FEDERATED MUNICIPAL SECURITIES FUND INC, 497, 1997-08-01

FEDERATED MUNICIPAL SECURITIES FUND INC
497, 1997-08-01

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Federated Municipal Securities Fund, Inc.

Class A Shares, Class B Shares, Class C Shares

PROSPECTUS

The shares of Federated 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 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 Statement of Additional Information dated July 31,
1997, with the Securities and Exchange Commission (the "SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated July 31, 1997

TABLE OF CONTENTS

Summary of Fund Expenses 1
Financial Highlights -- Class A Shares 2
Financial Highlights -- Class B Shares 3
Financial Highlights -- Class C Shares 4
General Information 5
Calling the Fund 5
Investment Information 5
Investment Objective 5
Investment Policies 5
Investment Risks 7
Investment Limitations 7
Net Asset Value 8
Investing in the Fund 8
Purchasing Shares 8
Purchasing Shares through a Financial Intermediary 9
Purchasing Shares by Wire 9
Purchasing Shares by Check 9
Systematic Investment Program 9
Class A Shares 9
Class B Shares 10
Class C Shares 10
Redeeming and Exchanging Shares 10
Redeeming or Exchanging Shares through a
Financial Intermediary 10
Redeeming or Exchanging Shares by Telephone 10
Redeeming or Exchanging Shares by Mail 11
Requirements for Redemption 11
Requirements for Exchange 11
Systematic Withdrawal Program 11
Contingent Deferred Sales Charge 11
Eliminating the Contingent Deferred Sales Charge 12
Account and Share Information 12
Confirmations and Certificates 12
Dividends and Distributions 12
Accounts with Low Balances 12
Fund Information 12
Management of the Fund 12
Distribution of Shares 13
Administration of the Fund 14
Shareholder Information 15
Tax Information 15
Federal Income Tax 15
State and Local Taxes 15
Performance Information 16

SUMMARY OF FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of
offering price) 4.50% None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as None 5.50%(1) 1.00%(1)
applicable)
Redemption Fee (as a percentage of amount redeemed, None None None
if applicable)
Exchange Fee None None None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C> <C> <C> <C>
Management Fee 0.60% 0.60% 0.60%
12b-1 Fee None 0.75% 0.75%

Total Other Expenses 0.33% 0.47% 0.46%
Shareholder Services Fee (after waiver) 0.11%(2) 0.25% . 24%(2)
Total Operating Expenses 0.93%(3) 1.82%(4) 1.81%(3)

</TABLE>

(1) For shareholders of Class B Shares, the contingent deferred sales charge is
5.50% in the first year declining to 1.00% in the sixth year and 0.00%
thereafter. For shareholders of Class C Shares, 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 shareholder services fees for Class A Shares and Class C Shares only
have been reduced to reflect voluntary waivers. The shareholder service
provider can terminate these voluntary waivers at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.

(3) The total operating expenses for Class A Shares and Class C Shares would
have been 1.07% and 1.82%, respectively, absent the voluntary waivers
described in note 2 above.

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

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Investing in the Fund" 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 CLASS A CLASS B CLASS C
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment
of the maximum sales charge.
<S> <C> <C> <C>
1 Year $ 54 $ 75 $ 29
3 Years $ 73 $101 $ 57
5 Years $ 94 $122 $ 98
10 Years $154 $190 $213
You would pay the following expenses on the same investment, assuming no redemption.
1 Year $ 54 $ 18 $ 18
3 Years $ 73 $ 57 $ 57
5 Years $ 94 $ 99 $ 98
10 Years $154 $190 $213
</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

(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 2, 1997, on the Fund's financial
statements for the year ended March 31, 1997, and on the following table for the
periods presented, is included in the Annual Report, which is incorporated by
reference. This table should be read in conjunction with the Fund's financial
statements and notes thereto, which may be obtained from the Fund.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
NET ASSET VALUE, $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 $10.03 $10.80
BEGINNING OF PERIOD
INCOME FROM
INVESTMENT OPERATIONS
Net investment income 0.55 0.66 0.67 0.66 0.66 0.67 0.71 0.72 0.72 0.73
Net realized and
unrealized gain
(loss) on investments (0.36) (0.09) (0.05) (0.40) 0.64 0.37 0.14 0.21 0.23 (0.77)
Total from investment 0.19 0.57 0.62 0.26 1.30 1.04 0.85 0.93 0.95 (0.04)
operations
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.66) (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73)
Distributions in excess
of net investment income(a) (0.05) -- -- -- -- -- -- -- -- --
Total distributions from
net investment income (0.60) (0.66) (0.67) (0.66) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73)
Distributions from net
realized gain on investments (0.10) (0.01) (0.23) (0.02) -- -- -- -- -- --
Total distributions (0.70) (0.67) (0.90) (0.68) (0.66) (0.67) (0.71) (0.72) (0.72) (0.73)
NET ASSET VALUE, $10.31 $10.82 $10.92 $11.20 $11.62 $10.98 $10.61 $10.47 $10.26 $10.03
END OF PERIOD
TOTAL RETURN(B) 1.84% 5.32% 5.90% 2.10% 12.13% 10.05% 8.42% 9.20% 9.76% (0.17)%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.93% 0.98% 0.92% 0.84% 0.80% 0.84% 0.89% 0.90% 0.95% 0.95%
Net investment income 5.37% 5.97% 6.17% 5.59% 5.81% 6.17% 6.77% 6.80% 7.07% 7.28%
Expense waiver/ 0.14% 0.13% -- -- -- -- -- -- -- --
reimbursement(c)
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $595,515 $663,538 $708,712 $714,384 $706,126 $590,118 $511,611 $474,797 $440,445 $338,916
Portfolio turnover 33% 29% 41% 27% 13% 8% 45% 25% 58% 55%
</TABLE>

(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

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

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED MARCH 31, 1997, WHICH CAN BE
OBTAINED FREE OF CHARGE.

FINANCIAL HIGHLIGHTS -- CLASS B SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

YEAR ENDED MARCH 31,

<S> <C> <C> <C>
1997 1996 1995(A)
NET ASSET VALUE, BEGINNING OF PERIOD $10.82 $10.92 $11.06
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47 0.56 0.40
Net realized and unrealized gain (loss) on investments (0.37) (0.09) (0.03)
Total from investment operations 0.10 0.47 0.37
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.56) (0.40)
Distributions in excess of net investment income(b) (0.04) -- --
Total distributions from net investment income (0.51) (0.56) (0.40)
Distributions from net realized gain on investments (0.10) (0.01) (0.11)
Total distributions (0.61) (0.57) (0.51)
NET ASSET VALUE, END OF PERIOD $10.31 $10.82 $10.92
TOTAL RETURN(C) 0.94% 4.40% 3.49%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.82% 1.86% 1.84%*
Net investment income 4.50% 5.23% 5.94%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $77,536 $58,296 $18,201
Portfolio turnover 33% 29% 41%
</TABLE>

* Computed on an annualized basis.

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

(b) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

(c) Based on net asset value, which does not reflect the sales charge 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, 1997, WHICH CAN BE
OBTAINED FREE OF CHARGE.

FINANCIAL HIGHLIGHTS -- CLASS C SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

YEAR ENDED MARCH 31,
<S> <C> <C> <C> <C>
1997 1996 1995 1994(A)
NET ASSET VALUE, BEGINNING OF PERIOD $10.82 $10.92 $11.20 $11.70
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.46 0.56 0.58 0.52
Net realized and unrealized gain (loss) on investments (0.36) (0.09) (0.05) (0.48)
Total from investment operations 0.10 0.47 0.53 0.04
LESS DISTRIBUTIONS
Distributions from net investment income (0.46) (0.56) (0.58) (0.52)
Distributions in excess of net investment income(b) (0.05) -- -- --
Total distributions from net investment income (0.51) (0.56) (0.58) (0.52)
Distributions from net realized gain on investments (0.10) (0.01) (0.23) (0.02)
Total distributions (0.61) (0.57) (0.81) (0.54)
NET ASSET VALUE, END OF PERIOD $10.31 $10.82 $10.92 $11.20
TOTAL RETURN(C) 0.95% 4.42% 4.96% 0.17%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.81% 1.82% 1.81% 1.80%*
Net investment income 4.51% 5.16% 5.28% 4.70%*
Expense waiver/reimbursement(d) 0.01% 0.04% -- --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $20,544 $25,914 $22,389 $22,066
Portfolio turnover 33% 29% 41% 27%
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from April 21, 1993 (date of initial
public offering) to March 31, 1994.

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

(d) 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, 1997, WHICH CAN BE
OBTAINED FREE OF CHARGE.

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on September
10, 1976. Class A Shares, Class B Shares and Class C Shares of the Fund
("Shares") 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. The Fund's current net asset value and offering price may be found
in the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.

CALLING THE FUND

Call the Fund at 1-800-341-7400.

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. Unless otherwise noted, 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.

The Fund may dispose of a commitment prior to settlement if the Fund's
investment 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.

FINANCIAL FUTURES

The Fund may purchase and sell interest rate and index financial futures
contracts. These financial futures contracts may be used to hedge all or a
portion of its portfolio against changes in the market value of portfolio
securities and interest rates, provide additional liquidity, and accomplish its
current strategies in a more expeditious fashion. Financial futures contracts
call for the delivery of particular debt instruments at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.

As a matter of investment policy, which may be changed without shareholder
approval, the Fund may not purchase or sell futures contracts if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures positions would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of cash or cash
equivalents, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to collateralize
the position and thereby insure that the use of such futures contract is
unleveraged.

RISKS

When the Fund uses financial futures, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in the Fund's portfolio. This may cause the futures
contract to react differently than the portfolio securities to market changes.
In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In these events, the Fund may lose money on the futures
contract. It is not certain that a secondary market for positions in futures
contracts will exist at all times. Although the investment adviser will consider
liquidity before entering into futures transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular futures contract at any particular time. The Fund's ability to
establish and close out futures positions depends on this secondary market.

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 Fund's adviser 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 ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV 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.

All purchases, redemptions and exchanges are processed at the NAV next
determined after the request in proper form is received by the Fund. The NAV is
determined as of the close of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time) every day the New York Stock Exchange is open.

INVESTING IN THE FUND

This prospectus offers three classes of Shares each with the characteristics
described below.

CLASS A CLASS B CLASS C
Minimum and Subsequent $500/$100 $1500/$100 $1500/$100
Investment Amounts
Maximum Sales Charge 4.50%* None None
Maximum Contingent None 5.50+ 1.00%#
Deferred Sales
Charge**
Conversion Feature No Yes++ No * Class A Shares are sold at NAV, plus a
sales charge as follows:

SALES CHARGE DEALER
AS A PERCENTAGE OF CONCESSION AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
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%

** Computed on the lesser of the NAV of the redeemed Shares at the time of
purchase or the NAV of the redeemed Shares at the time of redemption.

+The following contingent deferred sales charge schedule applies to Class B
Shares:

YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%

++ Class B Shares convert to Class A Shares (which pay lower ongoing
expenses) approximately eight years after purchase. See "Conversion of Class
B Shares."

# The contingent deferred sales charge is assessed on Shares redeemed within one
year of their purchase date.

PURCHASING 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 intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in certain other funds advised and distributed by
affiliates of Federated Investors ("Federated Funds") may exchange their Shares
for Shares of the corresponding class of the Fund. The Fund reserves the right
to reject any purchase or exchange request.

In connection with any sale, Federated Securities Corp. may, from time to time,
offer certain items of nominal value to any shareholder or investor.

PURCHASING SHARES THROUGH A
FINANCIAL INTERMEDIARY

Orders placed through a financial intermediary are considered received when the
Fund is notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a 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 intermediaries must be
received by the financial intermediary 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 intermediary's responsibility to transmit orders promptly.
Financial intermediaries may charge fees for their services.

The financial intermediary 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 intermediaries may be subject to reclaim by the
distributor for accounts transferred to financial intermediaries which do not
maintain investor accounts on a fully disclosed basis and do not account for
share ownership periods.

PURCHASING SHARES BY WIRE

Shares may be purchased by Federal Reserve 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: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention; EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number -- this number can be found on the
account statement or by contacting the Fund); 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

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

SYSTEMATIC INVESTMENT PROGRAM

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. Shareholders should contact their financial intermediary
or the Fund to participate in this program.

CLASS A SHARES

Class A Shares are sold at NAV, plus a sales charge. However:

NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:

* through financial intermediaries that do not receive sales charge dealer
concessions;

* by Federated Life Members who maintain a $500 minimum balance in at least
one of the Federated Funds; or

* through "wrap accounts" or similar programs under which clients pay a fee for
services.

IN ADDITION, THE SALES CHARGE CAN BE REDUCED OR ELIMINATED BY:

* purchasing in quantity and accumulating purchases at the levels in the
table under "Investing in the Fund";

* combining concurrent purchases of two or more funds;

* signing a letter of intent to purchase a specific quantity of shares
within 13 months; or

* using the reinvestment privilege.

Consult a financial intermediary or Federated Securities Corp. for details on
these programs. In order to eliminate the sales charge or receive sales charge
reductions, Federated Securities Corp. must be notified by the shareholder in
writing or by a financial intermediary at the time of purchase.

DEALER CONCESSION

For sales of Class A Shares, a dealer will normally receive up to 90% of the
applicable sales charge. Any portion of the sales charge 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 charge 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 charge; 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
charge 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 charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the establishment of customer accounts
and purchases of Shares.

CLASS B SHARES

Class B Shares are sold at NAV. Under certain circumstances, a contingent
deferred sales charge will be assessed at the time of a redemption. Orders
for $250,000 or more of Class B Shares will automatically be invested in
Class A Shares.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares after eight full
years from the purchase date. Such conversion will be on the basis of the
relative NAVs per Share, without the imposition of any charges. Class B Shares
acquired by exchange from Class B Shares of another Federated Fund will convert
into Class A Shares based on the time of the initial purchase.

CLASS C SHARES

Class C Shares are sold at NAV. A contingent deferred sales charge of 1.00% will
be charged on assets redeemed within the first full 12 months following
purchase.

REDEEMING AND EXCHANGING SHARES

Shares of the Fund may be redeemed for cash or exchanged for Shares of the same
class of other Federated Funds on days on which the Fund computes its NAV.
Shares are redeemed at NAV less any applicable contingent deferred sales charge.
Exchanges are made at NAV. Shareholders who desire to automatically exchange
Shares, of a like Share class, in a predetermined amount on a monthly,
quarterly, or annual basis may take advantage of a systematic exchange
privilege. Information on this privilege is available from the Fund or your
financial intermediary. Depending upon the circumstances, a capital gain or loss
may be realized when Shares are redeemed or exchanged. REDEEMING OR
EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY

Shares of the Fund may be redeemed or exchanged by contacting your financial
intermediary before 4:00 p.m. (Eastern time). In order for these transactions to
be processed at that day's NAV, financial intermediaries (other than
broker/dealers) must transmit the request to the Fund before 4:00 p.m. (Eastern
time), while broker/dealers must transmit the request to the Fund before 5:00
p.m. (Eastern time). The financial intermediary is responsible for promptly
submitting transaction requests and providing proper written instructions.
Customary fees and commissions may be charged by the financial intermediary for
this service. Appropriate authorization forms for these transactions must be on
file with the Fund.

REDEEMING OR EXCHANGING SHARES BY TELEPHONE

Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check to the shareholder's address of record or wire-transferred 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 or Exchanging
Shares by Mail" should be considered. The telephone transaction privilege may be
modified or terminated at any time. Shareholders would be promptly notified.

REDEEMING OR EXCHANGING SHARES BY MAIL

Shares may be redeemed in any amount, or exchanged, by mailing a written request
to: Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, MA 02266-8600. If share certificates have been issued, they must
accompany the written request. It is recommended that certificates be sent
unendorsed by registered or certified mail.

All written requests should state: Fund Name and the Share Class name; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount of the transaction. An exchange
request should also state the name of the Fund into which the exchange is to be
made. All owners of the account must sign the request exactly as the Shares are
registered. A check for redemption proceeds is normally mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request. Dividends are paid up to and including the day that
a redemption or exchange request is processed. REQUIREMENTS FOR REDEMPTION

Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record, must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.

REQUIREMENTS FOR EXCHANGE

Shareholders must exchange Shares having a NAV equal to the minimum investment
requirements of the fund into which the exchange is being made. Contact your
financial intermediary directly or the Fund for free information on and
prospectuses for the Federated Funds into which your Shares may be exchanged.
Before the exchange, the shareholder must receive a prospectus of the fund for
which the exchange is being made.

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. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.

SYSTEMATIC WITHDRAWAL PROGRAM

Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder. 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
intermediary or by calling the Fund.

Because participation in this program may reduce, and eventually deplete, the
shareholder's investment in the Fund, payments under this program should not be
considered as yield or income. It is not advisable for shareholders to continue
to purchase Class A Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge may be imposed on Class B and C
Shares.

CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. 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. The contingent deferred sales charge will not be imposed with respect to
Shares acquired through the reinvestment of dividends or distributions of
long-term capital gains. In determining the applicability of the contingent
deferred sales charge, the required holding period for your new Shares received
through an exchange will include the period for which your original Shares were
held.

ELIMINATING THE CONTINGENT DEFERRED
SALES CHARGE

Upon written notification to Federated Securities Corp. or the transfer
agent, no contingent deferred sales charge will be imposed on redemptions:

* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;

* representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age of
701U2;

* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;

* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;

* which are reinvested in the Fund under the reinvestment privilege;

* 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 intermediary that sells Shares of the Fund pursuant to a sales
agreement with the distributor, and their immediate family members to the
extent that no payments were advanced for purchases made by these persons; and

* of Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940, or any other
financial intermediary, to the extent that no payments were advanced for
purchases made through such entities.

For more information regarding the elimination of the contingent deferred sales
charge through a Systematic Withdrawal Program, or any of the above provisions,
contact your financial intermediary or the Fund. The Fund reserves the right to
discontinue or modify these provisions. Shareholders will be notified of such
action.

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND CERTIFICATES

Shareholders will receive detailed confirmations of all transactions and
periodic confirmations reporting other activity. Share certificates are not
issued unless requested in writing to Federated Shareholder Services
Company.

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared daily and paid monthly to all shareholders invested in
the Fund on the record date. Net long-term capital gains realized by the Fund,
if any, will be distributed at least once every twelve months. Dividends and
distributions are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date NAV without a sales charge, unless
shareholders request cash payments on the new account form or by contacting the
transfer agent.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
close an account by redeeming all Shares and paying the proceeds to the
shareholder if the account balance falls below the applicable minimum investment
amount. Accounts where the balance falls below the minimum due to NAV changes
will not be closed in this manner. Before an account is closed, the shareholder
will be notified and allowed 30 days to purchase additional Shares to meet the
minimum.
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 0.30% 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.

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 $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.

Mary Jo Ochson has been the Fund's portfolio manager since 1996. Ms. Ochson
joined Federated Investors in 1982 and has been a Senior Vice President of
the Fund's investment adviser since January 1996. From 1988 through 1995,
Ms. Ochson served as a Vice President of the Fund's investment adviser. Ms.
Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance
from the University of Pittsburgh.

J. Scott Albrecht has been the Fund's portfolio manager since 1966. Mr.
Albrecht joined Federated Investors in 1989 and has been a Vice President of
the Fund's investment adviser since 1994. From 1992 to 1994, Mr. Albrecht
served as an Assistant Vice President of the Fund's investment adviser. In
1991, Mr. Albrecht acted as an investment analyst. Mr. Albrecht is a
Chartered Financial Analyst and received his M.S. in Public Management from
Carnegie Mellon University.

Both the Fund and the Adviser have adopted strict codes of ethics governing
the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to
the Fund's shareholders and must place the interests of shareholders ahead
of the employees' own interest. Among other things, the codes: require
preclearance and periodic reporting of personal securities transactions;
prohibit personal transactions in securities being purchased or sold, or
being considered for purchase or sale, by the Fund; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Directors, and could result in severe penalties.

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

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 0.75% 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 services or distribution-related
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 0.75% 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 sales services and distribution and
distribution-related support services pursuant to the Distribution 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 Distribution Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% 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. Under
the Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

With respect to Class A Shares, Class B Shares, and Class C Shares, in addition
to payments made pursuant to the Distribution Plan and Shareholder Services
Agreement, Federated Securities Corp. and Federated Shareholder Services, from
their own assets, may pay financial institutions supplemental fees for the
performance of substantial sales services, distribution-related support
services, or shareholder services. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the distributor may be reimbursed by the Fund's investment
adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.

SHAREHOLDER INFORMATION

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.

Directors may be removed by the Directors or by 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. As of July 7, 1997,
Merrill Lynch Pierce Fenner & Smith, Jacksonville, Florida, for the sole benefit
of its customers, was the owner of record of approximately 507,787 shares
(27.39%) of the Class C Shares of the Fund, and, therefore, may, for certain
purposes, be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. Shareholders are
not required to pay the federal regular income tax on any dividends received
from the Fund that represent net interest on tax-exempt municipal bonds.
However, under the Tax Reform Act of 1986, dividends representing net interest
earned on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations.

The alternative minimum tax, up to 28% of alternative minimum taxable income for
individuals and 20% for corporations, applies when it exceeds the regular tax
for the taxable year. Alternative minimum taxable income is equal to the regular
taxable income of the taxpayer increased by certain "tax-preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.

The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item for both individuals and
corporations. Unlike traditional governmental purpose municipal bonds, which
finance roads, schools, libraries, prisons and other public facilities, private
activity bonds provide benefits to private parties. The Fund may purchase all
types of municipal bonds, including private activity bonds. Thus, should it
purchase any such bonds, a portion of the Fund's dividends may be treated as a
tax preference item.

In addition, in the case of a corporate shareholder, dividends of the Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75% of
the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the full
amount of any Fund dividend, and alternative minimum taxable income does not
include the portion of the Fund's dividend attributable to municipal bonds which
are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.

Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.

These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and distributions
is provided annually.

STATE AND LOCAL TAXES

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

Because interest received by the Fund may not be exempt from all state and local
income taxes, shareholders may be required to pay state and local taxes on
dividends received from the Fund. 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, yield, and
tax-equivalent 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 tax-equivalent yield is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that a
class of Shares would have had to earn to equal its actual yield, assuming a
specific tax rate. The yield and tax-equivalent 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 charge 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. Expense differences between Class A Shares, Class B
Shares, and Class C Shares may affect the performance of each class. 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.

FEDERATED MUNICIPAL SECURITIES FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
Federated Investors Tower Pittsburgh, PA 15222-3779

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

INVESTMENT ADVISER
Federated Advisers
Federated Investors Tower Pittsburgh, PA 15222-3779

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

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

INDEPENDENT AUDITORS
Deloitte & Touche LLP
2500 One PPG Place Pittsburgh, PA 15222-5401

Federated Securities Corp., Distributor

Cusip 313913105
Cusip 313913204
Cusip 313913303
G00322-01 (7/97) [Graphic]

[Graphic] Federated Investors

Federated Municipal Securities Fund, Inc.

Class A Shares, Class B Shares,
Class C Shares

PROSPECTUS
JULY 31, 1997

An Open-End, Diversified
Management Investment Company

FEDERATED MUNICIPAL SECURITIES FUND, INC.

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the prospectus of
Federated Municipal Securities Fund, Inc. (the "Fund") dated July 31, 1997. This
Statement is not a prospectus. You may request a copy of a prospectus or a paper
copy of this Statement, if you have received it electronically, free of charge
by calling 1-800-341-7400.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated July 31, 1997 [Graphic]

Cusip 313913105
Cusip 313913204
Cusip 313913303

8051601B (7/97) [Graphic]

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Acceptable Investments 1
When-Issued and Delayed Delivery Transactions 1
Temporary Investments 1
Futures Transactions 1
Portfolio Turnover 2
INVESTMENT LIMITATIONS 2
Selling Short and Buying on Margin 2
Borrowing Money 2
Pledging Assets 3
Investing in Commodities or Minerals 3
Investing in Real Estate 3
Underwriting 3
Making Loans 3
Acquiring Securities Issued by Other Investment Companies 3
Diversification of Investments 3
Dealing in Put and Calls 3
Investing in Issuers Whose Securities are
Owned by Officers of the Fund 3
Concentration of Investments 4
Investing in Restricted Securities 4
Investing in Illiquid Securities 4
Investing in New or Foreign Issuers or in
Securities Not Readily Marketable 4
FEDERATED MUNICIPAL SECURITIES FUND, INC. MANAGEMENT 4
The Funds 7
Fund Ownership 8
Director Compensation 8
Director Liability 9
INVESTMENT ADVISORY SERVICES 9
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
OTHER SERVICES 10
Fund Administration 10
Custodian and Portfolio Accountant 10
Transfer Agent 10
Independent Auditors 10
PURCHASING SHARES 10
Quantity Discounts and Accumulated Purchases 10
Concurrent Purchases 10
Letter of Intent 11
Reinvestment Privilege 11
Conversion of Class B Shares 11
Purchases by Sales Representatives,
Fund Directors, and Employees 11
Distribution Plan (Class B Shares and
Class C Shares Only) and Shareholder Services 12
Conversion to Federal Funds 12
DETERMINING NET ASSET VALUE 12
Determining Market Value of Securities 12
Valuing Municipal Bonds 12
REDEEMING SHARES 13
Redemption in Kind 13
Contingent Deferred Sales Charge 13
TAX STATUS 14
The Fund's Tax Status 14
TOTAL RETURN 14
YIELD 14
TAX-EQUIVALENT YIELD 15
Tax-Equivalency Table 15
PERFORMANCE COMPARISONS 16
Economic and Market Information 16
ABOUT FEDERATED INVESTORS 17
Mutual Fund Market 17
Institutional Clients 17
Bank Marketing 17
Broker/Dealers and Bank Broker/Dealer
Subsidiaries 17
FINANCIAL STATEMENTS 17
APPENDIX 18

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 from
Federated Tax-Free Income Fund, Inc. to Liberty Municipal Securities Fund, Inc.
On February 26, 1996, the Directors approved an amendment to the Articles of
Incorporation to change the name of Liberty Municipal Securities Fund, Inc. to
Federated 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 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 S&P 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:

* as a reaction to market conditions;

* 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

* 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.

FUTURES TRANSACTIONS

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

"MARGIN" IN FUTURES TRANSACTIONS

Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or cash equivalents
with its custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied.

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

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, 1997, and 1996,
the portfolio turnover rates were 33% and 29%, 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 1U2 of 1% of the outstanding securities of such issuer, together own
beneficially 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.

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

FEDERATED MUNICIPAL SECURITIES FUND, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated 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. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, President and
Director of the Company.

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA

Birthdate: February 3, 1934

Director

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

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

Birthdate: June 23, 1937

Director

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

William J. Copeland
One PNC Plaza -- 23rd Floor
Pittsburgh, PA

Birthdate: July 4, 1918

Director

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

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

James E. Dowd
571 Hayward Mill Road
Concord, MA

Birthdate: May 18, 1922

Director

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA

Birthdate: October 11, 1932

Director

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

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA

Birthdate: June 18, 1924

Director

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

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL

Birthdate: March 16, 1942

Director

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

Gregor F. Meyer
203 Kensington Ct.
Pittsburgh, PA

Birthdate: October 6, 1926

Director

Former Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee
of the Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA

Birthdate: December 20, 1932

Director

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

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA

Birthdate: September 14, 1925

Director

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Birthdate: June 21, 1935

Director

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

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA

Birthdate: October 22, 1930

Executive Vice President

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

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA

Birthdate: October 26, 1938

Executive Vice President, Secretary and Treasurer

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

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Birthdate: May 17, 1923

Vice President

Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.

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

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

THE FUNDS

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

FUND OWNERSHIP

Officers and Directors own less than 1% of the Fund's outstanding Shares. As
of July 7, 1997, no shareholders of record owned 5% or more of the Class
A Shares and Class B Shares of the Fund.

As of July 7, 1997, the following shareholder of record owned 5% or more of the
Class C Shares of the Fund: Merrill Lynch Pierce Fenner & Smith, (a record owner
holding Shares for its clients), Jacksonville, Florida, owned approximately
507,787 shares (27.39%). DIRECTOR COMPENSATION

<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
FUND FUND* FROM FUND COMPLEX+
<S> <C> <S>
John F. Donahue, $0 $0 for the Fund and 56 investment companies
Chairman and Director
J. Christopher Donahue, $0 $0 for the Fund and 18 investment companies
President and Director
Thomas G. Bigley, $1,697 $108,725 for the Fund and 56 investment companies
Director
John T. Conroy, Jr., $1,867 $119,615 for the Fund and 56 investment companies
Director
William J. Copeland, $1,867 $119,615 for the Fund and 56 investment companies
Director
James E. Dowd, $1,867 $119,615 for the Fund and 56 investment companies
Director
Lawrence D. Ellis, M.D., $1,697 $108,725 for the Fund and 56 investment companies
Director
Edward L. Flaherty, Jr., $1,867 $119,615 for the Fund and 56 investment companies
Director
Peter E. Madden, $1,697 $108,725 for the Fund and 56 investment companies
Director
Gregor F. Meyer, $1,697 $108,725 for the Fund and 56 investment companies
Director
John E. Murray, Jr., $1,697 $108,725 for the Fund and 56 investment companies
Director
Wesley W. Posvar, $1,697 $108,725 for the Fund and 56 investment companies
Director
Marjorie P. Smuts, $1,697 $108,725 for the Fund and 56 investment companies
Director
<S>
* Information is furnished for the fiscal year ended March 31, 1997.

+ The information is provided for the last calendar year.

DIRECTOR LIABILITY

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

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

The Fund's investment adviser is Federated Advisers (the "Adviser"). 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.

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, 1997, 1996, and 1995, the Fund's Adviser earned $4,379,885, $4,644,716, and
$4,498,635, respectively.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the 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: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. During the fiscal
years ended March 31, 1997, 1996, and 1995, no brokerage commissions were paid
by the Fund.

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

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services served as the Fund's Administrator. For purposes of this Statement of
Additional Information, Federated Services Company and Federated Administrative
Services may hereinafter collectively be referred to as the "Administrators."
For the fiscal years ended March 31, 1997, 1996, and 1995, the Administrators
earned $547,583, $573,123, and $550,028, respectively.

CUSTODIAN AND PORTFOLIO ACCOUNTANT

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

TRANSFER AGENT

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

INDEPENDENT AUDITORS

The independent auditors for the Fund are Deloitte & Touche LLP.

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 prospectus under "Investing in the Fund" and
"Purchasing Shares."

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES

As described in the prospectus, larger purchases reduce or eliminate the sales
charge 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 charge. In addition, the sales charge, 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
charge on the additional purchase according to the schedule now in effect would
be 3.75%, not 4.50%. To receive the sales charge reduction, Federated
Securities Corp. must be notified by the shareholder in writing or by his
financial intermediary at the time the purchase is made that Class A Shares are
already owned or that purchases are being combined. The Fund will reduce or
eliminate the sales charge after it confirms the purchases. CONCURRENT
PURCHASES For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of Class A
Shares of two or more funds for which affiliates of Federated Investors serve as
investment adviser and principal underwriter (the "Federated Funds"), the
purchase price of which includes a sales charge. For example, if a shareholder
concurrently invested $30,000 in the Class A Shares of one of the other
Federated Funds with a sales charge, and $70,000 in this Fund, the sales charge
would be reduced.

To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial intermediary at the
time the concurrent purchases are made. The Fund will reduce the sales charge
after it confirms the purchases. LETTER OF INTENT If a shareholder
intends to purchase at least $100,000 of Class A Shares of Federated Funds
(excluding money market funds) over the next 13 months, the sales charge may be
reduced by signing a letter of intent to that effect. This letter of intent
includes a provision for a sales charge 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
charge.

While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge 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 Federated
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

The reinvestment privilege is available for all Shares of the Fund. 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 charge. Similarly, shareholders who redeem Class B
Shares or Class C Shares may be reinvested in the same Share class within 120
days but would not be entitled to a reimbursement of the contingent deferred
sales charge if paid at the time of redemption. However, such reinvested shares
would not be subject to a contingent deferred sales charge upon later
redemption. In addition, if the Class B or Class C Shares were reinvested
through a financial intermediary, the financial intermediary would not be
entitled to an advanced payment from Federated Securities Corp. on the
reinvested Shares. Federated Securities Corp. must be notified by the
shareholder in writing or by his financial intermediary of the reinvestment in
order to eliminate a sales charge or a contingent deferred sales charge. If the
shareholder redeems Shares in the Fund, there may be tax consequences.
CONVERSION OF CLASS B SHARES Class B Shares will automatically convert into
Class A Shares on or around the 15th of the month eight full years from the
purchase date and will no longer be subject to a fee under the distribution
plan. 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 a 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. PURCHASES BY SALES
REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES

The following individuals and their immediate family members may buy Class A
Shares at net asset value without a sales charge:

* Directors, employees, and sales representatives of the Fund, Federated
Advisers, and Federated Securities Corp. and its affiliates;

* Federated Life Members; and

* any associated person of an investment dealer who has a sales agreement with
Federated Securities Corp. Shares may also be sold without a sales charge to
trusts, pensions, or profit-sharing plans for these individuals.

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.

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

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services, to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.

By adopting the Distribution Plan (Class B Shares and Class C Shares only), the
Directors expect that Class B Shares and Class C Shares of 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 year ended March 31, 1997, payments in the amounts of $527,131
(Class B Shares) and $177,337 (Class C Shares) were made pursuant to the
Distribution Plan, all of which was paid to financial institutions. In addition,
for the fiscal year ended March 31, 1997, payments in the amounts of $1,576,818
(Class A Shares), $175,710 (Class B Shares), and $59,112 (Class C Shares) were
made pursuant to the Shareholder Services Agreement, of which $883,019 (Class A
Shares), $0 (Class B Shares), and $2,364 (Class C Shares) were voluntarily
waived.

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 Shareholder Services Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.

DETERMINING NET ASSET VALUE

The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class. Net asset value is not determined on (i) days on which there are
not sufficient changes in the value of the Fund's portfolio securities that its
net asset value might be materially affected; (ii) days during which no Shares
are tendered for redemption and no orders to purchase Shares are received; or
(iii) the following holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities are determined as follows:

VALUING MUNICIPAL BONDS

The Directors use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on quoted
prices. Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. REDEEMING SHARES

The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
prospectus under "Redeeming and Exchanging Shares." Although the transfer agent
does not charge for telephone redemptions, it reserves the right to charge a fee
for the cost of wire-transferred redemptions of less than $5,000.
REDEMPTION IN KIND

Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio.

Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Directors determine to be fair and
equitable.

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

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

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; (3) Shares held for fewer than six years with respect to Class B
Shares and for less than one full year from the date of purchase with respect to
Class C Shares on a first-in, first-out basis.

ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES

To qualify for elimination of the contingent deferred sales charge through a
Systematic Withdrawal Program, the redemptions of Class B Shares must be from
an account that is at least 12 months old, has all Fund distributions
reinvested in Fund Shares, and has an account value of at least $10,000 when
the Systematic Withdrawal Program is established. Qualifying redemptions may
not exceed 1.00% monthly of the account value as periodically determined by
the Fund. The amounts that a shareholder may withdraw under a Systematic
Withdrawal Program that qualify for elimination of the Contingent Deferred
Sales Charge may not exceed 12% annually with reference initially to the value
of the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the annual valuation date. Redemptions on a
qualifying Systematic Withdrawal Program can be made at a rate of 1.00%
monthly, 3.00% quarterly, or 6.00% semi-annually with reference to the
applicable account valuation amount. Amounts that exceed the 12.00% annual
limit for redemption, as described, may be subject to the Contingent Deferred
Sales Charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated 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 12-month holding requirement. However, for
purposes of meeting the $10,000 minimum account value requirement, Class B
Share accounts will be not be aggregated. Any Shares purchased prior to the
termination of this program would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the Shares.

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:

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

* derive less than 30% of its gross income from the sale of securities held less
than three months;

* invest in securities within certain statutory limits; and

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

TOTAL RETURN

The Fund's average annual total returns based on offering price for the
following periods ended March 31, 1997 were:

SHARE CLASS INCEPTION DATE ONE-YEAR FIVE-YEARS TEN-YEARS SINCE INCEPTION
Class A 10/4/76 (2.75%) 4.42% 5.89% 6.12%
Class B 7/26/94 (4.62%) N/A N/A 1.74%
Class C 4/21/93 (0.03%) N/A N/A 2.64%

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.

YIELD

The Fund's yields for the thirty-day period ended March 31, 1997 were:

SHARE CLASS YIELD
Class A 4.46%
Class B 3.56%
Class C 3.57%

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, 1997
for Class A Shares, Class B Shares, and Class C Shares were 6.19%, 4.94%, and
4.96%, 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.

</TABLE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
<CAPTION>
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
<C> <C> <C> <C> <C> <C>
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% 3.91% 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%
</TABLE>

Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes paid on
comparable taxable investments were not used to increase federal deductions.

The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.

* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local income taxes.

PERFORMANCE COMPARISONS

The performance of each of the classes of Shares depends upon such variables as:

* portfolio quality;

* average portfolio maturity;

* type of instruments in which the portfolio is invested;

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

* changes in the Fund's or any class of Shares' expenses; and

* 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:

* 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.

* 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.

* LEHMAN SEVEN YEAR STATE GENERAL OBLIGATIONS INDEX is an index of general
obligation bonds rated A or better with 6-8 years to maturity.

* 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.

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

ECONOMIC AND MARKET INFORMATION

Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect of the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute.

ABOUT FEDERATED INVESTORS

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

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

In the municipal sector, as of December 31, 1996, Federated Investors managed 12
bond funds with approximately $2.0 billion in assets and 21 money market funds
with approximately $9.5 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. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

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

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.*

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

INSTITUTIONAL CLIENTS

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

BANK MARKETING

Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Federated funds are available to consumers through major brokerage firms
nationwide -- we now have over 2,200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any other
mutual fund distributor. Federated's service to financial professionals and
institutions has earned it high ratings in several surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.

FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended March 31, 1997, are
incorporated herein by reference to the Annual Report of the Fund dated March
31, 1997 (File Nos. 2-57181 and 811-2677). A copy of this report may be obtained
without charge by contacting the Fund.

* Source: Investment Company Institute

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.