United States
Securities and Exchange Commission
Washington, D.C. 20549
Form N-CSR
Certified Shareholder Report of Registered Management Investment Companies
811-4489
(Investment Company Act File Number)
Federated U.S. Government Bond Fund
---------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Date of Fiscal Year End: 8/31/05
Date of Reporting Period: Fiscal year ended 8/31/05
-------------------------
Item 1. Reports to Stockholders
Federated
World-Class Investment Manager
Federated U.S. Government Bond Fund
ANNUAL SHAREHOLDER REPORT
August 31, 2005
FINANCIAL HIGHLIGHTS
SHAREHOLDER EXPENSE EXAMPLE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
PORTFOLIO OF INVESTMENTS SUMMARY TABLES
PORTFOLIO OF INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF TRUSTEES AND FUND OFFICERS
BOARD REVIEW OF ADVISORY CONTRACT
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
QUARTERLY PORTFOLIO SCHEDULE
Not FDIC Insured * May Lose Value * No Bank Guarantee
Federated Investors 50 Years of Growth & Innovation
Financial Highlights
(For a Share Outstanding Throughout Each Period)
| Year Ended August 31 | | 2005 | 1 | | 2004 | | 2003 | | 2002 | | 2001 | ||||
| Net Asset Value, Beginning of Period | $11.54 | $11.10 | $11.45 | $10.93 | $10.27 | ||||||||||
| Income From Investment Operations: | |||||||||||||||
| Net investment income | 0.49 | 0.47 | 0.48 | 0.51 | 0.53 | ||||||||||
| Net realized and unrealized gain (loss) on investments and futures contracts | 0.62 | 0.49 | (0.29 | ) | 0.54 | 0.65 | |||||||||
| TOTAL FROM INVESTMENT OPERATIONS | 1.11 | 0.96 | 0.19 | 1.05 | 1.18 | ||||||||||
| Less Distributions: | |||||||||||||||
| Distributions from net investment income | (0.49 | ) | (0.47 | ) | (0.48 | ) | (0.51 | ) | (0.52 | ) | |||||
| Distributions from net realized gain on investments | - -- | (0.05 | ) | (0.06 | ) | (0.02 | ) | - -- | |||||||
| TOTAL DISTRIBUTIONS | (0.49 | ) | (0.52 | ) | (0.54 | ) | (0.53 | ) | (0.52 | ) | |||||
| Net Asset Value, End of Period | $12.16 | $11.54 | $11.10 | $11.45 | $10.93 | ||||||||||
| Total Return 2 | 9.88 | % | 8.81 | % | 1.55 | % | 9.99 | % | 11.82 | % | |||||
| Ratios to Average Net Assets: | |||||||||||||||
| Net expenses | 0.91 | % | 0.91 | % | 0.91 | % | 0.91 | % | 0.92 | % | |||||
| Net investment income | 4.22 | % | 4.18 | % | 4.13 | % | 4.74 | % | 4.99 | % | |||||
| Expense waiver/reimbursement 3 | 0.35 | % | 0.29 | % | 0.22 | % | 0.27 | % | 0.20 | % | |||||
| Supplemental Data: | |||||||||||||||
| Net assets, end of period (000 omitted) | $80,208 | $95,878 | $111,880 | $107,058 | $115,645 | ||||||||||
| Portfolio turnover | 25 | % | 16 | % | 62 | % | 52 | % | 88 | % | |||||
1 Beginning with the year ended August 31, 2005, the fund was audited by Ernst & Young LLP. The previous years were audited by another independent registered public accounting firm.
2 Based on net asset value, which does not reflect the sales charge, redemption fee, or contingent deferred sales charge, if applicable. Total returns for periods of less than one year are not annualized.
3 This voluntary expense decrease is reflected in both the net expense and the net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Shareholder Expense Example
As a shareholder of the Fund, you incur ongoing costs, including management fees; to the extent applicable, distribution (12b-1) fees and/or shareholder services fees; and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from March 1, 2005 to August 31, 2005.
ACTUAL EXPENSES
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled "Expenses Paid During Period" to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are provided to enable you to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
| | Beginning Account Value 3/1/2005 | | Ending Account Value 8/31/2005 | | Expenses Paid During Period 1 | |
| Actual | $1,000 | $1,063.50 | $4.73 | |||
| Hypothetical (assuming a 5% return before expenses) | $1,000 | $1,020.62 | $4.63 |
1 Expenses are equal to the Fund's annualized expense ratio of 0.91%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).
Management's Discussion of Fund Performance
The Federated U.S. Government Bond Fund's (the "fund") total return for the 12-month reporting period was 9.88%. The total return consisted of 4.51% of taxable dividends and 5.37% in capital appreciation of fund shares. The Merrill Lynch 10+ Year Treasury Index (the "Index"), a performance benchmark for the fund, returned 10.97% during the 12-month reporting period. 1 The fund's total return reflected actual cashflows, transaction costs and other expenses not reflected in the total return of the Index.
During the 12-month reporting period, the fund's investment strategy focused on: (a) duration and yield curve management; and (b) allocation between the U.S. Treasury and U.S. Agency sectors. 2
MARKET OVERVIEW
The U.S. Treasury yield curve ended the fund's annual reporting period flatter with shorter-term yields higher and longer-term yields lower. The Federal Reserve Board (the "Fed") remained in a tightening mode during the reporting period. The Fed increased the Federal Funds Target Rate eight times during the reporting period to 3.50% from the beginning period level of 1.50%. Yields ended the reporting period lower with 10-year and 30-year Treasury securities at 4.01% and 4.25%, respectively, at the end of August 2005. 3
1 The Index is an unmanaged index which includes U.S. Treasury securities with maturities greater than ten years. Investments cannot be made in an index.
2 Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities with shorter durations.
3 Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
The 2- to 30-year Treasury yield curve flattened significantly, with only a 44 basis point difference between the 2-year and the 30-year yield at the end of the reporting period, as compared to a 253 basis point difference at the end of August 2004. The 10- to 30-year portion of the curve also flattened, ending the reporting period at a yield spread of 24 basis points reduced from a yield spread of 81 basis points at the end of August 2004.
As a result of these changes, the prices of U.S. Treasury and government agency securities with maturities of 10 years or longer rose during the 12-month reporting period, with the longest maturities having the most significant price increases.
DURATION
The fund maintained a portfolio duration below that of the Index throughout the reporting period. The shorter duration detracted from fund performance during the 12-month reporting period. However, the flattening of the 10- to 30-year portion of the yield curve helped the fund outperform the Index and partially offset the results of the fund's shorter duration.
SECTOR ALLOCATION
Although the majority of the fund remained in Treasury securities, 18% of the fund was invested in government agency securities at the start of the reporting period. The fund's agency allocation was increased and ended the reporting period at 28%. Fund performance was helped by the allocation to agency securities as agency securities outperformed Treasury securities over the entire reporting period.
GROWTH OF A $25,000 INVESTMENT
The graph below illustrates the hypothetical investment of $25,000 1 in Federated U.S. Government Bond Fund (the "Fund") from August 31, 1995 to August 31, 2005, compared to the Merrill Lynch 10+ Year Treasury Index (ML10+T) and the Merrill Lynch 10-Year Treasury Index (ML10T). 2
| Average Annual Total Return for the Period Ended 8/31/2005 | | |
| 1 Year | 9.88% | |
| 5 Years | 8.35% | |
| 10 Years | 7.53% |
Performance data quoted represents past performance which is no guarantee 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. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance and after-tax returns, visit FederatedInvestors.com or call 1-800-341-7400. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.
1 The Fund's performance assumes the reinvestment of all dividends and distributions. The ML10+T and the ML10T have been adjusted to reflect reinvestment of dividends on securities in the index.
2 The ML10+T includes U.S. Treasury securities with maturities greater than ten years. The ML10T tracks the current ten-year Treasury securities. The ML10+T and the ML10T are not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The indexes are unmanaged, and unlike the Fund, are not affected by cash flows. It is not possible to invest directly in an index.
Performance data quoted represents past performance which is no guarantee 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. Mutual fund performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance, visit FederatedInvestors.com or call 1-800-341-7400.
Portfolio of Investments Summary Tables
At August 31, 2005, the Fund's portfolio composition 1 was as follows:
| Type of Investments | | Percentage of Total Net Assets | |
| U.S. Treasury Securities | 66.9 | % | |
| U.S. Government Agency Securities | 28.2 | % | |
| Derivative Contracts for U.S. Treasury Securities | (0.0 | )% 2 | |
| Repurchase Agreements--Cash | 1.0 | % | |
| Repurchase Agreements--Collateral 3 | 15.2 | % | |
| Other Assets and Liabilities--Net 4 | (11.3 | )% | |
| TOTAL | 100.0 | % | |
At August 31, 2005, the Fund's effective maturity 5 schedule was as follows:
| Investments with an Effective Maturity of | | Percentage of Total Net Assets |
| Less than 10 Years 6 | 9.1% | |
| 10-20 Years | 56.9% | |
| More than 20 Years | 30.1% | |
| TOTAL | 96.1% |
1 See the Fund's Prospectus for a description of the principal types of securities and derivative contracts in which the Fund invests.
2 The impact of a derivative contract on the Fund's performance may be larger than its relative market value would indicate. In many cases, the value of securities underlying a derivative contract or the notional amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's derivative contracts, including such underlying or notional values, can be found in the table at the end of the Portfolio of Investments included in this Annual Report.
3 Repurchase agreements purchased with cash collateral received in securities lending transactions or held to fund payments under derivatives contracts.
4 See Statement of Assets and Liabilities.
5 For callable investments, "effective maturity" is the unexpired period until the earliest date the investment is subject to prepayment or repurchase by the issuer (and market conditions indicate that the issuer will prepay or repurchase the investment). For adjustable rate investments, "effective maturity" is the unexpired period until the date of the earliest interest rate adjustment. Derivative contracts are treated as having the same maturity as the underlying securities or index. For all other investments, "effective maturity" is the unexpired period until final maturity.
6 Does not include repurchase agreements purchased with cash collateral received in securities lending transactions or held to fund payments under derivatives contracts.
Portfolio of Investments
August 31, 2005
| Principal Amount | | | Value | ||||
| U.S. TREASURY--66.9% | |||||||
| U.S. Treasury Bonds--64.4% | |||||||
| $ | 3,650,000 | 9.250%, 2/15/2016 | $ | 5,233,771 | |||
| 1,300,000 | 7.500%, 11/15/2016 | 1,689,792 | |||||
| 1,500,000 | 9.125%, 5/15/2018 | 2,226,330 | |||||
| 4,000,000 | 9.000%, 11/15/2018 | 5,931,240 | |||||
| 4,000,000 | 8.125%, 8/15/2019 | 5,631,880 | |||||
| 4,000,000 | 1 | 8.750%, 5/15/2020 | 5,958,760 | ||||
| 500,000 | 7.875%, 2/15/2021 | 703,515 | |||||
| 3,200,000 | 8.000%, 11/15/2021 | 4,581,504 | |||||
| 1,000,000 | 7.125%, 2/15/2023 | 1,344,220 | |||||
| 2,300,000 | 7.625%, 2/15/2025 | 3,295,831 | |||||
| 3,000,000 | 6.875%, 8/15/2025 | 4,017,660 | |||||
| 3,350,000 | 1 | 6.750%, 8/15/2026 | 4,468,063 | ||||
| 3,400,000 | 6.125%, 11/15/2027 | 4,272,848 | |||||
| 2,000,000 | 5.250%, 11/15/2028 | 2,273,760 | |||||
| TOTAL | 51,629,174 | ||||||
| U.S. Treasury Note--2.5% | |||||||
| 2,037,200 | 1 | 1.625%, 1/15/2015 | 2,035,611 | ||||
| TOTAL U.S. TREASURY (IDENTIFIED COST $44,842,255) | 53,664,785 | ||||||
| GOVERNMENT AGENCIES--28.2% | |||||||
| Federal Home Loan Bank System--14.7% | |||||||
| 5,000,000 | 5.500%, 7/20/2020 | 4,995,050 | |||||
| 5,000,000 | 7.125%, 2/15/2030 | 6,790,650 | |||||
| TOTAL | 11,785,700 | ||||||
| Federal Home Loan Mortgage Corporation--4.7% | |||||||
| 3,000,000 | 2 | 6.250%, 7/15/2032 | 3,764,880 | ||||
| Federal National Mortgage Association--8.8% | |||||||
| 4,500,000 | 5.000%, 3/2/2015 | 4,494,915 | |||||
| 2,000,000 | 6.625%, 11/15/2030 | 2,593,600 | |||||
| TOTAL | 7,088,515 | ||||||
| TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $20,448,941) | 22,639,095 | ||||||
| Principal Amount | | | Value | ||||
| REPURCHASE AGREEMENTS--16.2% | |||||||
| $ | 774,000 | Interest in $1,500,000,000 joint repurchase agreement 3.61%, dated 8/31/2005 under which Bank of America N.A., will repurchase a U.S. Government Agency Security with a maturity of 7/1/2035 for $1,500,150,417 on 9/1/2005. The market value of the underlying securities at the end of the period was $1,530,000,000. | $ | 774,000 | |||
| 12,235,000 | Interest in $1,143,000,000 joint repurchase agreement 3.61%, dated 8/31/2005 under which BNP Paribas Securities Corp., will repurchase U.S. Government Agency Securities with various maturities to 9/1/2035 for $1,143,114,617 on 9/1/2005. The market value of the underlying securities at the end of the period was $1,169,697,210 (held as collateral for securities lending). | 12,235,000 | |||||
| TOTAL REPURCHASE AGREEMENTS (AT AMORTIZED COST) | 13,009,000 | ||||||
| TOTAL INVESTMENTS--111.3% (IDENTIFIED COST $78,300,196) 3 | 89,312,880 | ||||||
| OTHER ASSETS AND LIABILITIES - NET--(11.3)% | (9,104,785 | ) | |||||
| TOTAL NET ASSETS--100% | $ | 80,208,095 | |||||
1 All or a portion of these securities are temporarily on loan to unaffiliated broker/dealers.
2 Pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding short futures contracts.
3 The cost of investments for federal tax purposes amounts to $78,369,299.
At August 31, 2005, the Fund had the following outstanding futures contracts:
| Contracts | | Number of Contracts | | Notional Value | | Expiration Date | | Unrealized Depreciation |
| U.S. 10-Year Treasury Notes | 40 | $4,483,125 | December 2005 | $(41,410) |
Note: The categories of investments are shown as a percentage of total net assets at August 31, 2005.
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
August 31, 2005
| Assets: | ||||||
| Investments in securities | $ | 76,303,880 | ||||
| Investments in repurchase agreements | 13,009,000 | |||||
| Total investments in securities, at value including, $11,958,450 of securities loaned (identified cost $78,300,196) | $ | 89,312,880 | ||||
| Cash | 961 | |||||
| Income receivable | 738,521 | |||||
| Receivable for investments sold | 2,282,144 | |||||
| Receivable for shares sold | 337,288 | |||||
| TOTAL ASSETS | 92,671,794 | |||||
| Liabilities: | ||||||
| Payable for shares redeemed | 74,386 | |||||
| Income distribution payable | 86,182 | |||||
| Payable for daily variation margin | 20,000 | |||||
| Payable for collateral due to broker | 12,235,000 | |||||
| Payable for shareholder services fee (Note 5) | 3,308 | |||||
| Payable for Directors'/ Trustees' fee | 1,774 | |||||
| Accrued expenses | 43,049 | |||||
| TOTAL LIABILITIES | 12,463,699 | |||||
| Net assets for 6,595,035 shares outstanding | $ | 80,208,095 | ||||
| Net Assets Consist of: | ||||||
| Paid-in capital | $ | 67,417,598 | ||||
| Net unrealized appreciation of investments and futures contracts | 10,971,274 | |||||
| Accumulated net realized gain on investments | 1,803,289 | |||||
| Undistributed net investment income | 15,934 | |||||
| TOTAL NET ASSETS | $ | 80,208,095 | ||||
| Net Asset Value, Offering Price and Redemption Proceeds per Share: | ||||||
| $80,208,095 ÷ 6,595,035 shares outstanding, no par value, unlimited shares authorized | $12.16 |
See Notes which are an integral part of the Financial Statements
Statement of Operations
Year Ended August 31, 2005
| Investment Income: | ||||||||||||
| Interest (including income on securities loaned of $21,721) | $ | 4,281,412 | ||||||||||
| Expenses: | ||||||||||||
| Investment adviser fee (Note 5) | $ | 499,938 | ||||||||||
| Administrative personnel and services fee (Note 5) | 150,000 | |||||||||||
| Custodian fees | 11,749 | |||||||||||
| Transfer and dividend disbursing agent fees and expenses | 65,883 | |||||||||||
| Directors'/Trustees' fees | 11,157 | |||||||||||
| Auditing fees | 19,187 | |||||||||||
| Legal fees | 3,103 | |||||||||||
| Portfolio accounting fees | 42,859 | |||||||||||
| Shareholder services fee (Note 5) | 191,581 | |||||||||||
| Share registration costs | 30,892 | |||||||||||
| Printing and postage | 11,126 | |||||||||||
| Insurance premiums | 8,589 | |||||||||||
| Miscellaneous | 8,712 | |||||||||||
| TOTAL EXPENSES | 1,054,776 | |||||||||||
| Waivers (Note 5): | ||||||||||||
| Waiver of investment adviser fee | $ | (119,212 | ) | |||||||||
| Waiver of administrative personnel and services fee | (24,166 | ) | ||||||||||
| Waiver of shareholder services fee | (149,919 | ) | ||||||||||
| TOTAL WAIVERS | (293,297 | ) | ||||||||||
| Net expenses | 761,479 | |||||||||||
| Net investment income | 3,519,933 | |||||||||||
| Realized and Unrealized Gain on Investments: | ||||||||||||
| Net realized gain on investments | 2,481,926 | |||||||||||
| Net change in unrealized appreciation of investments | 1,671,882 | |||||||||||
| Net change in unrealized depreciation of futures contracts | (41,410 | ) | ||||||||||
| Net realized and unrealized gain on investment and futures contracts | 4,112,398 | |||||||||||
| Change in net assets resulting from operations | $ | 7,632,331 |
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
| Year Ended August 31 | | 2005 | | 2004 | ||||
| Increase (Decrease) in Net Assets | ||||||||
| Operations: | ||||||||
| Net investment income | $ | 3,519,933 | $ | 4,635,595 | ||||
| Net realized gain (loss) on investments and futures contracts | 2,481,926 | (516,870 | ) | |||||
| Net change in unrealized appreciation/depreciation of investments and futures contracts | 1,630,472 | 4,156,525 | ||||||
| CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 7,632,331 | 8,275,250 | ||||||
| Distributions to Shareholders: | ||||||||
| Distributions from net investment income | (3,495,677 | ) | (4,633,235 | ) | ||||
| Distributions from net realized gains | - -- | (456,321 | ) | |||||
| CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (3,495,677 | ) | (5,089,556 | ) | ||||
| Share Transactions: | ||||||||
| Proceeds from sale of shares | 29,056,474 | 52,520,738 | ||||||
| Net asset value of shares issued to shareholders in payment of distributions declared | 2,236,987 | 3,516,769 | ||||||
| Cost of shares redeemed | (51,100,320 | ) | (75,225,027 | ) | ||||
| CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | (19,806,859 | ) | (19,187,520 | ) | ||||
| Change in net assets | (15,670,205 | ) | (16,001,826 | ) | ||||
| Net Assets: | ||||||||
| Beginning of period | 95,878,300 | 111,880,126 | ||||||
| End of period (including accumulated net investment income (loss) of $15,934 and $(8,322), respectively) | $ | 80,208,095 | $ | 95,878,300 |
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
August 31, 2005
1. ORGANIZATION
Federated U.S. Government Bond Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The investment objective of the Fund is to pursue total return.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles (GAAP) in the United States of America.
Investment Valuation
U.S. government securities are generally valued at the mean of the latest bid and asked price as furnished by an independent pricing service. The Fund generally values short-term securities according to prices furnished by an independent pricing service, except that short-term securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost. Prices furnished by an independent pricing service are intended to be indicative of the mean between the bid and asked prices currently offered to institutional investors for the securities. Securities for which no quotations are readily available are valued at fair value as determined in accordance with procedures established by and under general supervision of the Board of Trustees (the "Trustees").
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 the collateral at least equals the repurchase price to be paid under the repurchase agreement.
The Fund will only enter into repurchase agreements with banks and other recognized financial intermediaries, 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 Trustees. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreement. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
Investment Income, Expenses and Distributions
Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. Distributions of net investment income are declared daily and paid monthly.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the "Code") and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary.
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. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Securities Lending
The Fund participates in a securities lending program providing for the lending of government securities to qualified brokers. The Fund normally receives cash collateral for securities loaned that is invested in short-term securities including repurchase agreements. Collateral is maintained at a minimum level of 102% of the market value of investments loaned, plus interest, if applicable. Earnings on collateral are allocated between the securities lending agent, as a fee for its services under the program, and the Fund, according to agreed-upon rates.
As of August 31, 2005, securities subject to this type of arrangement and related collateral were as follows:
| Market Value of Securities Loaned | | Market Value of Collateral |
| $11,958,450 | $12,235,000 |
Futures Contracts
The Fund periodically may sell interest rate futures contracts to manage duration and to potentially reduce transaction costs. Upon entering into a bond interest rate futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a "variation margin" account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. For the year ended August 31, 2005, the Fund had no realized gain/loss on futures contracts.
Futures contracts outstanding at period end, if any, are listed after the fund's portfolio of investments.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 a trade date basis. Realized gains and losses from investment transactions are recorded on an identified cost basis.
3. CAPITAL STOCK
The following table summarizes share activity:
| Year Ended August 31 | | 2005 | | 2004 | ||
| Shares sold | 2,467,192 | 4,628,138 | ||||
| Shares issued to shareholders in payment of distributions declared | 189,563 | 309,425 | ||||
| Shares redeemed | (4,371,135 | ) | (6,703,779 | ) | ||
| NET CHANGE RESULTING FROM SHARE TRANSACTIONS | (1,714,380 | ) | (1,766,216 | ) |
4. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due to the deferral of losses on wash sales.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended August 31, 2005 and August 31, 2004 was as follows:
| | 2005 | | 2004 | |
| Ordinary income 1 | $3,495,677 | $4,633,235 | ||
| Long-term capital gains | - -- | $456,321 |
1 For tax purposes short-term capital gain distributions are considered ordinary income distributions.
As of August 31, 2005, the components of distributable earnings on a tax basis were as follows:
| Undistributed ordinary income | | $ | 102,116 |
| Undistributed long-term capital gain | $ | 1,872,392 | |
| Net unrealized appreciation | $ | 10,902,171 |
At August 31, 2005, the cost of investments for federal tax purposes was $78,369,299. The net unrealized appreciation of investments for federal tax purposes was $10,902,171 excluding unrealized depreciation from futures of $41,410. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $10,909,332 and net unrealized depreciation from investments for those securities having an excess of cost over value of $7,161.
The Fund used capital loss carryforwards of $64,137 to offset taxable gains realized during the year ended August 31, 2005.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser fee equal to 0.60% of the Fund's average daily net assets. The Adviser may voluntarily choose to waive any portion of its fee. The Adviser can modify or terminate this voluntary waiver at any time at its sole discretion. For the year ended August 31, 2005, the Adviser voluntarily waived $119,212 of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of all Federated funds as specified below:
| Maximum Administrative Fee | | Average Aggregate Daily Net Assets of the Federated Funds |
| 0.150% | on the first $5 billion | |
| 0.125% | on the next $5 billion | |
| 0.100% | on the next $10 billion | |
| 0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. FAS may voluntarily choose to waive any portion of its fee. FAS can modify or terminate this voluntary waiver at any time at its sole discretion. For the year ended August 31, 2005, the net fee paid to FAS was 0.150% of average aggregate daily net assets of the Fund.
Shareholder Services Fee
The Fund may pay fees (Services Fees) up to 0.25% of the average daily net assets of the Fund's Shares to financial intermediaries or to Federated Shareholder Services Company (FSSC), a subsidiary of Federated Investors, Inc., for providing services to shareholders and maintaining shareholder accounts. Under certain agreements, rather than paying financial intermediaries directly, the Fund may pay Service Fees to FSSC and FSSC will use the fees to compensate financial intermediaries. FSSC or these financial intermediaries may voluntarily choose to waive any portion of their fee. This voluntary waiver can be modified or terminated at any time. For the year ended August 31, 2005, FSSC voluntarily waived $149,919 of its fee. For the year ended August 31, 2005, FSSC did not retain any fees paid by the Fund.
General
Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
6. LEGAL PROCEEDINGS
Beginning in October 2003, Federated Investors, Inc. and various subsidiaries thereof (including the advisers and distributor for various investment companies, collectively, "Federated"), along with various investment companies sponsored by Federated (Funds) were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. Federated and various Funds have also been named as defendants in several additional lawsuits, the majority of which are now pending in the United States District Court for the Western District of Pennsylvania, alleging, among other things, excessive advisory and Rule 12b-1 fees. The Board of the Funds has retained the law firm of Dickstein Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations may be filed in the future. The potential impact of these lawsuits, all of which seek unquantified damages, attorneys' fees and expenses, and future potential similar suits is uncertain. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.
7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On May 20, 2005, the Fund's Trustees, upon the recommendation of the Audit Committee, appointed Ernst & Young LLP (E&Y) as the Fund's independent registered public accounting firm. The Fund's previous independent registered public accounting firm, Deloitte & Touche LLP (D&T) declined to stand for re-election. The previous reports issued by D&T on the Fund's financial statements for the fiscal years ended August 31, 2003 and August 31, 2004, contained no adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Fund's fiscal years ended August 31, 2003 and August 31, 2004: (i) there were no disagreements with D&T on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of D&T, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the financial statements for such years; and (ii) there were no reportable events of the kind described in Item 304(a) (1) (v) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
As indicated above, the Fund appointed E&Y as the independent registered public accounting firm to audit the Fund's financial statements for the fiscal year ended August 31, 2005. During the Fund's fiscal year ended August 31, 2003 and August 31, 2004, and the interim period commencing September 1, 2004 and ending May 20, 2005, neither the Fund nor anyone on its behalf has consulted E&Y on items which: (i) concerned the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Fund's financial statements; or (ii) concerned the subject of a disagreement (as defined in paragraph (a) (1) (iv) of Item 304 of Regulations S-K) or reportable events (as described in paragraph (a) (1) (v) of said Item 304).
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FEDERATED U.S. GOVERNMENT BOND FUND:
We have audited the accompanying statement of assets and liabilities of Federated U.S. Government Bond Fund (the "Fund"), including the portfolio of investments, as of August 31, 2005, and the related statement of operations, statement of changes in net assets and financial highlights for 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 audit. The statement of changes in net assets for the year ended August 31, 2004 and the financial highlights for each of the four years in the period then ended were audited by another independent registered public accounting firm whose report, dated October 20, 2004, expressed an unqualified opinion on that statement and those financial highlights.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2005, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. 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 U.S. Government Bond Fund at August 31, 2005, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
October 10, 2005
Board of Trustees and Fund Officers
The Board is responsible for managing the Fund's business affairs and for exercising all the Fund's powers except those reserved for the shareholders. The following tables give information about each Board member and the senior officers of the Fund. Where required, the tables separately list Board members who are "interested persons" of the Fund (i.e., "Interested" Board members) and those who are not (i.e., "Independent" Board members). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA. As of December 31, 2004, the Federated Fund Complex consisted of 44 investment companies (comprising 133 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Board member oversees all portfolios in the Federated Fund Complex and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Fund Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
INTERESTED TRUSTEES BACKGROUND
| Name Birth Date Address Positions Held with Fund Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| John F. Donahue* Birth Date: July 28, 1924 CHAIRMAN AND TRUSTEE Began serving: May 1985 | Principal Occupations : Chairman and Director or Trustee of the Federated Fund Complex; Chairman and Director, Federated Investors, Inc. Previous Positions : Trustee, Federated Investment Management Company and Chairman and Director, Federated Investment Counseling. | |
| J. Christopher Donahue* Birth Date: April 11, 1949 PRESIDENT AND TRUSTEE Began serving: January 2000 | Principal Occupations : Principal Executive Officer and President of the Federated Fund Complex; Director or Trustee of some of the Funds in the Federated Fund Complex; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Passport Research, Ltd.; Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions : President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. | |
| Name Birth Date Address Positions Held with Fund Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Lawrence D. Ellis, M.D.* Birth Date: October 11, 1932 3471 Fifth Avenue Suite 1111 Pittsburgh, PA TRUSTEE Began serving: August 1987 | Principal Occupations : Director or Trustee of the Federated Fund Complex; Professor of Medicine, University of Pittsburgh; Medical Director, University of Pittsburgh Medical Center Downtown; Hematologist, Oncologist and Internist, University of Pittsburgh Medical Center. Other Directorships Held : Member, National Board of Trustees, Leukemia Society of America. Previous Positions : Trustee, University of Pittsburgh; Director, University of Pittsburgh Medical Center. | |
* Family relationships and reasons for "interested" status: John F. Donahue is the father of J. Christopher Donahue; both are "interested" due to the positions they hold with Federated Investors, Inc. and its subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his son-in-law is employed by the Fund's principal underwriter, Federated Securities Corp.
INDEPENDENT TRUSTEES BACKGROUND
| Name Birth Date Address Positions Held with Fund Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Thomas G. Bigley Birth Date: February 3, 1934 15 Old Timber Trail Pittsburgh, PA TRUSTEE Began serving: November 1994 | Principal Occupation : Director or Trustee of the Federated Fund Complex. Other Directorships Held : Director, Member of Executive Committee, Children's Hospital of Pittsburgh; Director, University of Pittsburgh. Previous Position : Senior Partner, Ernst & Young LLP. | |
| John T. Conroy, Jr. Birth Date: June 23, 1937 Investment Properties Corporation 3838 North Tamiami Trail Suite 402 Naples, FL TRUSTEE Began serving: August 1991 | Principal Occupations : Director or Trustee of the Federated Fund Complex; Chairman of the Board, Investment Properties Corporation; Partner or Trustee in private real estate ventures in Southwest Florida. Previous Positions : President, Investment Properties Corporation; Senior Vice President, John R. Wood and Associates, Inc., Realtors; President, Naples Property Management, Inc. and Northgate Village Development Corporation. | |
| Name Birth Date Address Positions Held with Fund Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Nicholas P. Constantakis Birth Date: September 3, 1939 175 Woodshire Drive Pittsburgh, PA TRUSTEE Began serving: January 1999 | Principal Occupations : Director or Trustee of the Federated Fund Complex. Other Directorships Held : Director and Member of the Audit Committee, Michael Baker Corporation (engineering and energy services worldwide). Previous Position : Partner, Andersen Worldwide SC. | |
| John F. Cunningham Birth Date: March 5, 1943 353 El Brillo Way Palm Beach, FL TRUSTEE Began serving: January 1999 | Principal Occupation : Director or Trustee of the Federated Fund Complex. Other Directorships Held : Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions : Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. | |
| Peter E. Madden Birth Date: March 16, 1942 One Royal Palm Way 100 Royal Palm Way Palm Beach, FL TRUSTEE Began serving: August 1991 | Principal Occupation : Director or Trustee of the Federated Fund Complex. Other Directorships Held : Board of Overseers, Babson College. Previous Positions : Representative, Commonwealth of Massachusetts General Court; President, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. | |
| Name Birth Date Address Positions Held with Fund Date Service Began | | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
| Charles F. Mansfield, Jr. Birth Date: April 10, 1945 80 South Road Westhampton Beach, NY TRUSTEE Began serving: January 1999 | Principal Occupations : Director or Trustee of the Federated Fund Complex; Management Consultant; Executive Vice President, DVC Group, Inc. (marketing communications and technology) (prior to 9/1/00). Previous Positions : Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly, Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University. | |
| John E. Murray, Jr., J.D., S.J.D. Birth Date: December 20, 1932 Chancellor, Duquesne University Pittsburgh, PA TRUSTEE Began serving: February 1995 | Principal Occupations : Director or Trustee of the Federated Fund Complex; Chancellor and Law Professor, Duquesne University; Partner, Murray, Hogue and Lannis. Other Directorships Held : Director, Michael Baker Corp. (engineering, construction, operations and technical services). Previous Positions : President, Duquesne University; Dean and Professor of Law, University of Pittsburgh School of Law; Dean and Professor of Law, Villanova University School of Law. | |
| Marjorie P. Smuts Birth Date: June 21, 1935 4905 Bayard Street Pittsburgh, PA TRUSTEE Began serving: May 1985 | Principal Occupations : Director or Trustee of the Federated Fund Complex; Public Relations/Marketing Consultant/Conference Coordinator. Previous Positions : National Spokesperson, Aluminum Company of America; television producer; President, Marj Palmer Assoc.; Owner, Scandia Bord. | |
| John S. Walsh Birth Date: November 28, 1957 2604 William Drive Valparaiso, IN TRUSTEE Began serving: January 1999 | Principal Occupations : Director or Trustee of the Federated Fund Complex; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position : Vice President, Walsh & Kelly, Inc. | |
OFFICERS
| Name Birth Date Positions Held with Fund Date Began Serving | | Principal Occupation(s) for Past Five Years and Previous Position(s) |
| John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: May 1985 | Principal Occupations : Executive Vice President and Secretary of the Federated Fund Complex; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions : Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. | |
| Richard J. Thomas Birth Date: June 17, 1954 TREASURER Began serving: November 1998 | Principal Occupations : Principal Financial Officer and Treasurer of the Federated Fund Complex; Senior Vice President, Federated Administrative Services. Previous Positions : Vice President, Federated Administrative Services; held various management positions within Funds Financial Services Division of Federated Investors, Inc. | |
| Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: May 1985 | Principal Occupations : Vice Chairman or Vice President of some of the Funds in the Federated Fund Complex; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions : President and Director or Trustee of some of the Funds in the Federated Fund Complex; Executive Vice President, Federated Investors, Inc. and Director and Chief Executive Officer, Federated Securities Corp. | |
| Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable, fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski is a Chartered Financial Analyst. He received his M.S. in Industrial Administration from Carnegie Mellon University. | |
| Todd A. Abraham Birth Date: February 10, 1966 VICE PRESIDENT Began serving: August 2005 | Todd A. Abraham is Vice President of the Fund. Mr. Abraham has been a Portfolio Manager since 1995 and a Vice President of the Fund's Adviser since 1997. Mr. Abraham joined Federated in 1993 as an Investment Analyst and served as Assistant Vice President from 1995 to 1997. Mr. Abraham served as a Portfolio Analyst at Ryland Mortgage Co. from 1992-1993. Mr. Abraham is a Chartered Financial Analyst and received his M.B.A. in Finance from Loyola College. | |
Board Review of Advisory Contract
As required by the Act, the Fund's Board has reviewed the Fund's investment advisory contract. The Board's decision to approve the contract reflects the exercise of its business judgment on whether to continue the existing arrangements. During its review of the contract, the Board considers many factors, among the most material of which are: the Fund's investment objectives; the Adviser's management philosophy, personnel, processes, and investment and operating strategies; long-term performance; the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry; the range of comparable fees for similar funds in the mutual fund industry; the range and quality of services provided to the Fund and its shareholders by the Federated organization in addition to investment advisory services; and the Fund's relationship to the Federated family of funds.
In its decision to appoint or renew an Adviser, the Board is mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognizes that most shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and in the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's "selection" or approval of the Adviser must reflect the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund. The Board also considers the compensation and benefits received by the Adviser. This includes fees received for services provided to the Fund by other entities in the Federated organization and research services received by the Adviser from brokers that execute fund trades, as well as advisory fees. In this regard, the Board is aware that various courts have interpreted provisions of the Act and have indicated in their decisions that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the Fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize "economies of scale" as the Fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with the Fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts bearing on the Adviser's service and fee. The Fund's Board is aware of these factors and is guided by them in its review of the Fund's advisory contract to the extent they are appropriate and relevant, as discussed further below.
The Board considers and weighs these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and is assisted in its deliberations by the advice of independent legal counsel. In this regard, the Board requests and receives substantial and detailed information about the Fund and the Federated organization. Federated provides much of this information at each regular meeting of the Board, and furnishes additional reports in connection with the particular meeting at which the Board's formal review of the advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board's evaluation of an advisory contract is informed by reports covering such matters as: the Adviser's investment philosophy, personnel, and processes; operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or "peer group" funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities; the nature and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The evaluation process is evolutionary, reflecting continually developing considerations. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be particularly useful, given the high degree of competition in the mutual fund business. The Board focuses on comparisons with other similar mutual funds (rather than non-mutual fund products or services) because, simply put, they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle already chosen by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group may be a useful indicator of how the Adviser is executing on the Fund's investment program, which would in turn assist the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services are such as to warrant continuation of the advisory contract.
The Board also receives financial information about Federated, including reports on the compensation and benefits Federated derives from its relationships with the Federated funds. These reports cover not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The reports also discuss any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades as well as waivers of fees and/or reimbursements of expenses. In order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waive fees and/or reimburse expenses. Although the Board considers the profitability of the Federated organization as a whole, it does not evaluate, on a fund-by-fund basis, Federated's "profitability" and/or "costs" (which would include an assessment as to whether "economies of scale" would be realized if the fund were to grow to some sufficient size). In the Board's view, the cost of performing advisory services on a fund-specific basis is both difficult to estimate satisfactorily and a relatively minor consideration in its overall evaluation. Analyzing isolated funds would require constructed allocations of the costs of shared resources and operations based on artificial assumptions that are inconsistent with the existing relationships within a large and diversified family of funds that receive advisory and other services from the same organization. Although the Board is always eager to discover any genuine "economies of scale," its experience has been that such "economies" are likely to arise only when a fund grows dramatically, and becomes and remains very large in size. Even in these instances, purchase and redemption activity, as well as the presence of expense limitations (if any), may offset any perceived economies. As suggested above, the Board considers the information it receives about the Fund's performance and expenses as compared to an appropriate set of similar competing funds to be more relevant.
The Board bases its decision to approve an advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above are relevant to every Federated fund, nor does the Board consider any one of them to be determinative. With respect to the factors that are relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provide a satisfactory basis to support the decision to continue the existing arrangements.
Voting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on "Form N-PX" of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available through Federated's website. Go to FederatedInvestors.com, select "Products," select the "Prospectuses and Regulatory Reports" link, then select the Fund to access the link to Form N-PX. This information is also available from the EDGAR database on the SEC's website at www.sec.gov.
Quarterly Portfolio Schedule
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on "Form N-Q." These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the "Products" section of the Federated Investors website at FederatedInvestors.com by clicking on "Portfolio Holdings" and selecting the name of the Fund, or by selecting the name of the Fund and clicking on "Portfolio Holdings." You must register on the website the first time you wish to access this information.
Mutual funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in mutual funds involves investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's prospectus, which contains facts concerning its objective and policies, management fees, expenses, and other information.
Federated
World-Class Investment Manager
Federated U.S. Government Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
Cusip 314284100
G00569-01 (10/05)
Federated is a registered mark of Federated Investors, Inc. 2005 (c)Federated Investors, Inc.
Item 2. Code of Ethics
(a) As of the end of the period covered by this report, the registrant has
adopted a code of ethics (the "Section 406 Standards for Investment Companies
- - Ethical Standards for Principal Executive and Financial Officers") that
applies to the registrant's Principal Executive Officer and Principal
Financial Officer; the registrant's Principal Financial Officer also serves
as the Principal Accounting Officer.
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f)(3) The registrant hereby undertakes to provide any person, without
charge, upon request, a copy of the code of ethics. To request a copy of the
code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy
of the Section 406 Standards for Investment Companies - Ethical Standards for
Principal Executive and Financial Officers.
Item 3. Audit Committee Financial Expert
The registrant's Board has determined that each member of the Board's Audit
Committee is an "audit committee financial expert," and that each such member
is "independent," for purposes of this Item. The Audit Committee consists of
the following Board members: Thomas G. Bigley, John T. Conroy, Jr., Nicholas
P. Constantakis and Charles F. Mansfield, Jr.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees billed to the registrant for the two most recent
fiscal years:
Fiscal year ended 2005 - $20,895
Fiscal year ended 2004 - $19,147
(b) Audit-Related Fees billed to the registrant for the two most
recent fiscal years:
Fiscal year ended 2005 - $81
Fiscal year ended 2004 - $190
Fiscal year ended 2005- Transfer agent testing. Fiscal year
ended 2004- Transfer Agent Service Auditors Report
Amount requiring approval of the registrant's audit committee pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $26,801 and
$61,414 respectively. Fiscal year ended 2005 - Sarbanes Oxley sec. 302
procedures and Transfer Agent Service Auditors report. Fiscal year
ended 2004 - Attestations services relating to the review of fund share
transactions and Transfer Agent Service Auditors report.
(c) Tax Fees billed to the registrant for the two most recent fiscal
years:
Fiscal year ended 2005 - $0
Fiscal year ended 2004 - $0
Amount requiring approval of the registrant's audit committee pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $65,000
respectively.
Analysis regarding the realignment of advisory companies.
(d) All Other Fees billed to the registrant for the two most recent
fiscal years:
Fiscal year ended 2005 - $0
Fiscal year ended 2004 - $0
Amount requiring approval of the registrant's audit committee pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $22,187 and
$125,143 respectively. Fiscal year ended 2005 - Discussions with
auditor related to market timing and late trading activities and
executive compensation analysis. Fiscal year ended 2004 - Consultation
regarding information requests by regulatory agencies and executive
compensation analysis.
(e)(1) Audit Committee Policies regarding Pre-approval of Services.
The Audit Committee is required to pre-approve audit and
non-audit services performed by the independent auditor in order to assure
that the provision of such services do not impair the auditor's
independence. Unless a type of service to be provided by the independent
auditor has received general pre-approval, it will require specific
pre-approval by the Audit Committee. Any proposed services exceeding
pre-approved cost levels will require specific pre-approval by the Audit
Committee.
Certain services have the general pre-approval of the Audit
Committee. The term of the general pre-approval is 12 months from the date
of pre-approval, unless the Audit Committee specifically provides for a
different period. The Audit Committee will annually review the services that
may be provided by the independent auditor without obtaining specific
pre-approval from the Audit Committee and may grant general pre-approval for
such services. The Audit Committee will revise the list of general
pre-approved services from time to time, based on subsequent determinations.
The Audit Committee will not delegate its responsibilities to pre-approve
services performed by the independent auditor to management.
The Audit Committee has delegated pre-approval authority to its
Chairman. The Chairman will report any pre-approval decisions to the Audit
Committee at its next scheduled meeting. The Committee will designate
another member with such pre-approval authority when the Chairman is
unavailable.
AUDIT SERVICES
The annual Audit services engagement terms and fees will be subject to
the specific pre-approval of the Audit Committee. The Audit Committee must
approve any changes in terms, conditions and fees resulting from changes in
audit scope, registered investment company (RIC) structure or other matters.
In addition to the annual Audit services engagement specifically
approved by the Audit Committee, the Audit Committee may grant general
pre-approval for other Audit Services, which are those services that only the
independent auditor reasonably can provide. The Audit Committee has
pre-approved certain Audit services, all other Audit services must be
specifically pre-approved by the Audit Committee.
AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements or that are traditionally performed by the independent
auditor. The Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor, and has
pre-approved certain Audit-related services, all other Audit-related services
must be specifically pre-approved by the Audit Committee.
TAX SERVICES
The Audit Committee believes that the independent auditor can provide
Tax services to the Company such as tax compliance, tax planning and tax
advice without impairing the auditor's independence. However, the Audit
Committee will not permit the retention of the independent auditor in
connection with a transaction initially recommended by the independent
auditor, the purpose of which may be tax avoidance and the tax treatment of
which may not be supported in the Internal Revenue Code and related
regulations. The Audit Committee has pre-approved certain Tax services, all
Tax services involving large and complex transactions must be specifically
pre-approved by the Audit Committee.
ALL OTHER SERVICES
With respect to the provision of services other than audit, review or
attest services the pre-approval requirement is waived if:
(1) The aggregate amount of all such services provided constitutes no more
than five percent of the total amount of revenues paid by
the registrant, the registrant's adviser (not including any
sub-adviser whose role is primarily portfolio management
and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or
under common control with the investment adviser that
provides ongoing services to the registrant to its
accountant during the fiscal year in which the services are
provided;
(2) Such services were not recognized by the registrant, the registrant's
adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with
the investment adviser that provides ongoing services to
the registrant at the time of the engagement to be
non-audit services; and
(3) Such services are promptly brought to the attention of the Audit
Committee of the issuer and approved prior to the
completion of the audit by the Audit Committee or by one or
more members of the Audit Committee who are members of the
board of directors to whom authority to grant such
approvals has been delegated by the Audit Committee.
The Audit Committee may grant general pre-approval to those permissible
non-audit services classified as All Other services that it believes are
routine and recurring services, and would not impair the independence of the
auditor.
The SEC's rules and relevant guidance should be consulted to determine
the precise definitions of prohibited non-audit services and the
applicability of exceptions to certain of the prohibitions.
PRE-APPROVAL FEE LEVELS
Pre-approval fee levels for all services to be provided by the
independent auditor will be established annually by the Audit Committee. Any
proposed services exceeding these levels will require specific pre-approval
by the Audit Committee.
PROCEDURES
Requests or applications to provide services that require specific
approval by the Audit Committee will be submitted to the Audit Committee by
both the independent auditor and the Principal Accounting Officer and/or
Internal Auditor, and must include a joint statement as to whether, in their
view, the request or application is consistent with the SEC's rules on
auditor independence.
(e)(2) Percentage of services identified in items 4(b) through 4(d) that
were approved by the registrants audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
4(b)
Fiscal year ended 2005 - 0%
Fiscal year ended 2004 - 0%
Percentage of services provided to the registrants investment
adviser and any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the registrant that were approved by the registrants
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X, 0% and 0% respectively.
4(c)
Fiscal year ended 2005 - 0%
Fiscal year ended 2004 - 0%
Percentage of services provided to the registrants investment
adviser and any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the registrant that were approved by the registrants
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X, 0% and 0% respectively.
4(d)
Fiscal year ended 2005 - 0%
Fiscal year ended 2004 - 0%
Percentage of services provided to the registrants investment
adviser and any entity controlling, controlled by, or under
common control with the investment adviser that provides ongoing
services to the registrant that were approved by the registrants
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X, 0% and 0% respectively.
(f) NA
(g) Non-Audit Fees billed to the registrant, the registrant's investment
adviser, and certain entities controlling, controlled by or under
common control with the investment adviser:
Fiscal year ended 2005 - $123,871
Fiscal year ended 2004 - $310,275
(h) The registrant's Audit Committee has considered that the
provision of non-audit services that were rendered to the registrant's
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed Registrants
Not Applicable
Item 6. Schedule of Investments
Not Applicable
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not Applicable
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not Applicable
Item 9. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers
Not Applicable
Item 10. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 11. Controls and Procedures
(a) The registrant's President and Treasurer have concluded that the
registrant's disclosure controls and procedures (as defined in rule 30a-3(c)
under the Act) are effective in design and operation and are sufficient to
form the basis of the certifications required by Rule 30a-(2) under the Act,
based on their evaluation of these disclosure controls and procedures within
90 days of the filing date of this report on Form N-CSR.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in rule 30a-3(d) under the Act) during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant Federated U.S. Government Bond Fund
By /S/ Richard J. Thomas
Richard J. Thomas, Principal Financial Officer
(insert name and title)
Date October 21, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By /S/ J. Christopher Donahue
J. Christopher Donahue, Principal Executive Officer
Date October 21, 2005
By /S/ Richard J. Thomas
Richard J. Thomas, Principal Financial Officer
Date October 21, 2005