements are fully collateralized by U.S. government and/or agency
obligations based on market prices at the date of the portfolio. The investment
in the repurchase agreements are through participation in joint accounts with
other Fedrerated funds.
(c) Although final maturity falls beyond seven days, a liquidity feature is
included in each transaction to permit termination of the repurchase agreement
within seven days.
(d) The cost of investments for federal tax purposes amounts to $5,401,886. The
net unrealized appreciation of investments on a federal tax basis amounts to
$70,074, which is comprised of $157,925 appreciation and $87,851 depreciation at
September 30, 1998. Note: The categories of investments are shown as a
percentage of net assets ($5,239,249) at September 30, 1998. The following
acronyms are used throughout this portfolio:

LLC--Limited Liability Corporation

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

STATEMENT OF ASSETS AND LIABILITIES
FEDERATED MORTGAGE FUND

SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C> <S>
ASSETS:
Total investments in securities, at value (identified and tax cost
$5,401,886) $5,471,960
Cash 47,940
Income receivable 32,373
Receivable for shares sold 5,000
Total assets 5,557,273
LIABILITIES:
Payable for investments purchased $189,284
Income distribution payable 21,167
Payable for dollar roll transactions 99,425
Accrued Expenses 8,148
Total liabilities 318,024
NET ASSETS for 518,447 shares outstanding $5,239,249
NET ASSETS CONSIST OF:
Paid in capital $5,188,651
Net unrealized appreciation of investments 70,074
Accumulated net realized loss on investments (13,712)
Distributions in excess of net investment income (5,764)
Total net assets $5,239,249
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PROCEEDS PER SHARE:
INSTITUTIONAL SHARES:
$5,223,825 / 516,921 shares outstanding $10.11
INSTITUTIONAL SERVICE SHARES:
$15,424 / 1,526 shares outstanding $10.11
</TABLE>

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

STATEMENT OF OPERATIONS
FEDERATED MORTGAGE FUND

YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest (net of dollar roll expense of $11,537) $501,738
EXPENSES:
Investment advisory fee $ 20,745
Administrative personnel and services fee 155,001
Custodian fees 2,861
Transfer and dividend disbursing agent fees and expenses 39,849
Directors'/Trustees' fees 2,650
Auditing fees 7,025
Legal fees 2,366
Portfolio accounting fees 57,175
Distribution services fee--Institutional Service Shares 7
Shareholder services fee--Institutional Shares 12,958
Shareholder services fee--Institutional Service Shares 7
Share registration costs 57,179
Printing and postage 24,177
Insurance premiums 2,730
Taxes 2,174
Miscellaneous 916
Total expenses 387,820
Waivers and reimbursements--
Waiver of investment advisory fee $ (20,745)
Waiver of distribution services fee--Institutional Service
Shares (6)
Waiver of shareholder services fee--Institutional Shares (12,958)
Reimbursement of other operating expenses (340,834)
Total waivers and reimbursements (374,543)
Net expenses 13,277
Net investment income 488,461
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (3,683)
Net change in unrealized depreciation of investments (75,797)
Net realized and unrealized loss on investments (79,480)
Change in net assets resulting from operations $408,981
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997(A)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 488,461 $ 123,389
Net realized loss on investments ($13,712) and $0, respectively, as
computed for federal tax purposes) (3,683) (15,576)
Net change in unrealized appreciation (depreciation) (75,797) 147,609
Change in net assets resulting from operations 408,981 255,422
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income
Institutional Shares (488,300) (123,380)
Institutional Service Shares (161) (9)
Change in net assets resulting from distributions to shareholders (488,461) (123,389)
SHARE TRANSACTIONS--
Proceeds from sale of shares 5,156,650 10,633,387
Net asset value of shares issued to shareholders in payment of
distributions declared 46,227 278
Cost of shares redeemed (5,034,414) (5,615,432)
Change in net assets resulting from share transactions 168,463 5,018,233
Change in net assets 88,983 5,150,266
NET ASSETS:
Beginning of period 5,150,266 0
End of period (including accumulated distributions in excess of net
investment income of ($5,764) and $0, respectively) $ 5,239,249 $ 5,150,266
</TABLE>

(a) 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 MORTGAGE FUND

SEPTEMBER 30, 1998

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 Mortgage 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.

The Board of Directors approved changing the Fund name from Federated Government
Fund to the Federated Mortgage Fund. This change was effective as of June 30,
1998.

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.

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.

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

At September 30, 1998, the Fund, for federal tax purposes, had a capital loss
carryforward of $13,712, 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
2006 ($13,712).

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

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

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, 1998, 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
Institutional Service Shares 1,000,000
Total shares authorized 2,000,000

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997(A)
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES SHARES AMOUNT SHARES AMOUNT
Shares sold 508,001 $ 5,141,650 1,060,203 $10,628,087
Shares issued to shareholders in payment of distributions declared 4,581 46,199 27 272
Shares redeemed (496,925) (5,029,318) (558,966) (5,615,428)
Net change resulting from Institutional Share transactions 15,657 $ 158,531 501,264 $ 5,012,931

<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997(A)
INSTITUTIONAL SERVICE SHARES SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 1,494 $ 15,000 523 $ 5,300
Shares issued to shareholders in payment of distributions declared 3 28 -- 6
Shares redeemed (494) (5,096) -- (4)
Net change resulting from Institutional Service Share transactions 1,003 $ 9,932 523 $ 5,302
Net change resulting from share transactions 16,660 $ 168,463 501,787 $ 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, Inc. 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 for the period. The fee paid to FSS is used to finance certain
services for shareholders and to maintain shareholder accounts. FSS may
voluntarily choose to waive any portion of its fee. FSS can modify or terminate
this voluntary waiver at any time at its sole discretion.

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

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

GENERAL
Certain of the Officers and Directors of the 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, 1998, were as follows:
PURCHASES $8,528,894
SALES $7,333,371

YEAR 2000 (UNAUDITED)
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Directors of Federated Total Return Series, Inc.
and Shareholders of Federated Mortgage Fund:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of the Federated Mortgage Fund (one of the
portfolios constituting the Federated Total Return Series, Inc.), as of
September 30, 1998, and the related statement of operations for the year then
ended and the statement of changes in net assets and financial highlights for
the periods 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, 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 audits provide 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 Mortgage Fund of the Federated Total Return Series, Inc. at September
30, 1998, the results of its operations for the year then ended and the changes
in its net assets and financial highlights for the periods presented therein, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Boston, Massachusetts
November 13, 1998

Federated Mortgage Fund
(formerly, Federated Government Fund)
(A Portfolio of Federated
Total Return Series, Inc.)
Institutional Shares

PROSPECTUS
NOVEMBER 30, 1998

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

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

DISTRIBUTOR

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

INVESTMENT ADVISER
Federated Management
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

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

TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600

INDEPENDENT AUDITORS

Ernst & Young LLP
200 Claredon Street
Boston, MA 02116

Federated Securities Corp., Distributor

1-800-341-7400

www.federatedinvestors.com

Cusip 31428Q887
G01922-01-IS (11/98)

[Graphic]

Federated Mortgage Fund

(formerly, Federated Government Fund)
(A Portfolio of Federated Total Return Series, Inc.)
Institutional Service Shares

PROSPECTUS

The Institutional Service Shares of Federated Mortgage 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.

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, 1998

TABLE OF CONTENTS

Summary of Fund Expenses 1

Financial Highlights - Institutional Service Shares 2

General Information 3

Year 2000 Statement 3

Investment Information 3

Investment Objective 3

Investment Policies 3

Portfolio Turnover 9

Hub and Spoke [registered trademark] Option 9

Net Asset Value 9

Investing in Institutional Service Shares 9

Share Purchases 9

Minimum Investment Required 9

What Shares Cost 10

Confirmations and Account Statements 10

Dividends and Distributions 10

Redeeming Institutional Service 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 Inside Back Cover

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>
<S> <C> <C>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(1) 0.00%
12b-1 Fee (after waiver)(2) 0.03%
Total Other Expenses 0.45%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 0.48%
</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
as its sole discretion. The maximum 12b-1 fee is 0.25%.
(3) The total operating expenses would have been 9.00% 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 "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 $ 5
3 Years $15
5 Years $27
10 Years $60

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
FEDERATED MORTGAGE FUND
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Report of Ernst & Young LLP, Independent Auditors on
the inside back cover.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997(A)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.26 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.92 0.24
Net realized and unrealized gain (loss) on investments (0.15) 0.26
Total from investment operations 0.77 0.50
LESS DISTRIBUTIONS
Distributions from net investment income (0.92) (0.24)
NET ASSET VALUE, END OF PERIOD $10.11 $10.26
TOTAL RETURN(B) 7.93% 5.07%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.48% 0.00%*
Net investment income 6.62% 7.76%*
Expense waiver/reimbursement(c) 8.52% 14.14%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $15 $5
Portfolio turnover 147% 9%
</TABLE>

(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 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.