LIBERTY MUNICIPAL SECURITIES FUND INC, 497, 1995-05-30

LIBERTY MUNICIPAL SECURITIES FUND INC
497, 1995-05-30

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LIBERTY MUNICIPAL SECURITIES FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
COMBINED PROSPECTUS

The shares of Liberty Municipal Securities Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a mutual
fund) with an investment objective of providing its shareholders a high level of
current income which is exempt from federal regular income tax by investing in a
professionally managed, diversified portfolio primarily limited to municipal
bonds.

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 the Fund. Keep this prospectus for future reference.

The Fund has also filed a Combined Statement of Additional Information dated May
31, 1995, with the Securities and Exchange Commission. The information contained
in the Combined Statement of Additional Information is incorporated by reference
into this prospectus. You may request a copy of the Statement of Additional
Information free of charge by calling 1-800-235-4669. To obtain other
information or to make inquiries about the Fund, contact your financial
institution.

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

Prospectus dated May 31, 1995

- ------------------------------------- ---------------------------------------
TABLE OF CONTENTS

Summary of Fund Expenses.......................................................1

Financial Highlights...........................................................4

Synopsis.......................................................................7

Liberty Family of Funds........................................................8

Investment Information.........................................................9
Investment Objective.........................................................9
Investment Policies..........................................................9
Investment Risks............................................................12
Investment Limitations......................................................12

Net Asset Value...............................................................13

Investing in the Fund.........................................................13

How To Purchase Shares........................................................14
Investing In Class A Shares.................................................14
Investing In Class B Shares.................................................17
Investing In Class C Shares.................................................17
Special Purchase Features...................................................18

Exchange Privilege............................................................19
Requirements For Exchange...................................................19
Tax Consequences............................................................19
Making An Exchange..........................................................19

How To Redeem Shares..........................................................20
Special Redemption Features.................................................21
Contingent Deferred Sales Charge............................................22
Elimination of Contingent Deferred
Sales Charge.............................................................23

Account and Share Information.................................................24

Fund Information..............................................................25
Management of the Fund......................................................25
Distribution of Shares......................................................25
Administration of the Fund..................................................27

Shareholder Information.......................................................28
Voting Rights...............................................................28

Tax Information...............................................................28
Federal Income Tax..........................................................28
Pennsylvania Personal Property
Taxes....................................................................28

Performance Information.......................................................29

- ------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES
LIBERTY MUNICIPAL SECURITIES FUND, INC.

<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... 4.50%
Maximum Sales Load 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) (1)...................................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee................................................................................................... 0.62%
12b-1 Fee........................................................................................................ None
Total Other Expenses............................................................................................. 0.38%
Shareholder Services Fee (after waiver) (2)....................................................... 0.12%
Total Class A Shares Operating Expenses (3)............................................................. 1.00%
</TABLE>

(1) Class A Shares purchased with the proceeds of a redemption of Shares of an
unaffiliated investment company purchased or sold with a sales load and not
distributed by Federated Securities Corp. may be charged a Contingent
Deferred Sales Charge of .50 of 1.00% for redemptions made within one full
year of purchase. See "Contingent Deferred Sales Charge."

(2) The maximum shareholder services fee is 0.25%.

(3) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class A Shares operating expenses were 0.92% for the fiscal year ended March
31, 1995.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS A SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS A SHARES" AND "FUND
INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
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.......................................................... $60 $75 $98 $162
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $55 $75 $98 $162
</TABLE>

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

- ------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES
LIBERTY MUNICIPAL SECURITIES FUND, INC.

<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... None
Maximum Sales Load 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) (1)...................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee................................................................................................... 0.62%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.51%
Shareholder Services Fee.......................................................................... 0.25%
Total Class B Shares Operating Expenses (2)(3).......................................................... 1.88%
</TABLE>

(1) The contingent deferred sales charge is 5.50% in the first year, declining
to 1.00% in the sixth year and 0.00% thereafter (see "Contingent Deferred
Sales Charge").

(2) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.

(3) The total Class B Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class B Shares operating expenses were 1.84% for the fiscal year ended March
31, 1995.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS B SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS B SHARES" AND "FUND
INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
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.......................................................... $76 $103
You would pay the following expenses on the same investment, assuming no redemption................ $19 $59
</TABLE>

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

- ------------------------------------- ---------------------------------------
SUMMARY OF FUND EXPENSES
LIBERTY MUNICIPAL SECURITIES FUND, INC.

<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... None
Maximum Sales Load 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) (1)...................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee................................................................................................... 0.62%
12b-1 Fee........................................................................................................ 0.75%
Total Other Expenses............................................................................................. 0.46%
Shareholder Services Fee (after waiver) (2)....................................................... 0.20%
Total Class C Shares Operating Expenses (3)............................................................. 1.83%
</TABLE>

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, see
"Contingent Deferred Sales Charge".

(2) The maximum shareholder services fee is 0.25%.

(3) The total Class C Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending March 31, 1996. The total
Class C Shares operating expenses were 1.81% for the fiscal year ended March
31, 1995.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF CLASS C SHARES WILL BEAR,
EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS
COSTS AND EXPENSES, SEE "INVESTING IN THE FUND", "CLASS C SHARES" AND "FUND
INFORMATION". Wire-transferred redemptions of less than $5,000 may be subject to
additional fees.

Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted under the rules of the National
Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
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.......................................................... $29 $58 $99 $215
You would pay the following expenses on the same investment, assuming no
redemption................................................................... $19 $58 $99 $215
</TABLE>

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

- ------------------------------------- --------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
LIBERTY MUNICIPAL SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated May 15, 1995 on the Fund's financial
statements for the year ended March 31, 1995, and on the following table for
each of the periods presented, is included in the Annual Report dated March 31,
1995, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, whch may be
obtained from the Fund.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 11.20 $ 11.62 $ 10.98 $ 10.61 $ 10.47 $ 10.26 $ 10.03 $ 10.80 $ 10.51
- ---------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------------------
Net investment income 0.67 0.66 0.66 0.67 0.71 0.72 0.72 0.73 0.75
- ---------------------------
Net realized and
unrealized gain (loss) on
investments (0.05) (0.40) 0.64 0.37 0.14 0.21 0.23 (0.77) 0.29
- --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations 0.62 0.26 1.30 1.04 0.85 0.93 0.95 (0.04) 1.04
- ---------------------------
LESS DISTRIBUTIONS
- ---------------------------
Distributions from net
investment income (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) (0.75)
- ---------------------------
Distributions from net
realized gain on
investment transactions (0.23) (0.02) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions (0.90) (0.68) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73) (0.75)
- --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD $ 10.92 $ 11.20 $ 11.62 $ 10.98 $ 10.61 $ 10.47 $ 10.26 $ 10.03 $ 10.80
- --------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN(A) 5.90% 2.10% 12.13% 10.05% 8.42% 9.20% 9.76% (0.17%) 10.28%
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------------
Expenses 0.92% 0.84% 0.80% 0.84% 0.89% 0.90% 0.95% 0.95% 0.95%
- ---------------------------
Net investment income 6.17% 5.59% 5.81% 6.17% 6.77% 6.80% 7.07% 7.28% 7.07%
- ---------------------------
Expense waiver/
reimbursement(b) -- -- -- -- -- -- -- -- --
- ---------------------------
SUPPLEMENTAL DATA
- ---------------------------
Net assets, end of period
(000 omitted) $708,679 $714,384 $706,126 $590,118 $511,611 $474,797 $440,445 $388,916 $424,655
- ---------------------------
Portfolio turnover 41% 27% 13% 8% 45% 25% 58% 55% 13%
- ---------------------------

<CAPTION>
1986
<S> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 8.91
- ---------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ---------------------------
Net investment income 0.80
- ---------------------------
Net realized and
unrealized gain (loss) on
investments 1.60
- --------------------------- ---------
Total from investment
operations 2.40
- ---------------------------
LESS DISTRIBUTIONS
- ---------------------------
Distributions from net
investment income (0.80)
- ---------------------------
Distributions from net
realized gain on
investment transactions 0.00
- --------------------------- ---------
Total distributions (0.80)
- --------------------------- ---------
NET ASSET VALUE, END OF
PERIOD $ 10.51
- --------------------------- ---------
TOTAL RETURN(A) 28.25%
- ---------------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------------
Expenses 0.93%
- ---------------------------
Net investment income 8.39%
- ---------------------------
Expense waiver/
reimbursement(b) 0.23%
- ---------------------------
SUPPLEMENTAL DATA
- ---------------------------
Net assets, end of period
(000 omitted) $248,710
- ---------------------------
Portfolio turnover 2%
- ---------------------------
</TABLE>

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

- ------------------------------------- ---------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
LIBERTY MUNICIPAL SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated May 15, 1995 on the Fund's financial
statements for the year ended March 31, 1995, and on the following table for the
period presented, is included in the Annual Report dated March 31, 1995, which
is incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, whch may be obtained from the
Fund.

<TABLE>
<CAPTION>
PERIOD ENDED
MARCH 31,
1995(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.06
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.40
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.03)
- ---------------------------------------------------------------------------------------------------- -------
Total from investment operations 0.37
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.40)
- ----------------------------------------------------------------------------------------------------
Distributions from net realized gain on investment transactions (0.11)
- ---------------------------------------------------------------------------------------------------- -------
Total distributions (0.51)
- ---------------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 10.92
- ---------------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 3.49%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.84%(c)
- ----------------------------------------------------------------------------------------------------
Net investment income 5.94%(c)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $18,201
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 41%
- ----------------------------------------------------------------------------------------------------
</TABLE>

(a) Reflects operations for the period from July 26, 1994 (date of initial
public investment) to March 31, 1995.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

- ------------------------------------- ---------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
LIBERTY MUNICIPAL SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
<S> <C> <C>
1995 1994(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.20 $ 11.70
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.58 0.52
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.05) (0.48)
- ----------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations 0.53 0.04
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Distributions from net investment income (0.58) (0.52)
- -----------------------------------------------------------------------------------------------
Distributions from net realized gain on investment transactions (0.23) (0.02)
- ----------------------------------------------------------------------------------------------- --------- -----------
Total distributions (0.81) (0.54)
- ----------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.92 $ 11.20
- ----------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN (B) 4.96% 0.17%
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 1.81% 1.80%(c)
- -----------------------------------------------------------------------------------------------
Net investment income 5.28% 4.70%(c)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $22,389 $22,066
- -----------------------------------------------------------------------------------------------
Portfolio turnover 41% 27%
- -----------------------------------------------------------------------------------------------
</TABLE>

(a) Reflects operations for the period from April 20, 1993 (date of initial
public investment) to March 31, 1994.]

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended March 31, 1995, which can be obtained
free of charge.

- --------------------------------------------------------------------------------
SYNOPSIS

The Fund was incorporated under the laws of the State of Maryland on September
10, 1976. The Fund's address is Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. The Articles of Incorporation permit the Fund to offer
separate series representing interests in separate portfolios of securities. As
of the date of this prospectus, the Board of Directors ("Directors") has
established three classes of Shares for the Fund, known as Class A Shares, Class
B Shares, and Class C Shares (individually and collectively as the context
requires, "Shares").

Shares of the Fund are designed for individuals and institutions seeking a high
level of current income which is exempt from federal regular income tax by
investing in a professionally managed, diversified portfolio primarily limited
to municipal bonds.

For information on how to purchase Shares of the Fund, please refer to "How To
Purchase Shares." The minimum initial investment for Class A Shares is $500. The
minimum initial investment for Class B Shares and Class C Shares is $1500.
Subsequent investments in any class must be in amounts of at least $100.

Class A Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see "How
To Redeem Shares."

Class B Shares are sold at net asset value and are redeemed at net asset value.
However, a contingent deferred sales charge is imposed on certain Shares which
are redeemed within six full years of purchase. See "How To Redeem Shares."

Class C Shares are sold at net asset value. A contingent deferred sales charge
of 1.00% will be charged on assets redeemed within the first 12 months following
purchase. See "How To Redeem Shares."

In addition, the Fund also pays a Shareholder Services Fee at an annual rate not
to exceed 0.25% of average daily net assets.

Additionally, information regarding the exchange privilege offered with respect
to the Fund and certain other funds for which affiliates of Federated Investors
serve as principal underwriter ("Federated Funds") can be found under "Exchange
Privilege."

Federated Advisers is the investment adviser (the "Adviser") to the Fund and
receives compensation for its services. The Adviser's address is Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779.

Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including entering into repurchase agreements and investing in
when-issued securities. These risks are described under "Investment Policies."

- --------------------------------------------------------------------------------
LIBERTY FAMILY OF FUNDS

This Fund is a member of a family of mutual funds, collectively known as the
Liberty Family of Funds. The other funds in the Liberty Family of Funds are:

.American Leaders Fund, Inc., providing growth of capital and income through
high-quality stocks;

.Capital Growth Fund, providing appreciation of capital primarily through equity
securities;

.Fund for U.S. Government Securities, Inc., providing current income through
long-term U.S. government securities;

.International Equity Fund, providing long-term capital growth and income
through international securities;

.International Income Fund, providing a high level of current income consistent
with prudent investment risk through high-quality debt securities denominated
primarily in foreign currencies;

.Liberty Equity Income Fund, Inc., providing above-average income and capital
appreciation through income producing equity securities;

.Liberty High Income Bond Fund, Inc., providing high current income through
high-yielding, lower-rated corporate bonds;

.Liberty U.S. Government Money Market Trust, providing current income consistent
with stability of principal through high-quality U.S. government securities;

.Liberty Utility Fund, Inc., providing current income and long-term growth of
income, primarily through electric, gas, and communications utilities;

.Limited Term Fund, providing a high level of current income consistent with
minimum fluctuation in principal value through investment grade securities;

.Limited Term Municipal Fund, providing a high level of current income exempt
from federal regular income tax consistent with the preservation of principal,
primarily limited to municipal securities;

.Michigan Intermediate Municipal Trust, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the state
of Michigan and Michigan municipalities, primarily through Michigan municipal
securities;

.Pennsylvania Municipal Income Fund, providing current income exempt from
federal regular income tax and the personal income taxes imposed by the
Commonwealth of Pennsylvania, primarily through Pennsylvania municipal
securities;

.Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;

.Tax-Free Instruments Trust, providing current income consistent with stability
of principal and exempt from federal income tax, through high-quality,
short-term municipal securities; and

.World Utility Fund, providing total return primarily through securities issued
by domestic and foreign companies in the utilities industries.

Prospectuses for these funds are available by writing to Federated Securities
Corp.

Each of the funds may also invest in certain other types of securities as
described in each fund's prospectus.

The Liberty Family of Funds provides flexibility and diversification for an
investor's long-term investment planning. It enables an investor to
meet the challenges of changing market conditions by offering convenient
exchange privileges which give access to various investment vehicles and by
providing the investment services of proven, professional investment advisers.

Shareholders of Class A Shares who have been designated as Liberty Life Members
are exempt from sales loads on future purchases in and exchanges between the
Class A Shares of any funds in the Liberty Family of Funds, as long as they
maintain a $500 balance in one of the Liberty Funds.

- --------------------------------------------------------------------------------
INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide for its shareholders a high
level of current income which is exempt from federal regular income tax. 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 investment objective and the policies and limitations described
below cannot be changed without approval of shareholders.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund invests its assets so that at least 80% of its annual interest income
is exempt from federal regular income tax. The Fund pursues its investment
objective by investing at least 65% of its portfolio in municipal bonds.
Municipal bonds are debt obligations issued by or on behalf of states,
territories, and possessions of the United States, including the District of
Columbia, and their political subdivisions, agencies, and instrumentalities, the
interest from which is exempt from federal regular income tax.

CHARACTERISTICS

The municipal bonds which the Fund buys have the same characteristics assigned
by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings
Group ("S & P") to bonds of investment grade quality or better. However, the
Fund is not restricted to buying rated securities. Medium investment grade
quality bonds are rated A and Baa by Moody's or A and BBB by S & P. In certain
cases the Fund's adviser may choose bonds which are unrated if it judges
the bonds to have the same characteristics as medium quality bonds (i.e., an
adequate but not outstanding capacity to service their debt). Bonds rated "BBB"
by S & P or "Baa" by Moody's have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to weaken capacity to
make principal and interest payments than higher rated bonds. If a high-rated
bond loses its rating or has its rating reduced after the Fund has purchased it,
the Fund is not required to drop the bond from the portfolio, but will consider
doing so. There is no limit to portfolio maturity. A description of the ratings
categories is contained in the Appendix to the Statement of Additional
Information.

WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS

The Fund may purchase municipal bonds 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 or
yield considered to be advantageous. Settlement dates may be a month or more
after entering into these transactions, and the market value of the securities
purchased may vary from the purchase prices. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.

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.

TEMPORARY INVESTMENTS

From time to time on a temporary basis, or when the investment adviser
determines that market conditions call for a temporary defensive posture, the
Fund may invest in short-term tax-exempt or taxable temporary investments. These
temporary investments include: notes issued by or on behalf of municipal or
corporate issuers; obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; and repurchase agreements (arrangements in
which the organization selling the Fund a bond or temporary investment agrees at
the time of sale to repurchase it at a mutually agreed upon time and price).

There are no rating requirements applicable to temporary investments. However,
the investment adviser will limit temporary investments to those it considers to
be of good quality. The Fund intends to invest no more than 20% of its assets in
temporary investments.

Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax.

PORTFOLIO TURNOVER

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

MUNICIPAL BONDS

Municipal bonds are generally issued to finance public works, such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
streets, and water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to make loans to
other public institutions and facilities.

Municipal bonds include industrial development bonds issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.

The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith and credit and taxing power for the payment of principal and
interest. Interest on and principal of revenue bonds, however, are payable only
from the revenue generated by the facility financed by the bond or other
specified sources of revenue. Revenue bonds do not represent a pledge of credit
or create any debt of or charge against the general revenues of a municipality
or public authority. Industrial development bonds are typically classified as
revenue bonds.

Municipal bonds may carry fixed, floating or inverse floating rates of interest.
Fixed rate bonds bear interest at the same rate from issuance until maturity.
The interest rate on floating rate bonds is subject to adjustment based upon
changes in market interest rates or indices, such as a bank's prime rate or a
published market index. The interest rate may be adjusted at specified intervals
or immediately upon any change in the applicable index rate. The interest rate
for most floating rate bonds varies directly with changes in the index rate, so
that the market value of the bond will approximate its stated value at the time
of each adjustment. However, inverse floating rate bonds have interest rates
that vary inversely with changes in the applicable index rate, such that the
bond's interest rate rises when market interest rates fall and fall when market
rates rise. The market value of floating rate bonds is less sensitive than fixed
rate bonds to changes in market interest rates. In contrast, the market value of
inverse floating rate bonds is more sensitive to market rate changes than fixed
or floating rate bonds. The affect of market rate changes on bonds depends upon
a variety of factors, including market expectations as to future changes in
interest rates and, in the case of floating and inverse floating rate bonds, the
frequency with which the interest rate is adjusted and the multiple of the index
rate used in making the adjustment.

Most municipal bonds pay interest in arrears on a semiannual or more frequent
basis. However, certain bonds, variously known as capital appreciation bonds or
zero coupon bonds, do not provide for any interest payments prior to maturity.
Such bonds are normally sold at a discount from their stated value, or provide
for periodic increases in their stated value to reflect a compounded interest
rate. The market value of these bonds is also more sensitive to changes in
market interest rates than bonds that provide for current interest payments.

The Fund does not intend to purchase securities if, as a result of such
purchase, more than 25% of the value of its total assets would be invested in
the securities of governmental subdivisions located in any one state, territory,
or possession of the United States.

The Fund will not invest 25% or more of its total assets in any one industry.
Governmental issuers of municipal securities are not considered part of any
"industry." However, municipal securities backed only by the assets and revenues
of nongovernmental users may, for this purpose, be deemed to be related to the
industry in which such nongovernmental users engage, and the 25% limitation
would apply to such obligations. It is nonetheless possible that the Fund may
invest more than 25% of its assets in a broader segment of the municipal
securities market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations or airport revenue
obligations. This would be the case only if the Fund determines that the yields
available from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries, economic,
business, political and other developments generally affecting the revenues of
such users (for example, proposed legislation or pending court decisions
affecting the financing of such projects and market factors affecting the demand
for their services or products) may have a general adverse effect on all
municipal securities in such a market segment. The Fund reserves the right to
invest more than 25% of its assets in industrial development bonds or private
activity bonds or in securities of issuers located in the same state, however,
it has no present intention to do so.

INVESTMENT RISKS

Yields on municipal bonds depend on a variety of factors, including: the general
conditions of the money market and the taxable and municipal bond markets; the
size of the particular offering; the maturity of the obligations; and the rating
of the issue. The ability of the Fund to achieve its investment objective also
depends on the continuing ability of the issuers of municipal bonds to meet
their obligations for the payment of interest and principal when due. The prices
of municipal bonds fluctuate inversely in relation to the direction of interest
rates. The prices of longer term bonds fluctuate more widely in response to
market interest rate changes.

INVESTMENT LIMITATIONS

The Fund will not:

.borrow money or pledge securities except, under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up to
10% of the value of those assets to secure such borrowings;

.invest more than 5% of its total assets in securities of one issuer (except
cash and cash items and U.S. government obligations); or

.invest more than 10% of its total assets in municipal bonds subject to legal or
contractual restrictions on resale, including repurchase agreements maturing in
more than seven days.

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

The Fund will not:

.invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations; or

.invest more than 10% of its net assets in illiquid securities, including
restricted securities which the adviser believes cannot be sold within seven
days and repurchase agreements maturing in more than seven days.

-------------------------------------------------------------------------------
NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ 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.

The net asset value of each class of Shares of the Fund is determined at 4:00
p.m. (Eastern time), Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities that
it's 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, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

- --------------------------------------------------------------------------------
INVESTING IN THE FUND

The Fund offers investors three classes of Shares that carry sales loads and
contingent deferred sales charges in different forms and amounts and which bear
different levels of expenses.

CLASS A SHARES

An investor who purchases Class A Shares pays a maximum sales load of 4.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales loads. See "Reducing or
Eliminating the Sales Load." Class A Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales load, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee.

CLASS C SHARES

Class C Shares are sold without an initial sales load, but are subject to a
1.00% contingent deferred sales charge on assets redeemed within the first 12
months following purchase. Class C Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but will have a higher expense ratio and pay lower dividends than Class A
Shares due to the higher 12b-1 fee. Class C Shares have no conversion feature.

- --------------------------------------------------------------------------------
HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. (Financial institutions may impose different minimum investment
requirements on their customers.)

The Fund reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an order
is received, plus a sales load as follows:

<TABLE>
<CAPTION>
DEALER
SALES LOAD SALES LOAD CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "DEALER CONCESSION."

No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, or to shareholders designated as Liberty Life Members.
However, investors who purchase Shares through a trust department or investment
adviser may be charged an additional service fee by that institution.
Additionally, no sales load is imposed for Class A Shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee or fees for
services.

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales load. Any portion of the sales load which is not paid to a
dealer will be retained by the distributor. However, the distributor, may offer
to pay dealers up to 100% of the sales load retained by it. Such payments may
take the form of cash or promotional incentives, such as reimbursement of
certain expenses of qualified employees and their spouses to attend
informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. In some instances,
these incentives will be made available only to dealers whose employees have
sold or may sell a significant amount of Shares. On purchases of $1 million or
more, the investor pays no sales load; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price over
the first year following the purchase. Such payments are based on the original
purchase price of Shares outstanding at each month end.

The sales load for Shares sold other than through registered broker/dealers will
be retained by Federated Securities Corp. Federated Securities Corp. may pay
fees to banks out of the sales load in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.

REDUCING OR ELIMINATING
THE SALES LOAD

The sales load can be reduced or eliminated on the purchase of Class A Shares
through:

.quantity discounts and accumulated purchases;

.concurrent purchases;

.signing a 13-month letter of intent;

.using the reinvestment privilege; or

.purchases with proceeds from redemptions of unaffiliated investment company
shares.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales load paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales load. In addition, the sales load, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.

If an additional purchase of Class A Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns Class A Shares having a current value at the public offering price
of $90,000 and he purchases $10,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 3.75%, not 4.50%.

To receive the sales load reduction, Federated Securities Corp. must be notified
by the shareholder in writing or by his financial institution at the time the
purchase is made that Class A Shares are already owned or that purchases are
being combined. The Fund will reduce the sales load after it confirms the
purchases.

CONCURRENT PURCHASES

For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $70,000 in this Fund, the sales
load would be reduced.

To receive this sales load reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at the
time the concurrent purchases are made. The Fund will reduce the sales load
after it confirms the purchases.

LETTER OF INTENT

If a shareholder intends to purchase at least $100,000 of Shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 4.50% of the total amount intended to
be purchased in escrow (in Shares) until such purchase is completed.

The Shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period, whichever
comes first. If the amount specified in the letter of intent is not purchased,
an appropriate number of escrowed Shares may be redeemed in order to realize the
difference in the sales load.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales load applicable to
the total amount intended to be purchased. At the time a letter of intent is
established, current balances in accounts in any Class A Shares of any fund in
the Liberty Family of Funds, excluding money market accounts, will be aggregated
to provide a purchase credit towards fulfillment of the letter of intent. Prior
trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales load. Federated Securities
Corp. must be notified by the shareholder in writing or by his financial
institution of the reinvestment in order to eliminate a sales load. If the
shareholder redeems his Class A Shares in the Fund, there may be tax
consequences.

PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES

Investors may purchase Class A Shares at net asset value, without a sales load,
with the proceeds from the redemption of shares of an unaffiliated investment
company that were purchased or sold with a sales load or commission and were not
distributed by Federated Securities Corp. The purchase must be made within 60
days of the redemption, and Federated Securities Corp. must be notified by the
investor in writing, or by his financial institution, at the time the purchase
is made. From time to time, the Fund may offer dealers a payment of .50 of 1.00%
for Shares purchased under this program. If Shares are purchased in this manner,
fund purchases will be subject to a contingent deferred sales charge for one
year from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering as described above.

INVESTING IN CLASS B SHARES

Class B Shares are sold at their net asset value next determined after an order
is received. While Class B Shares are sold without an initial sales load, under
certain circumstances described under "Contingent Deferred Sales Charge--Class B
Shares," a contingent deferred sales charge may be applied by the distributor at
the time Class B Shares are redeemed.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around the
fifteenth of the month eight full years after the purchase date, except as noted
below, and will no longer be subject to a distribution services fee (see
"Distribution of Shares"). Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. Class B Shares acquired by exchange from Class B Shares of another
fund in the Liberty Family of Funds will convert into Class A Shares based on
the time of the initial purchase. For purposes of conversion to Class A Shares,
Shares purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in the
sub-account) convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares. The conversion of
Class B Shares to Class A Shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B Shares to Class A Shares will not occur if such ruling or
opinion is not available. In such event, Class B Shares would continue to be
subject to higher expenses than Class A Shares for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on assets
redeemed within the first full 12 months following purchase. For a complete
description of this charge see "Contingent Deferred Sales Charge--Class C
Shares."

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

An investor may call his financial institution (such as a bank or an investment
dealer) to place an order to purchase Shares. Orders placed through a financial
institution are considered received when the Fund is notified of the purchase
order or when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for Shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for Shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly. Financial
institutions may charge additional fees for their services.

The financial institution which maintains investor accounts in Class B Shares or
Class C Shares with the Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the contingent deferred
sales charge (see "Contingent Deferred Sales Charge"). In addition, advance
payments made to financial institutions may be subject to reclaim by the
distributor for accounts transferred to financial institutions which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.

PURCHASING SHARES BY WIRE

Once an account has been established, Shares may be purchased by wire by calling
the Fund. All information needed will be taken over the telephone, and the order
is considered received when State Street Bank receives payment by wire. Federal
funds should be wired as follows: State Street Bank and Trust Company, Boston,
MA; Atten; EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number);
Account Number; Trade Date and Order Number; Group Number or Dealer Number;
Nominee or Institution Name; and ABA Number 011000028. Shares cannot be
purchased by wire on holidays when wire transfers are restricted.

PURCHASING SHARES BY CHECK

Once an account has been established, Shares may be purchased by sending a check
made payable to the name of the Fund (designate class of Shares and account
number) to: Federated Services Company, P.O. Box 8600, Boston, MA 02266-8600.
Orders by mail are considered received when payment by check is converted into
federal funds (normally the business day after the check is received).

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account at
an Automated Clearing House ("ACH") member and invested in the Fund at the net
asset value next determined after an order is received by the Fund, plus the
sales load, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.

- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE

CLASS A SHARES

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Neither the
Fund nor any of the funds in the Liberty Family of Funds imposes any additional
fees on exchanges.

CLASS B SHARES

Class B shareholders may exchange all or some of their Shares for Class B Shares
of other funds in the Liberty Family of Funds. (Not all funds in the Liberty
Family of Funds currently offer Class B Shares. Contact your financial
institution regarding the availability of other Class B Shares in the Liberty
Family of Funds). Exchanges are made at net asset value without being assessed a
contingent deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.

CLASS C SHARES

Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other Class C Shares in the Liberty Family of Funds.) To the
extent that a shareholder exchanges Shares for Class C Shares in other funds in
the Liberty Family of Funds, the time for which the exchanged-for Shares are to
be held will be added to the time for which exchanged-from Shares were held for
purposes of satisfying the applicable holding period. For more information, see
"Contingent Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset value
equal to the minimum investment requirements of the fund into which the exchange
is being made. Before the exchange, the shareholder must receive a prospectus of
the fund for which the exchange is being made.

This privilege is available to shareholders resident in any state in which the
Shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, Shares submitted for exchange are redeemed and
proceeds invested in the same class of Shares of the other fund. The exchange
privilege may be modified or terminated at any time. Shareholders will be
notified of the modification or termination of the exchange privilege.

Further information on the exchange privilege and prospectuses for the Liberty
Family of Funds are available by contacting the Fund.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the circumstances, a capital gain or loss may be
realized.

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family of Funds may be given in
writing or by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to Federated Services Company, 500
Victory Road--2nd Floor, Quincy, Massachusetts 02171.

TELEPHONE INSTRUCTIONS

Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the Fund.
If the instructions are given by a broker, a telephone authorization form
completed by the broker must be on file with the Fund. If reasonable procedures
are not followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. Shares may be exchanged between two funds by
telephone only if the two funds have identical shareholder registrations.

Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Federated Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600 and deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon the
shareholder. Such instructions will be processed as of 4:00 p.m. (Eastern time)
and must be received by the Fund before that time for Shares to be exchanged the
same day. Shareholders exchanging into a Fund will begin receiving dividends the
following business day. This privilege may be modified or terminated at any
time.

- --------------------------------------------------------------------------------
HOW TO REDEEM SHARES

Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. 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
as described below.

REDEEMING SHARES THROUGH A
FINANCIAL INSTITUTION

Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to the
Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. Redemption requests through other financial institutions
(such as banks) must be received by the financial institution and transmitted to
the Fund before 4:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The financial institution is responsible for
promptly submitting redemption requests and providing proper written redemption
instructions. Customary fees and commissions may be charged by the financial
institution for this service.

REDEEMING SHARES BY TELEPHONE

Shares may be redeemed in any amount by calling the Fund provided the Fund has a
properly completed authorization form. These forms can be obtained from
Federated Securities Corp. Proceeds will be mailed in the form of a check, to
the shareholder's address of record or by wire transfer to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. The minimum amount for a wire transfer is $1,000. Proceeds from redeemed
Shares purchased by check or through ACH will not be wired until that method of
payment has cleared.

Telephone instructions will 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
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to: Federated
Services Company, Fund Name, Fund Class, P.O. Box 8600, Boston, MA 02266-8600.

The written request should state: 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. It is recommended
that any share certificates be sent by registered or certified mail with the
written request.

If you are requesting a redemption of any amount to be sent to an address other
than that on record with the Fund, or a redemption payable to a third party,
then all signatures appearing on the written request must be guaranteed by a
bank which is a member of the Federal Deposit Insurance Corporation, a trust
company, a member firm of a domestic stock exchange, or any other "eligible
guarantor institution," as defined by the Securities and Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

Normally, a check for the proceeds is mailed within one business day, but in no
event more than seven days, after receipt of a proper written redemption
request.

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, Shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder.

Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the Fund. To be eligible to
participate in this program, a shareholder must have an account value of at
least $10,000. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales load, it is not advisable for shareholders to continue to purchase Class A
Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B Shares and Class C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:

CLASS A SHARES

Class A Shares purchased under a periodic special offering with the proceeds of
a redemption of Shares of an unaffiliated investment company purchased or sold
with a sales load and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of .50 of 1.00% for redemptions made
within one full year of purchase. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption.

CLASS B SHARES

Shareholders redeeming Class B Shares from their Fund accounts within six full
years of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor. Any applicable contingent deferred sales
charge will be imposed on the lesser of the net asset value of the redeemed
Shares at the time of purchase or the net asset value of the redeemed Shares at
the time of redemption in accordance with the following schedule:

<TABLE>
<CAPTION>
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption.

CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following order:
(1) Shares acquired through the reinvestment of dividends and long-term capital
gains; (2) Shares held for more than six full years from the date of purchase
with respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares; (3) Shares held for
fewer than six years with respect to Class B Shares and one full year from the
date of purchase with respect to Class C Shares and applicable Class A Shares on
a first-in, first-out basis. A contingent deferred sales charge is not assessed
in connection with an exchange of Fund Shares for Shares of other funds in the
Liberty Family of Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged for Shares
are redeemed is calculated as if the shareholder had held the Shares from the
date on which he became a shareholder of the exchanged-from Shares. Moreover,
the contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds.

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 70-1/2; and (3) involuntary redemptions by the Fund of
Shares in shareholder accounts that do not comply with the minimum balance
requirements. No contingent deferred sales charge will be imposed on redemptions
of Shares held by Directors, employees and sales representatives of the Fund,
the distributor, or affiliates of the Fund or distributor; employees of any
financial institution that sells Shares of the Fund pursuant to a sales
agreement with the distributor; and spouses and children under the age of 21 of
the aforementioned persons. Finally, no contingent deferred sales charge will be
imposed on the redemption of Shares originally purchased through a bank trust
department, an investment adviser registered under the Investment Advisers Act
of 1940, as amended, or any other financial institution, to the extent that no
payments were advanced for purchases made through such entities. The Directors
reserve the right to discontinue elimination of the contingent deferred sales
charge. Shareholders will be notified of such elimination. Any Shares purchased
prior to the termination of such waiver would have the contingent deferred sales
charge eliminated as provided in the Fund's prospectus at the time of the
purchase of the Shares. If a shareholder making a redemption qualifies for an
elimination of the contingent deferred sales charge, the shareholder must notify
Federated Securities Corp. or the transfer agent in writing that he is entitled
to such elimination.

- --------------------------------------------------------------------------------
ACCOUNT AND SHARE
INFORMATION

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Services Company maintains a share
account for each shareholder. Share certificates are not issued unless requested
in writing to Federated Services Company.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during that
month.

DIVIDENDS

Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-dividend
date net asset value without a sales load, unless shareholders request cash
payments on the new account form or by contacting the transfer agent. All
shareholders on the record date are entitled to the dividend. If Shares are
redeemed or exchanged prior to the record date or purchased after the record
date, those Shares are not entitled to that month's dividend.

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be distributed at
least once every twelve months.

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 the Class A Share required minimum value of $500 or
the required minimum value of $1,500 for Class B Shares and Class C Shares. This
requirement does not apply, however, if the balance falls below the required
minimum value because of changes in the net asset value of the respective Share
Class. 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 Fund's business affairs and for exercising all the Fund's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Directors handles the Board's responsibilities between meetings of the Board.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Advisers, 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 Adviser receives an annual investment advisory fee equal to .30 of 1% of the
Fund's average daily net assets, plus 4.5% of the Fund's gross income (excluding
any capital gains or losses).

The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses. The Adviser can terminate this voluntary waiver at
any time at its sole discretion. The Adviser has also undertaken to reimburse
the Fund for operating expenses in excess of limitations established by certain
states.

ADVISER'S BACKGROUND

Federated Advisers, a Delaware business trust organized on April 11, 1989, is a
registered investment adviser under the Investment Advisers Act of 1940. It is a
subsidiary of Federated Investors. All of the Class A (voting) Shares of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.

Federated Advisers and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $72 billion invested across more than 260 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,750 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.

Jonathan C. Conley has been the Fund's portfolio manager since October 1984. Mr.
Conley joined Federated Investors in 1979 and has been a Vice President of the
Fund's investment adviser since 1982. Mr. Conley is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of Virginia.

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. 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.

The distributor may offer to pay financial institutions an amount equal to 1% of
the net asset value of Class C Shares purchased by their clients or customers at
the time of purchase. These payments will be made directly by the distributor
from its assets, and will not be made from assets of the Fund. Financial
institutions may elect to waive the initial payment described above; such waiver
will result in the waiver by the Fund of the otherwise applicable contingent
deferred sales charge.

The distributor will pay dealers an amount equal to 5.5% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES PLANS

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a
fee to the distributor in an amount computed at an annual rate of .75% of the
average daily net assets of each class of Shares to finance any activity which
is principally intended to result in the sale of Shares subject to the
Distribution Plan. For Class C Shares, the distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales support services as agents for
their clients or customers. With respect to Class B Shares, because distribution
fees to be paid by the Fund to the distributor may not exceed an annual rate of
.75% of each class of Shares' average daily net assets, it will take the
distributor a number of years to recoup the expenses it has incurred for its
distribution and distribution-related services pursuant to the Plan.

The Distribution Plan is a compensation type Plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by it from the Fund, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by Shares
under the Plan.

In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class A Shares, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts ("Shareholder Services"). The Fund has entered into a
Shareholder Services Agreement with Federated Shareholder Services, a subsidiary
of Federated Investors, under which 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.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the capacities described above or should
Congress relax current restrictions on depository institutions, the Directors
will consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS

With respect to Class A Shares, Class B Shares, and Class C Shares, the
distributor may offer to pay a fee from its own assets to financial institutions
as financial assistance for providing substantial marketing and sales support.
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 Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which relates to the average aggregate
daily net assets of all Federated Funds as specified below:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.10 of 1% on the next $250 million
0.075 of 1% on assets in excess of
$750 million
</TABLE>

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 Administrative Services may choose voluntarily to waive a portion of
its fee.

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT

Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.

INDEPENDENT AUDITORS

The independent auditors for the Fund are Deloitte & Touche LLP, 2500 One PPG
Place, Pittsburgh, Pennsylvania 15222.

- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION

VOTING RIGHTS

Each share of the Fund gives the shareholder one vote in Director elections and
other matters submitted to shareholders for vote. All Shares of each portfolio
or class in the Fund have equal voting rights, except that in matters affecting
only a particular portfolio or class, only Shares of that portfolio or class are
entitled to vote.

As a Maryland corporation, the Fund is not required to hold annual shareholder
meetings. Shareholder approval will be sought only for certain changes in the
Fund's operation and for the election of Directors under certain circumstances.

Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund'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 applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies.

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 the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.

PENNSYLVANIA PERSONAL
PROPERTY TAXES

Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION

From time to time the Fund advertises its total return and yield for each class
of Shares.

Total return represents the change, over a specific period of time, in the value
of an investment in each class of Shares 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 each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class 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 each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges, such
as the maximum sales load or contingent deferred sales charges, which, if
excluded, would increase the total return and yield.

Total return and yield will be calculated separately for Class A Shares, Class B
Shares and Class C Shares. Because Class B Shares and Class C Shares are subject
to Rule 12b-1 fees, and higher Shareholder Services fees, the yield for Class A
Shares, for the same period, may exceed that of Class B Shares and Class C
Shares.

Because Class A Shares are subject to a sales load, the total return for Class B
Shares and Class C Shares for the same period will exceed that of Class A
Shares. Depending on the dollar amount invested, and the time period for which
any particular class of Shares is held, the total return for any particular
class may exceed that of another.

From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares of the Fund may refer to ratings rankings, and other information in
certain financial publications and/or compare the performance of Class A Shares,
Class B Shares, and Class C Shares to certain indices.

LIBERTY MUNICIPAL
SECURITIES FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

COMBINED PROSPECTUS

An Open-End, Diversified
Management Investment Company

May 31, 1995

[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
530900109
530900406
530900208
G00322-01 (5/95)

LIBERTY MUNICIPAL SECURITIES FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
Combined Statement of Additional Information

This Combined Statement of Additional Information should be read
with the combined prospectus for Liberty Municipal Securities
Fund, Inc. (the "Fund") dated May 31, 1995. This Statement is not
a prospectus itself. To receive a copy of the prospectus, write
or call the Fund.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated May 31, 1995

FEDERATED SECURITIES CORP.
Distributor

A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE
FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Acceptable Investments 1
When-Issued and Delayed
Delivery Transactions 1
Temporary Investments 1
Portfolio Turnover 2
Investment Limitations 2
LIBERTY MUNICIPAL SECURITIES
FUND, INC. MANAGEMENT 4
Fund Ownership 8
Directors Compensation 9
INVESTMENT ADVISORY SERVICES 9
Adviser to the Fund 9
Advisory Fees 10
ADMINISTRATIVE SERVICES 10
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 10
BROKERAGE TRANSACTIONS 10
PURCHASING SHARES 11
Distribution Plan (Class B
Shares and Class C Shares
Only) and Shareholder Services
Plan 11
Conversion to Federal Funds 11
Purchases by Sales
Representatives, Fund
Directors, and Employees 11
Valuing Municipal Bonds 12
REDEEMING SHARES 12
TAX STATUS 12
The Fund's Tax Status 12
TOTAL RETURN 12
YIELD 13
TAX-EQUIVALENT YIELD 13
Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 14
ABOUT FEDERATED INVESTORS 15
FINANCIAL STATEMENTS 16
APPENDIX 17
GENERAL INFORMATION ABOUT THE FUND
The Fund was incorporated under the laws of the State of Maryland on
September 10, 1976. On December 23, 1992, the shareholders of the Fund
voted to permit the Fund to offer separate series and classes of shares.
On January 6, 1993, the Board of Directors ("Directors") approved
changing the name of the Fund, effective January 6, 1993, from Federated
Tax-Free Income Fund, Inc. to Liberty Municipal Securities Fund, Inc.
Shares of the Fund are offered in three classes, known as Class A
Shares, Class B Shares, and Class C Shares (individually and
collectively referred to as "Shares" as the context may require.) This
Combined Statement of Additional Information relates to all three
classes of the above-mentioned Shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide for its shareholders a
high level of current income which is exempt from federal regular income
tax. The objective cannot be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in municipal bonds.
Characteristics and Risks
The municipal bonds in which the Fund invests have the
characteristics and risks set forth in the prospectus.
If ratings made by Moody's or Standard & Poor's change because of
changes in those organizations or in their rating systems, the
Fund will try to use comparable ratings as standards in accordance
with the investment policies described in the Fund's prospectus.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. No fees or other expenses,
other than normal transaction costs, are incurred. However, liquid
assets of the Fund sufficient to make payment for the securities to be
purchased are segregated at the trade date. These assets are marked to
market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than
20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes. During the last fiscal year, the Fund did not invest
in temporary investments and does not presently intend to do so in the
current fiscal year. The Fund might invest in temporary investments:
o as a reaction to market conditions;
o while waiting to invest proceeds of sales of shares or portfolio
securities, although generally proceeds from sales of shares will
be invested in municipal bonds as quickly as possible; or
o in anticipation of redemption requests.
The Fund will not purchase temporary investments (other than securities
of the U.S. government, its agencies, or instrumentalities) if, as a
result of the purchase, 25% or more of the value of its total assets
would be invested in any one industry. However, the Fund may, for
temporary defensive purposes, invest more than 25% of the value of its
assets in cash or cash items, U.S. Treasury bills, or securities issued
or guaranteed by the U.S. government, its agencies, or
instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
Repurchase Agreements
Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell
U.S. government securities or certificates of deposit to the Fund
and agree at the time of sale to repurchase them at a mutually
agreed upon time and price. The Fund or its custodian will take
possession of the securities subject to repurchase agreements and
these securities will be marked to market daily. To the extent
that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on
any sale of such securities. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of
such securities by the Fund might be delayed pending court action.
The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would
rule in favor of the Fund and allow retention or disposition of
such securities. The Fund may only enter into repurchase
agreements with banks and other recognized financial institutions,
such as broker/dealers, which are found by the Fund's adviser to
be creditworthy pursuant to guidelines established by the
Directors.
From time to time, such as when suitable municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any
portion of the Fund's assets maintained in cash will reduce the amount
of assets in municipal bonds and thereby reduce the Fund's yield.
PORTFOLIO TURNOVER
Portfolio trading will be undertaken principally to accomplish the
Fund's objective in relation to anticipated movements in the general
level of interest rates. The Fund is free to dispose of portfolio
securities at any time when changes in circumstances or conditions make
such a move desirable in light of the investment objective. The Fund
will not attempt to achieve or be limited to a predetermined rate of
portfolio turnover, such turnover always being incidental to
transactions undertaken with a view to achieving the Fund's investment
objective. During the fiscal years ended March 31, 1995 and 1994, the
portfolio turnover rates were 41% and 27% , respectively.
INVESTMENT LIMITATIONS
Selling Short and Buying on Margin
The Fund will not make short sales of securities or purchase any
securities on margin, except for such credits as are necessary for
the clearance of transactions.
Borrowing Money
The Fund will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts not
in excess of 5% of the value of its total assets or in an amount
up to one-third of the value of its total assets, including the
amount borrowed, in order to meet redemption requests without
immediately selling any portfolio securities. This borrowing
provision is not for investment leverage but solely to facilitate
management of the portfolio by enabling the Fund to meet
redemption requests where the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous.
While any such borrowings are outstanding, no net purchases of
investment securities will be made by the Fund.
Pledging Assets
The Fund will not pledge, mortgage or hypothecate its assets,
except to secure permitted borrowings. In those cases, it may
pledge securities having a market value at the time of pledge not
exceeding 10% of the value of the Fund's total assets.
Investing in Commodities or Minerals
The Fund will not purchase or sell commodities, commodity
contracts, oil, gas, or other mineral exploration or development
programs.
Investing in Real Estate
The Fund will not purchase or sell real estate, but this shall not
prevent the Fund from investing in Municipal Bonds secured by real
estate or interest therein.
Underwriting
The Fund will not underwrite any issue of securities except as it
may be deemed to be an underwriter under the Securities Act of
1933, in connection with the sale of securities in accordance with
its investment objective, policies and limitations.
Making Loans
The Fund will not make loans except that the Fund may, in
accordance with its investment objective, policies and
limitations, acquire publicly or non-publicly issued Municipal
Bonds or temporary investments or enter into repurchase
agreements.
Acquiring Securities Issued by Other Investment Companies
The Fund will not invest in securities issued by any other
investment company or investment trust.
Diversification of Investments
The Fund will not purchase the securities of any one issuer,
except in cash and cash instruments and securities issued by the
United States government, its agencies, and instrumentalities, if
as a result more than 5% of its total assets would be invested in
the securities of such issuer.
For purposes of this limitation, each governmental subdivision,
i.e. state, territory, possession of the United States or any
political subdivision of the foregoing including agencies,
authorities, instrumentalities, or similar entities, or of the
District of Columbia shall be considered a separate issuer if its
assets and revenues are separate from those of the governmental
body creating it and revenues are separate from those of the
governmental body creating it and the security is backed by its
own assets and revenues. In the case of an industrial development
bond, if the security is backed only by the assets and revenues of
a non-governmental user, then such non-governmental user will be
deemed to be the sole issuer. If, however, in the case of an
industrial development bond or governmental issued security, a
governmental or some other entity guarantees the security, such
guarantee would be considered a separate security issued by the
guarantor as well as the other issuer (as above defined), subject
to limited exclusions allowed by the Investment Company Act of
1940, as amended. For purposes of this limitation, cash
instruments do not include securities issued by banks.
Dealing in Puts and Calls
The Fund will not purchase or sell puts, calls, straddles,
spreads, or any combination thereof.
Investing in Issuers Whose Securities are Owned by Officers of the
Fund
The Fund will not purchase or retain the securities of any issuer
other than the securities of the Fund, if, to the Fund's
knowledge, those officers and directors of the Fund, or of the
Adviser, who individually own beneficially more than 1/2 of 1% of
the outstanding securities of such issuer, together own
benefically more than 5% of such outstanding securities.
Concentration of Investments
The Fund will not purchase securities if, as a result of such
purchase more than 25% of the value of its assets would be
invested in the securities of governmental subdivisions located in
any one state, territory, or possession of the United States. The
Fund may invest more than 25% of the value of its assets in
industrial development bonds. As to industrial development bonds,
the Fund may purchase securities of an issuer resulting in the
ownership of more than 25% of the Fund's assets in any one
industry.
Investing in Restricted Securities
The Fund will not invest more than 10% of the value of its total
assets in Municipal Bonds which are subject to legal or
contractual restrictions on resale, including repurchase
agreements maturing in more than seven days.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
Investing in Illiquid Securities
The Fund will not invest more than 10% of its net assets in
illiquid securities, including restricted securities which the
adviser believes cannot be sold within seven days and repurchase
agreements maturing in more than seven days.
Investing in New or Foreign Issuers or in Securities Not Readily
Marketable
In order to qualify Shares of the Fund for sale in certain states,
the Fund has agreed with certain state securities administrators
not to invest more than 5% of the value of its total assets in
securities of issuers with records of less than three years of
continuous operations, including the operation of any predecessor.
The Fund has also agreed not to purchase equity securities of any
issuer that are not readily marketable or to invest in securities
of any foreign issuer.
In addition, in order to comply with certain state restrictions, the
Fund will not invest in real estate limited partnerships, oil, gas or
other mineral leases.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not
result in a violation of such restriction.
The Fund did not borrow money, pledge securities, invest in municipal
bonds subject to legal or contractual restrictions, invest in issuers
whose securities are owned by officers of the Fund, or invest in
securities of issuers with a record of less than three years of
continuous operation in excess of 5% of the value of its net assets
during the last fiscal year and has no present intent to do so in the
coming fiscal year.
For purposes of its policies and limitations, the Fund considers
certificates of deposits and demand and time deposits issued by a U.S.
branch of a domestic bank or savings and loan having capital, surplus
and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
LIBERTY MUNICIPAL SECURITIES FUND, INC. MANAGEMENT
Officers and Directors are listed with their addresses, present
positions with Liberty Municipal Securities Fund, Inc., and principal
occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Director
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp.; Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and Director, Trustee, or
Managing General Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, President and Director of the Company.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Director
Director, Oberg Manufacturing Co.; Chairman of the Board, Children's
Hospital of Pittsburgh; Director, Trustee, or Managing General Partner
of the Funds; formerly, Senior Partner, Ernst & Young LLP.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President,
John R. Wood and Associates, Inc., Realtors; President, Northgate
Village Development Corporation; Partner or Trustee in private real
estate ventures in Southwest Florida; Director, Trustee, or Managing
General Partner of the Funds; formerly, President, Naples Property
Management, Inc.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
Director and Member of the Executive Committee, Michael Baker, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.

J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Director
President and Trustee, Federated Investors, Federated Advisers,
Federated Management, and Federated Research; President and Director,
Federated Research Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services Company, and
Federated Shareholder Services; President or Vice President of the
Funds; Director, Trustee, or Managing General Partner of some of the
Funds. Mr. Donahue is the son of John F. Donahue, Chairman and Director
of the Company.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Director,
Blue Cross of Massachusetts, Inc.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Director
Professor of Medicine and Member, Board of Trustees, University of
Pittsburgh; Medical Director, University of Pittsburgh Medical Center -
Downtown; Member, Board of Directors, University of Pittsburgh Medical
Center; formerly, Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director, Trustee, or Managing General Partner
of the Funds.

Edward L. Flaherty, Jr.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: June 18, 1924
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Director,
Eat'N Park Restaurants, Inc., and Statewide Settlement Agency, Inc.;
Director, Trustee, or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.

Peter E. Madden
225 Franklin Street
Boston, MA
Birthdate: April 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.

Gregor F. Meyer
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
Pittsburgh, PA
Birthdate: October 6, 1926
Director
Attorney-at-law; Partner, Henny, Kochuba, Meyer and Flaherty; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director,
Trustee, or Managing General Partner of the Funds; formerly, Vice
Chairman, Horizon Financial, F.A.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Director
President, Law Professor, Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director, Trustee or Managing General Partner
of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, Foreign Policy and Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., and U.S. Space Foundation; Chairman, Czecho Slovak
Management Center; Director, Trustee, or Managing General Partner of the
Funds; President Emeritus, University of Pittsburgh; formerly, Chairman,
National Advisory Council for Environmental Policy and Technology.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: July 21, 1935
Director
Public relations/marketing consultant; Director, Trustee, or Managing
General Partner of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Director,
Federated Research Corp.; Chairman and Director, Federated Securities
Corp.; President or Vice President of some of the Funds; Director or
Trustee of some of the Funds.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Vice President and Treasurer
Vice President, Treasurer, and Trustee, Federated Investors; Vice
President and Treasurer, Federated Advisers, Federated Management,
Federated Research, Federated Research Corp., and Passport Research,
Ltd.; Executive Vice President, Treasurer, and Director, Federated
Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Secretar
Secretary, Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice President,
Secretary, and Trustee, Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.

* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the
Board of Directors between meetings of the Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Automated Cash Management Trust; Automated Government Money
Trust; California Municipal Cash Trust; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport
Cash Trust; Federated ARMs Fund; Federated Exchange Fund, Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Intermediate Government Trust; Federated Short-Term U.S.
Government Trust; Federated Stock Trust; Federated Tax-Free Trust;
Federated U.S. Government Bond Fund; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund
for U.S. Government Securities, Inc.; Government Income Securities,
Inc.; High Yield Cash Trust; Insight Institutional Series, Inc.;
Insurance Management Series; Intermediate Municipal Trust; International
Series Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty Term Trust, Inc.-1999;
Liberty U.S. Government Money Market Trust; Liberty Utility Fund, Inc.;
Liquid Cash Trust; Mark Twain Funds; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; New York Municipal Cash Trust; 111 Corcoran Funds;
Peachtree Funds; The Planters Funds; Portage Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal Trust; Signet Select
Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; and
World Investment Series, Inc.
FUND OWNERSHIP
Officers and Directors own less than 1% of the Fund's outstanding
Shares.
As of May 5, 1995, there were no shareholders of record who owned 5% or
more of the outstanding Class A Shares of the Fund.
As of May 5, 1995, there were no shareholders of record who owned 5% or
more of the outstanding Class B Shares of the Fund.
Merrill Lynch Pierce Fenner & Smith (as record owner holding Class C
Shares for its clients) Jacksonville, Florida, owned approximately
625,806 Shares (30.31%) of the Fund as of May 5, 1995.
DIRECTORS COMPENSATION

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

John F. Donahue, $ -0-
$ -0- for the Corporation and
Chairman and Director 68
other investment companies in the Fund Complex
Thomas G. Bigley, $ 857.00
$ 20,688 for the Corporation and
Director 49
other investment companies in the Fund Complex
John T. Conroy, Jr., $ 1,908.00
$ 117,202 for the Corporation and
Director 64
other investment companies in the Fund Complex
William J. Copeland, $ 1,908.00
$ 117,202 for the Corporation and
Director 64
other investment companies in the Fund Complex
J. Christopher Donahue, $ -0-
$ -0- for the Corporation and
President and Director 14
other investment companies in the Fund Complex
James E. Dowd, $ 1,908.00
$ 117,202 for the Corporation and
Director 64
other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $ 1,731.00
$ 106,460 for the Corporation and
Director 64
other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $ 1,908.00
$ 117,202 for the Corporation and
Director 64
other investment companies in the Fund Complex
Peter E. Madden, $ 1,472.00
$ 90,563 for the Corporation and
Director 64
other investment companies in the Fund Complex
Gregor F. Meyer, $ 1,731.00
$ 106,460 for the Corporation and
Director 64
other investment companies in the Fund Complex
John E. Murray, Jr., $ -0-
$ -0- for the Corporation and
Director 64
other investment companies in the Fund Complex
Wesley W. Posvar, $ 1,731.00
$ 106,460 for the Corporation and
Director 64
other investment companies in the Fund Complex

Marjorie P. Smuts, $ 1,731.00
$ 106,460 for the Corporation and
Director 64
other investment companies in the Fund Complex

*Information is furnished for the fiscal year ended March 31, 1995.
+The information is provided for the last calendar year.

INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser is Federated Advisers. It is a subsidiary
of Federated Investors. All the Class A (voting) shares of Federated
Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue. John F. Donahue
is Chairman and Trustee of Federated Advisers, Chairman and Trustee,
Federated Investors, and Chairman and Director of the Fund. J.
Christopher Donahue is President and Trustee, Federated Advisers,
President and Trustee, Federated Investors, Trustee, Federated
Administrative Services, Trustee, Federated Services Company, and
President and Director of the Fund. John W. McGonigle is Vice President,
Secretary and Trustee of Federated Advisers, Trustee, Vice President,
Secretary and General Counsel, Federated Investors, Executive Vice
President, Secretary and Trustee, Federated Administrative Services,
Executive Vice President and Director, Federated Securities Corp.,
Trustee, Federated Services Company, and Vice President and Secretary of
the Fund.
The adviser shall not be liable to the Fund or any shareholder for any
losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Advisers receives an annual
investment advisory fee as described in the prospectus. During the
fiscal years ended March 31, 1995, 1994, and 1993, the Fund's adviser
earned $4,498,635, $4,570,573, and $4,015,243, respectively.
State Expense Limitations
The adviser has undertaken to comply with the expense limitation
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2-1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1-1/2% per year of the remaining
average net assets, the adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by
the amount of the excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be reimbursed by the
adviser will be limited, in any single fiscal year, by the amount
of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. For the fiscal year ended March 31,
1995, Federated Administrative Services earned $550,028. For the fiscal
year ended March 31, 1994, Federated Administrative Services and
Federated Administrative Services, Inc., the Fund's former
administrator, collectively earned $541,113. For the fiscal year ended
March 31, 1993, Federated Administrative Services, Inc. earned $398,773.
Dr. Henry J. Gailliot, an officer of Federated Advisers, the adviser to
the Fund, holds approximately 20% of the outstanding common stock and
serves as a director of Commercial Data Services, Inc., a company which
provides computer processing services to Federated Administrative
Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Corporation's accounting
records. The fee paid for this service is based upon the level of the
Fund's average net assets for the period plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the
order at a favorable price. In working with dealers, the adviser will
generally utilize those who are recognized dealers in specific portfolio
instruments, except when a better price and execution of the order can
be obtained elsewhere. In selecting among firms believed to meet these
criteria, the adviser may give consideration to those firms which have
sold or are selling Shares of the Fund and other funds distributed by
Federated Securities Corp. The adviser makes decisions on portfolio
transactions and selects brokers and dealers subject to review by the
Directors.
The adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relation to the value of the
brokerage and research services provided.
Research services provided by brokers may be used by the adviser or by
affiliates of Federated Investors in advising Federated Funds and other
accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
PURCHASING SHARES
Except under certain circumstances described in the prospectus, Shares
are sold at their net asset value (plus a sales charge on Class A Shares
only) on days the New York Stock Exchange is open for business. The
procedure for purchasing Shares is explained in the combined prospectus
under "How To Purchase Shares."
DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND
SHAREHOLDER SERVICES PLAN
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
With respect to the Class B and C Shares of the Fund, by adopting the
Distribution Plan, the Board of Directors expects that the Fund will be
able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
and (3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
For the fiscal period ending March 31, 1995, payments in the amount of
$206,000 were made pursuant to the Distribution Plan, all of which was
paid to the financial institutions. In addition, for this period,
payments in the amount of $728,702 were made pursuant to the Shareholder
Services Plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them
to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp. and their spouses and children under 21, may buy Class A Shares at
net asset value without a sales charge. Shares may also be sold without
a sales charge to trusts or pension or profit-sharing plans for these
people.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The Board of Directors uses an independent pricing service to value
municipal bonds. The independent pricing service takes into
consideration yield, stability, risk, quality, coupon rate, maturity,
type of issue, trading characteristics, special circumstances of a
security or trading market, and any other factors or market data it
considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on
quoted prices.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in the combined
prospectus under "How To Redeem Shares." Although State Street Bank does
not charge for telephone redemptions, it reserves the right to charge a
fee for the cost of wire-transferred redemptions of less than $5,000.
TAX STATUS
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
TOTAL RETURN
The Fund's average annual total return based on offering price for Class
A Shares for the one-year, five-year, and ten-year periods ended March
31, 1995, was 1.11%, 6.68%, and 8.86%, respectively. The Fund's
cumulative total return based on offering price for Class B Shares for
the period from July 26, 1994 (date of initial public offering for Class
B Shares) to March 31, 1995, was (2.17%). The Fund's one-year average
annual total return based on offering price for Class C Shares for the
period ended March 31, 1995 and for the period from April 20, 1993 (date
of initial public offering for Class C Shares) to March 31, 1995, was
3.91% and 2.61%, respectively.
The average annual total return for each class of Shares of the Fund is
the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by multiplying
the number of shares owned at the end of the period by the net asset
value per share at the end of the period. The number of shares owned at
the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load
adjusted over the period by any additional Shares, assuming the monthly
reinvestment of all dividends and distributions. Any applicable
contingent deferred sales charge is deducted from the ending value of
the investment based on the lesser of the original purchase price or the
net asset value of Shares redeemed.
Cumulative total return reflects the Class B Shares' total performance
over a specific period of time. This total return assumes and is reduced
by the payment of the maximum sales load and contingent deferred sales
charge, if applicable. The Class B Shares' total return is
representative of only eight months of investment activity since the
start of performance.
YIELD
The Fund's yields for the thirty-day period ended March 31, 1995 for
Class A Shares, Class B Shares, and Class C Shares were 5.10%, 4.44%,
and 4.45%, respectively.
The yield for each class of Shares of the Fund is determined by dividing
the net investment income per share (as defined by the Securities and
Exchange Commission) earned by any class of Shares over a thirty-day
period by the maximum offering price per share of the respective class
on the last day of the period. This value is then annualized using semi-
annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over
a 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of
certain adjustments required by the Securities and Exchange Commission
and therefore, may not correlate to the dividends or other distributions
paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment
in any class of Shares, the performance will be reduced for those
shareholders paying those fees.
TAX-EQUIVALENT YIELD
The Fund's tax-equivalent yields for the thirty-day period ended March
31, 1995 for Class A Shares, Class B Shares, and Class C Shares were
7.08%, 6.17%, and 6.18%, respectively.
The tax-equivalent yield of the Fund is calculated similarly to the
yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a 28% tax rate and
assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
A tax-equivalency table may be used in advertising and sales literature.
The interest earned by the municipal securities in the Fund's portfolio
generally remains free from federal regular income tax*, and is often
free from state and local taxes as well. As the table on the next page
indicates, a "tax-free" investment can be an attractive choice for
investors, particularly in times of narrow spreads between tax-free and
taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1995
MULTISTATE MUNICIPAL FUND

FEDERAL INCOME TAX BRACKET:

15.00% 28.00% 31.00% 36.00%
39.60%
Joint $1- $39,001 - $94,251 - $143,601 - OVER
Return 39,000 94,250 143,600 256,500 256,500

Single Return $1- $23,351 - $56,551 - $117,951 - OVER
23,350 56,550 117,950 256,500 $256,500
Tax-Exempt
Yield Taxable Yield Equivalent
1.00% 1.18% 1.39% 1.45% 1.56%
1.66%
1.50% 1.76% 2.08% 2.17% 2.34%
2.48%
2.00% 2.35% 2.78% 2.90% 3.13%
3.31%
2.50% 2.94% 3.47% 3.62% 2.91%
4.14%
3.00% 3.53% 4.17% 4.35% 4.69%
4.97%
3.50% 4.12% 4.86% 5.07% 5.47%
5.79%
4.00% 4.71% 5.56% 5.80% 6.25%
6.62%
4.50% 5.29% 6.25% 6.52% 7.03%
7.45%
5.00% 5.88% 6.94% 7.25% 7.81%
8.28%
5.50% 6.47% 7.64% 7.97% 8.59%
9.11%
6.00% 7.06% 8.33% 8.70% 9.38%
9.93%
6.50% 7.65% 9.03% 9.42% 10.16%
10.76%
7.00% 8.24% 9.72% 10.14% 10.94%
11.59%
7.50% 8.82% 10.42% 10.87% 11.72%
12.42%
8.00% 9.41% 11.11% 11.59% 12.50%
13.25%

NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE
TAXABLE YIELD EQUIVALENT.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of the Fund.
*Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
The performance of each of the classes of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's or any class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings
and offering price per share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any
change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the
general municipal bond funds category in advertising and sales
literature.
o LEHMAN BROTHERS REVENUE BOND INDEX is a total return performance
benchmark for the long-term, investment grade, revenue bond
market. Returns and attribute for the index are calculated semi-
monthly.
o LEHMAN SEVEN YEAR STATE GENERAL OBLIGATIONS INDEX is an index of
general obligation bonds rated A or better with 6-8 years to
maturity.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for any class of Shares may
quote total returns which are calculated on non-standardized base
periods. These total returns represent the historic change in the value
of an investment in any of the classes of Shares based on monthly
reinvestment of dividends over a specified period of time.
From time to time as it deems appropriate, the Fund may advertise the
performance of any of the classes of Shares using charts, graphs, and
descriptions, compared to federally insured bank products including
certificates of deposit and time deposits and to money market funds
using the Lipper Analytical Services money market instruments average.
Advertisements may quote performance which does not reflect the effect
of the sales charge for Class A Shares.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in
its investment decision making structured, straightforward, and
consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio
managers, analysts, and traders dedicated to specific market sectors.
In the municipal sector, as of December 31, 1994, Federated managed 18
bond funds with approximately $1.9 billion in assets and 18 money market
funds with approximately $6.6 billion in total assets. In 1976,
Federated introduced one of the first municipal bond mutual funds in the
industry and is now one of the largest institutional buyers of municipal
securities.
J. Thomas Madden, Executive Vice President, oversees Federated's equity
and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated's domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500
funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds
for a variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment
and financial advisors. The marketing effort to these institutional
clients is headed by John B. Fisher, President, Institutional Sales
Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust
divisions of the top 100 bank holding companies use Federated funds in
their clients' portfolios. The marketing effort to trust clients is
headed by Mark R. Gensheimer, Executive Vice President, Bank Marketing &
Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major
brokerage firms nationwide--including 200
New York Stock Exchange firms--supported by more wholesalers than any
other mutual fund distributor. The marketing effort to these firms is
headed by James F. Getz, President, Broker/Dealer Division.

*source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended March 31, 1995, are
incorporated herein by reference to the Annual Report of the Fund dated
March 31, 1995 (File Nos. 2-57181 and 811-2677). A copy of this report
may be obtained without charge by contacting the Fund.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard &
Poor's Ratings Group. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effect
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB--Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "BBB"- rating.
B--Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB "or "BB"- rating.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of.protection may not be as large as in AAA securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA--Bonds which are rated BAA are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA--Bonds which are rated BA are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
530900109
530900406
530900208
8051601B (5/95)