FEDERATED MUNICIPAL OPPORTUNITIES FUND INC, 497, 1997-11-03

FEDERATED MUNICIPAL OPPORTUNITIES FUND INC
497, 1997-11-03

Previous: GABELLI FUNDS INC ET AL, SC 13D/A, 1997-11-03

Next: FIDELITY NATIONAL FINANCIAL INC /DE/, 8-K, 1997-11-03

FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.

Class A Shares, Class B Shares, Class C Shares

PROSPECTUS

The shares of Federated Municipal Opportunities Fund, Inc. (the "Fund")
represent interests in a diversified, open-end, management investment company (a
mutual fund) that seeks a high level of current income exempt from the federal
regular income tax by investing primarily in a professionally managed,
diversified portfolio of municipal bonds.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in Class A Shares, Class B Shares, and Class C Shares of the Fund. Keep
this prospectus for future reference.

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares and Class F Shares dated October 31,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact 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 PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

Prospectus dated October 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
Reducing Risks of Lower-Rated Securities 7

Investment Limitations 8

Net Asset Value 8

Investing in the Fund 8

Purchasing Shares 9
Purchasing Shares Through a
Financial Intermediary 9
Purchasing Shares by Wire 9
Purchasing Shares by Check 9
Systematic Investment Program 9
Class A Shares 10
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 11
Redeeming or Exchanging Shares by Mail 11
Requirements for Redemption 11
Requirements for Exchange 11
Systematic Withdrawal Program 11
Contingent Deferred Sales Charge 12

Account and Share Information 12
Confirmations and Account Statements 12
Dividends and Distributions 12
Accounts with Low Balances 12

Fund Information 13
Management of the Fund 13
Distribution of Fund Shares 13
Distribution Plan and Shareholder Services 14
Supplemental Payments to Financial Institutions 14

Administration of the Fund 14
Administrative Services 14

Shareholder Information 15

Tax Information 15
Federal Income Tax 15
State and Local Taxes 15

Performance Information 16

Other Classes of Shares 16

Appendix 16

SUMMARY OF FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES

CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <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
purchaseprice or redemption proceeds, as applicable) None 5.50%(2) 1.00%(4)
Redemption Fee (as a percentage of amount redeemed, if applicable) None None None
Exchange Fee None None None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.60% 0.60% 0.60%
12b-1 Fee 0.00%(1) 0.75% 0.75%
Total Other Expenses 0.49% 0.49% 0.51%
Shareholder Services Fee 0.25% 0.25% 0.25%
Total Operating Expenses 1.09% 1.84%(3) 1.86%

</TABLE>

(1) The Class A Shares has no present intention of paying or accruing the 12b-1
fee during the fiscal year ending August 31, 1998. If the Fund were paying
or accruing the 12b-1 fee, the Fund would be able to pay up to 0.25% of its
average daily net assets for the 12b-1 fee. See "Fund Information."

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

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

(4) 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 "Redeeming
Class C Shares".

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class A Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Investing in Class A Shares" and "Fund Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>

EXAMPLE 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 $ 56 $ 75 $ 29
3 years $ 78 $102 $ 58
5 years $102 $123 $100
10 years $172 $195 $216

You would pay the following expenses on the same investment, assuming no
redemption.

1 year $ 19 $ 19
3 years $ 58 $ 58
5 years $100 $100
10 years $195 $216

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

</TABLE>

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 October 13, 1997, on the Fund's
financial statements for the year ended August 31, 1997, and on the following
table for each of the periods presented, is included in the Annual Report dated
August 31, 1997, 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.

YEAR ENDED
AUGUST 31,
-----------------------
1997 1996(A)
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.33 $10.42
- -------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------
Net investment income 0.58 0.08
- -------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.33 (0.12)
- ------------------------------------------------------------------- ------- -------
Total from investment operations 0.91 (0.04)
- ------------------------------------------------------------------- ------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------
Distributions from net investment income (0.57) (0.05)
- -------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.67 $10.33
- ------------------------------------------------------------------- ------- -------
TOTAL RETURN(B) 9.07% (0.36%)
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------
Expenses 1.09% 0.84%*
- -------------------------------------------------------------------
Net investment income 5.29% 6.15%*
- -------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------
Net assets, end of period (000 omitted) $94,941 $296
- -------------------------------------------------------------------
Portfolio turnover 20% 22%
- -------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public offering) to August 31, 1996.
(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, DATED AUGUST 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.

FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

YEAR ENDED
AUGUST 31,
-----------------------
1997 1996(A)
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.33 $10.42
- -------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------
Net investment income 0.51 0.08
- -------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.31 (0.12)
- ------------------------------------------------------------------- ------- -------
Total from investment operations 0.82 (0.04)
- ------------------------------------------------------------------- ------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------
Distributions from net investment income (0.49) (0.05)
- ------------------------------------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.66 $10.33
- ------------------------------------------------------------------- ------- -------
TOTAL RETURN(B) 8.17% (0.36%)
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------
Expenses 1.84% 0.84%*
- -------------------------------------------------------------------
Net investment income 4.55% 6.15%*
- -------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------
Net assets, end of period (000 omitted) $14,997 $296
- -------------------------------------------------------------------
Portfolio turnover 20% 22%
- -------------------------------------------------------------------
* Computed on an annualized basis.
(a) Reflects operations for the period from August 5, 1996 (date of initial
public offering) to August 31, 1996.
(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, DATED AUGUST 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.

</TABLE>

FINANCIAL HIGHLIGHTS -- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

YEAR ENDED
AUGUST 31,
-----------------------
1997 1996(A)
------- -------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.33 $10.42
- -------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------
Net investment income 0.50 0.08
- -------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.32 (0.12)
- ------------------------------------------------------------------- ------- -------
Total from investment operations 0.82 (0.04)
- ------------------------------------------------------------------- ------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------
Distributions from net investment income (0.49) (0.05)
- ------------------------------------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.66 $10.33
- ------------------------------------------------------------------- ------- -------
TOTAL RETURN(B) 8.17% (0.36%)
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------
Expenses 1.86% 0.84%*
- -------------------------------------------------------------------
Net investment income 4.51% 6.15%*
- -------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------
Net assets, end of period (000 omitted) $1,950 $296
- -------------------------------------------------------------------
Portfolio turnover 20% 22%
- -------------------------------------------------------------------

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED AUGUST 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.

</TABLE>

GENERAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on November
26, 1986.

Class A Shares, Class B Shares and Class C Shares of the Fund ("Shares") are
designed for individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of 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 a high level of current
income which is generally exempt from the federal regular income tax (federal
regular income tax does not include the federal alternative minimum tax). The
investment objective cannot be changed without approval of shareholders. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.

The Fund pursues its investment objective by investing primarily in a
diversified portfolio of municipal bonds. The Fund invests its assets so that at
least 80% of its annual interest income is exempt from federal regular income
tax. The Fund may invest up to but less than 35% of its net assets in lower
quality municipal bonds. These bonds will usually offer higher yields than
higher-rated bonds but involve greater investment risk at the time of issue.
(See "Investment Risks.")

INVESTMENT POLICIES

Unless otherwise designated, the investment policies described below may be
changed by the Directors without shareholder approval. Shareholders will be
notified before any material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS

The Fund invests primarily 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 the federal regular income tax. It is likely, however, that shareholders
will be required to include interest from a portion of the municipal bonds owned
by the Fund in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.

CHARACTERISTICS

The municipal bonds which the Fund buys are rated Ba or higher by Moody's
Investors Service, Inc. ("Moody's") or rated BB or higher by Standard & Poor's
("S&P"). The Fund will limit its purchases of municipal bonds rated Ba and BB
(commonly known as "junk bonds") to up to but less than 35% of its net assets.
The Fund may buy bonds which are unrated but which the adviser judges to be
similar in quality to those rated bonds which it purchases. A description of the
ratings categories is contained in the Appendix to this prospectus.

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

INVERSE FLOATERS

The Fund may invest in securities known as "inverse floaters" which represent
interests in municipal securities. The Fund intends to purchase inverse floaters
to assist in duration management and to seek current income. These obligations
pay interest rates that vary inversely with changes in the interest rates of
specified short-term municipal securities or an index of short-term municipal
securities. The interest rates on inverse floaters will typically decline as
short-term market interest rates increase and increase as short-term market
rates decline. Inverse floaters will generally respond to changes in market
interest rates more rapidly than fixed-rate long-term securities (typically
twice as fast). As a result, the market values of inverse floaters will
generally be more volatile than the market values of fixed-rate municipal
securities. Typically, the portion of the portfolio invested in inverse floaters
will be subject to additional volatility.

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 municipal
securities, 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.

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.

TEMPORARY INVESTMENTS

The Fund invests its assets so that at least 80% of its annual interest income
is exempt from the federal regular income tax, except when investing for
"defensive" purposes as described below. This policy cannot be changed without
approval of shareholders. 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: fixed or variable
rate 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.

OTHER INVESTMENT TECHNIQUES

The Fund may purchase a right to sell a security held by it back to the issuer
or to another party at an agreed upon price at any time during a stated period
or on a certain date. These rights may be referred to as "liquidity puts" or
"standby commitments."

The Fund may also hedge all or a portion of its investments by entering into
futures contracts or options on them. Any gains realized on futures contracts
and options thereon are taxable. The Fund will notify shareholders before it
engages in these futures transactions.

PORTFOLIO TURNOVER

Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its 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.

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. Municipal bonds are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Certain types of
"private activity" municipal bonds are issued to obtain funding for privately
operated facilities.

There are two categories of municipal bonds: general obligation and revenue.
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility.
Payment of principal and interest on such bonds is dependent solely on the
revenue generated by the facility financed by the bond or other specified
sources of revenue or collateral. Private activity bonds are typically one type
of "revenue" bonds.

In most cases, lower quality bonds are private activity bonds or other revenue
bonds which are not payable from general tax revenues. The Fund may invest more
than 25% of the value of its assets in private activity bonds which may result
in more than 25% of the Fund's assets being invested in one industry. It is also
possible that the Fund may from time to time invest more than 25% of its assets
in health care facilities revenue obligations, housing agency revenue
obligations or electric utility obligations. Economic, business, political and
other developments generally affecting the revenues of issuers in such a market
segment (for example, proposed legislation or pending court decisions affecting
the financing of projects and market factors affecting the demand for their
services or products) may have a general adverse impact on all municipal bonds
in the segment.

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.

INVESTMENT RISKS

The value of Shares will fluctuate. The amount of this fluctuation is dependent
upon the quality and maturity of the municipal bonds in the Fund's portfolio as
well as on market conditions. Generally speaking, the lower quality, long-term
bonds in which the Fund invests have greater fluctuation in value than high
quality, shorter-term bonds.

Municipal bond prices are interest rate sensitive, which means that their value
varies inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be sold
at a price less than its cost. Similarly, if market interest rates have declined
from the time a bond was purchased, the bond, if sold, might be sold at a price
greater than its cost. (In either instance, if the bond was held to maturity, no
loss or gain normally would be realized as a result of interim market
fluctuations.)

Prices of lower grade bonds also fluctuate with changes in the perceived quality
of the credit of their issuers. Consequently, shares may not be suitable for
persons who cannot assume the somewhat greater risks of capital depreciation
associated with higher tax-exempt income yields. In addition, 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 lead to weakened
capacity to make principal and interest payments than higher rated bonds.

A large portion of the Fund's portfolio may be invested in bonds whose interest
payments are from revenues of similar projects (such as housing or hospitals) or
where issuers share the same geographic location. As a result, the Fund may be
more susceptible to similar economic, political or regulatory developments than
would a portfolio of bonds with a greater geographic and project variety. This
susceptibility may result in greater fluctuations in share price.

Many issuers of municipal bonds which have characteristics of rated bonds choose
to not have their obligations rated. Unrated bonds may carry a greater risk and
a higher yield than rated securities. Although unrated bonds are not necessarily
of lower quality, the market for them may not be as broad as that for rated
bonds since many investors rely solely on the major rating agencies for credit
appraisal.

Further, the lower rated or unrated municipal bonds which the Fund may purchase
are frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting the
availability of such bonds for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell such bonds at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The Fund will not invest more than 10% of its total
assets in securities which are not readily marketable.

REDUCING RISKS OF LOWER-RATED SECURITIES

The Fund's investment adviser believes that the risks of investing in lower
rated securities can be reduced. The professional portfolio management
techniques used by the Fund to attempt to reduce these risks include:

CREDIT RESEARCH

When purchasing bonds, rated or unrated, the Fund's investment adviser performs
its own credit analysis in addition to using recognized rating agencies. This
credit analysis considers the economic feasibility of revenue bond project
financing and general purpose borrowings, the financial condition of the issuer
or guarantor with respect to liquidity, cash flow and ability to meet
anticipated debt service requirements, and political developments that may
affect credit quality.

DIVERSIFICATION

The Fund invests in securities of many different issuers to reduce portfolio
risks.

ECONOMIC ANALYSIS

The Fund's adviser also considers trends in the overall economy, in geographic
areas, in various industries, and in the financial markets.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an arrangement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may, exclusive of custodian
intra-day cash advances and the collateralization of such advances, 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; or

* invest more than 10% of its net assets in securities subject to restrictions
on resale under the Securities Act of 1933, except for certain restricted
securities which meet the criteria for liquidity as established by the
directors.

The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective. The Fund will not invest more than 5% of
its total assets in securities of one issuer (except cash and cash items and
U.S. government obligations).

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
Minimum and Subsequent NA NA NA
Investment Amount
for Retirement Plans
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
AS A PERCENTAGE OF DEALER
----------------------- 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, the distributor will normally offer to pay a dealer
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. 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 class, in a pre-determined 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, normally within one business day, but in no event more
than seven days, after the redemption request. 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, Share 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 an 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 70
1/2;

* 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 retirement plans
where the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates, 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 ACCOUNT STATEMENTS

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

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared 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 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. Retirement plan accounts and 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

DIRECTORS

The Fund is managed by the 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
Directors handles the Director's responsibilities between meetings of the
Directors.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Advisers, the Fund's
investment adviser (the "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.

Both the Corporation and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its portfolio
securities. These codes recognize that such persons owe a fiduciary duty to the
Fund's shareholders and must place the interests of shareholders ahead of the
employees' own 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.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to 0.60% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the fund for certain operating expenses. The
Adviser can terminate this voluntary waiver of its advisory fee 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. The 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 May 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 May 1996 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.

DISTRIBUTION OF FUND SHARES

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

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class A Shares, Class B Shares and Class C
Shares will pay a fee to the distributor in an amount computed at an annual rate
of 0.25%, 0.75% and 0.75%, respectively, 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-related support services pursuant to the Plan. The Fund is not
currently making payments for Class A Shares under the Distribution Plan, nor
does it anticipate doing so in the immediate future.

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 made by Shares under the
Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 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.

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 sales services, distribution-related support
services, or shareholder services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

In addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, the distributor may pay a supplemental fee from its own
assets to financial institutions as financial assistance for providing
substantial sales services, distribution- related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars at recreational-type facilities 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 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 of the Federated Funds as specified below:

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

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

SHAREHOLDER INFORMATION

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 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 October 6, 1997, the following shareholders of record owned 25% or more of
the outstanding Shares of the Fund: BHC Securities, Inc., Philadelphia, PA,
owned approximately 137,433 Class C Shares (76.31%) and Merrill Lynch Pierce,
Fenner & Smith (as record owner holding Class F Shares for its clients),
Jacksonville, FL, owned approximately 8,038,548 Class F Shares (26.32%) 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 alternate 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

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 including Class F Shares as described
under "Other Classes 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 gain 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 SEC) 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 of each class of Shares is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that each
class would have had to earn to equal its actual yield, assuming a specific tax
rate. The yield and the tax-equivalent yield do 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 the maximum sales charge and other similar
non-recurring charges, such as the contingent deferred sales charge, which, if
excluded, would increase the total return, yield, and tax-equivalent yield.

Total return, yield, and tax-equivalent yield will be calculated separately for
Class A Shares, Class B Shares, Class C Shares, and Class F Shares.

From time to time, advertisements for Class A Shares, Class B Shares, and Class
C Shares 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.

OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge, a contingent deferred sales charge and a minimum initial
investment of $1,500.

Shares and Class F Shares are subject to certain of the same expenses. Expense
differences, however, between Shares and Class F Shares may affect the
performance of each class.

To obtain more information and a prospectus for Class F Shares, investors may
call 1-800-341-7400 or contact their financial institution.

APPENDIX

MUNICIPAL BOND RATING DEFINITIONS
STANDARD AND POOR'S RATINGS GROUP

AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). 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.

MOODY'S INVESTORS SERVICE, INC.

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.

[LOGO OMITTED] FEDERATED INVESTORS

FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.

Class A Shares, Class B Shares,
Class C Shares

PROSPECTUS
OCTOBER 31, 1997

An Open-End, Diversified
Management Investment Company

FEDERATED MUNICIPAL OPPORTUNITIES 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

Federated Investors Tower
Pittsburgh, PA 15222-3779

1-800-341-7400

WWW.federatedinvestors.com

Cusip 313910200
Cusip 313910309
Cusip 313910408

G00570-03 (10/97)

[RECYCLE LOGO]
RECYCLED PAPER

FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.

Class F Shares

PROSPECTUS

The Class F Shares of Federated Municipal Opportunities Fund, Inc. (the "Fund")
represent interests in a diversified, open-end, management investment company (a
mutual fund) that seeks a high level of current income exempt from the federal
regular income tax by investing primarily in a professionally managed,
diversified portfolio of municipal bonds.

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

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated October 31,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact 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 October 31, 1997

TABLE OF CONTENTS

Summary of Fund Expenses 1

Financial Highlights -- Class F Shares 2

General Information 3
Calling the Fund 3

Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Risks 5
Reducing Risks of Lower-Rated Securities 5

Investment Limitations 6

Net Asset Value 6

Investing in the Fund 6

Purchasing Shares 7
Purchasing Shares Through a Financial Intermediary 7
Purchasing Shares by Wire 7
Purchasing Shares by Check 7
Systematic Investment Program 7
Eliminating the Sales Charge 7

Redeeming and Exchanging Shares 8
Redeeming or Exchanging Shares Through a
Financial Intermediary 8
Redeeming or Exchanging Shares by Telephone 8
Redeeming or Exchanging Shares by Mail 8
Requirements for Redemption 9
Requirements for Exchange 9
Systematic Withdrawal Program 9
Contingent Deferred Sales Charge 9

Account and Share Information 10
Confirmations and Account Statements 10
Dividends and Distributions 10
Accounts with Low Balances 10

Fund Information 10
Management of the Fund 10
Investment Adviser 10
Advisory Fees 10

Adviser's Background 10
Distribution of Class F Shares 11
Distribution Plan and Shareholder Services 11
Supplemental Payments to Financial Institutions 11

Administration of the Fund 12

Shareholder Information 12

Tax Information 12
Federal Income Tax 12
State and Local Taxes 13

Performance Information 13

Other Classes of Shares 13

Appendix 14

SUMMARY OF FUND EXPENSES -- CLASS F SHARES

SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 1.00% Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as applicable)(1)
1.00% Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.60%
12b-1 Fee(2) 0.00%
Total Other Expenses 0.48%
Shareholder Services Fee (after waiver)(3) 0.24%
Total Operating Expenses(4) 1.08%

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

(2) The Fund has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending August 31, 1998. If the Fund were paying or
accruing the 12b-1 fee, the Fund would be able to pay up to 0.25% of its
average daily net assets for the 12b-1 fee. See "Fund Information."

(3) The shareholder services fee has been reduced to reflect the voluntary
waiver of a portion of the shareholders services fee. The shareholder
services provider can terminate the voluntary waiver at any time at its sole
discretion. The maximum shareholder services fee is 0.25%.

(4) The total operating expenses would have been 1.09% absent the voluntary
waiver of a portion of the shareholder services fee.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class F Shares of the Fund will bear,
either directly or indirectly. For more complete descriptions of the various
costs and expenses, see "Fund Information." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.

EXAMPLE
- ---------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, redemption at the end of each time period, and payment of the
maximum sales charge.

1 year $ 31
3 years $ 55
5 year $ 69
10 years $140

You would pay the following expenses on the same investment, assuming no
redemption.

1 year $ 21
3 years $ 44
5 year $ 69
10 years $140

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

</TABLE>

FINANCIAL HIGHLIGHTS -- CLASS F 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 October 13, 1997 on the Fund's
financial statements for the year ended August 31, 1997, and on the following
table for each of the periods presented, is included in the Annual Report dated
August 31, 1997, 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.

YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.33 $10.71 $10.56 $11.28 $10.78 $10.39 $10.00 $10.23 $9.76 $10.07
- ---------------------
INCOME FROM
INVESTMENT OPERATIONS
- ---------------------
Net investment
income 0.54 0.69 0.63 0.61 0.62 0.66 0.70 0.72 0.74 0.78
- ---------------------
Net realized and
unrealized gain
(loss) on investments 0.37 (0.42) 0.15 (0.73) 0.51 0.39 0.40 (0.23) 0.49 (0.36)
- --------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from invest-
ment operations 0.91 0.27 0.78 (0.12) 1.13 1.05 1.10 0.49 1.23 0.42
- --------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------
Distributions from net
investment income (0.57) (0.65) (0.63) (0.60) (0.63) (0.66) (0.71) (0.72) (0.76) (0.73)
- --------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $10.67 $10.33 $10.71 $10.56 $11.28 $10.78 $10.39 $10.00 $10.23 $9.76
- --------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN(A) 9.07% 2.47% 7.73% (1.06%) 10.86% 10.45% 11.37% 4.98% 13.09% 4.43%
- ---------------------
RATIOS TO AVERAGE
NET ASSETS
- ---------------------
Expenses 1.08% 1.08% 1.08% 1.09% 1.09% 1.05% 1.02% 1.01% 0.90% 1.02%
- ---------------------
Net investment
income 5.23% 5.91% 6.18% 5.56% 5.65% 6.18% 6.86% 7.07% 7.27% 8.03%
- ---------------------
Expense waiver/
reimbursement(b) 0.01% 0.01% 0.00% 0.00% 0.00% 0.14% 0.33% 0.39% 0.83% 0.70%
- ---------------------
SUPPLEMENTAL DATA
- ---------------------
Net assets, end of
period (000 omitted) $331,588 $383,028 $426,010 $472,232 $458,331 $248,768 $135,628 $89,907 $62,501 $25,151
- ---------------------
Portfolio turnover 20% 22% 13% 27% 7% 14% 18% 24% 24% 34%
- ---------------------

(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED AUGUST 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.

</TABLE>

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on November
26, 1986. Class F Shares of the Fund ("Shares") are designed for individuals as
a convenient means of accumulating an interest in a professionally managed,
diversified portfolio of 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

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

CHARACTERISTICS

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete 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 values of the securities
purchased may vary from the purchase prices.

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

INVERSE FLOATERS

FINANCIAL FUTURES

RISKS

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.

TEMPORARY INVESTMENTS

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.

OTHER INVESTMENT TECHNIQUES

PORTFOLIO TURNOVER

MUNICIPAL BONDS

INVESTMENT RISKS

Prices of lower grade bonds also fluctuate with changes in the perceived quality
of the credit of their issuers. Consequently, Shares may not be suitable for
persons who cannot assume the somewhat greater risks of capital depreciation
associated with higher tax-exempt income yields. In addition, 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 lead to weakened capacity
to make principal and interest payments than higher rated bonds.

REDUCING RISKS OF LOWER-RATED SECURITIES

CREDIT RESEARCH

DIVERSIFICATION

The Fund invests in securities of many different issuers to reduce portfolio
risks.

ECONOMIC ANALYSIS

The Fund's adviser also considers trends in the overall economy, in geographic
areas, in various industries, and in the financial markets.

INVESTMENT LIMITATIONS

The Fund will not:

The Fund will not invest more than 5% of its total assets in securities of one
issuer (except cash and cash items and U.S. government obligations).

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.

INVESTING IN THE FUND

This prospectus offers Class F Shares with the characteristics described below.

CLASS F
--------------
Minimum and Subsequent Investment Amount $1,500/$100
Minimum and Subsequent Investment Amount for NA
Retirement Plans
Maximum Sales Charge* 1.00%
Maximum Contingent Deferred Sales Charge** 1.00%

* This is 1.01% of the net amount invested. There is no sales charge
for purchases of $1 million or more. In addition, no sales charge is
imposed for Shares purchased through certain entities or programs.
Please see the section entitled "Eliminating the Sales Charge."

** 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 F
Shares:

CONTINGENT
DEFERRED
AMOUNT OF PURCHASE SHARES HELD SALES CHARGE
- ------------------------ ---------------- ------------
Up to $1,999,999 Four Years or less 1.00%
$2,000,000 to $4,999,999 Two Years or less 0.50%
$5,000,000 or more One Year or less 0.25%

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 Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares 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

The financial intermediary which maintains investor accounts in Class F 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

PURCHASING SHARES BY CHECK

SYSTEMATIC INVESTMENT PROGRAM

ELIMINATING THE SALES CHARGE

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

NO SALES CHARGE IS IMPOSED FOR CLASS F SHARES PURCHASED:

* through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;

by sales representatives, Directors, and employees of the Fund, Federated
Advisers, Federated Securities Corp. or their affiliates and their immediate
family members;

* by any investment dealer who has a sales agreement with Federated
Securities Corp. and their immediate family members, or by any trusts or
pension or profit-sharing plans for these persons.

IN ADDITION, THE SALES CHARGE CAN BE ELIMINATED BY:

* purchasing in quantity and accumulating purchases;

* 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.

DEALER CONCESSION

For sales of Shares, the distributor will normally offer to pay dealers up to
100% of the sales charge. Any portion of the sales charge which is not paid to a
dealer will be retained by the distributor.

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.

REDEEMING AND EXCHANGING SHARES

Shares of the Fund may be redeemed for cash or exchanged for Class F Shares 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 pre-determined 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

REDEEMING OR EXCHANGING SHARES BY TELEPHONE

REDEEMING OR EXCHANGING SHARES BY MAIL

REQUIREMENTS FOR REDEMPTION

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.

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 F Shares subject to a sales charge while participating in this
program. A contingent deferred sales charge will be imposed on Shares redeemed
through this program within four years of their purchase dates.

CONTINGENT DEFERRED SALES CHARGE

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 a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has attained
the age of 70 1/2;

* representing a total or partial distribution from a qualified plan, other than
an individual Retirement Account, Keogh Plan, or a custodial account following
retirement;

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

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

For more information regarding the contingent deferred sales charge 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 ACCOUNT STATEMENTS

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared 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

FUND INFORMATION

MANAGEMENT OF THE FUND

DIRECTORS

INVESTMENT ADVISER

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.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to 0.60% of the
Fund's average daily net assets. The Adviser may voluntarily choose to waive a
portion of its fee or reimburse the Fund for certain operating expenses. The
Adviser can terminate this voluntary waiver of its advisory fee at any time at
its sole discretion.

ADVISER'S BACKGROUND

J. Scott Albrecht has been the Fund's portfolio manager since May 1996. 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.

DISTRIBUTION OF CLASS F SHARES

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

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Plan"), the distributor may select financial institutions such as
banks, fiduciaries, custodians for public funds, investment advisers and
brokers/dealers to provide sales services or distribution-related support
services as agents for their clients or customers. The Fund is not currently
making payments for Class F Shares under the Distribution Plan, nor does it
anticipate doing so in the immediate future.

The distributor will pay financial institutions a fee based upon Shares subject
to the Plan and 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 Directors of the Fund provided that for any period the total amount
of these fees shall not exceed an annual rate of 0.25% of the average net asset
value of shares subject to the Plan held during the period by clients or
customers of financial institutions. The current annual rate of such fees is
0.25%. Any fees paid by the distributor under the Plan, will be reimbursed from
the assets of the Fund.

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
the Fund to obtain certain personal services for shareholders and to provide 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

The distributor will pay brokers and financial institutions, for distribution
and/or administrative services, an amount equal to 1% of the offering price of
the shares acquired by their clients or customers on purchases up to $1,999,999,
0.50% of the offering price on purchases of $2,000,000 to $4,999,999, and 0.25%
of the offering price on purchases of $5,000,000 or more. (This fee is in
addition to the 1% sales charge on purchases of less than $1 million.) Any fees
paid by the distributor pursuant to these administrative arrangements will be
reimbursed by the Adviser. The administrator may elect to receive amounts less
than those stated, which would reduce the stated contingent deferred sales
charge and/or the holding period used to calculate the fee.

Furthermore, in addition to payments made pursuant to the Plan and Shareholder
Services Agreement, the distributor may pay a supplemental fee from its own
assets to financial institutions as financial assistance for providing
substantial sales services, distribution- related support services, or
shareholder services. The support may include sponsoring sales, educational and
training seminars at recreational-type facilities 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 Adviser or its
affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

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

SHAREHOLDER INFORMATION

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 October 6, 1997, the following shareholders of record owned 25% or more of
the outstanding Shares of the Fund: BHC Securities, Inc., Philadelphia, PA,
owned approximately 137,433 Class C Shares (76.31%); and Merrill Lynch Pierce
Fenner & Smith (as record owner holding Class F Shares for its clients),
Jacksonville, Florida, owned approximately 8,038,548 Class C Shares (26.32%)
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

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

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return, yield, and tax-
equivalent yield for Class F Shares including Class A Shares, Class B Shares,
and Class C Shares as described under "Other Classes of Shares."

Total return represents the change, over a specific period of time, in the value
of an investment in Shares after reinvesting all income and capital gain
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of Shares is calculated by dividing the net investment income per
share (as defined by the SEC) earned by the Fund over a thirty day period by the
maximum offering price per share of Shares on the last day of the period. This
number is then annualized using semi-annual compounding. The tax-equivalent
yield of Shares is calculated similarly to the yield, but is adjusted to reflect
the taxable yield that Shares would have had to earn to equal its actual yield,
assuming a specific tax rate. The yield and the tax-equivalent yield do not
necessarily reflect income actually earned by Shares and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.

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

Total return, yield and tax-equivalent yield will be calculated separately for
Class A Shares, Class B Shares, Class C Shares and Class F Shares.

From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.

OTHER CLASSES OF SHARES

The Fund also offers other classes of shares called Class A Shares, Class B
Shares and Class C Shares which are all sold primarily to customers of financial
institutions subject to certain differences.

Class A Shares are sold at net asset value subject to a front-end sales charge,
and a shareholder services fee, and are distributed pursuant to a Rule 12b-1
Plan. Investments in Class A Shares are subject to a minimum initial investment
of $500.

Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a shareholder services fee, and are distributed pursuant to a Rule
12b-1 Plan. Investments in Class B Shares are subject to a minimum initial
investment of $1,500.

Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a shareholder services fee, and are distributed pursuant to a Rule
12b-1 Plan. Investments in Class C Shares are subject to a minimum investment of
$1,500.

Class A Shares, Class B Shares, Class C Shares and Class F Shares are subject to
certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, Class C Shares and Class F Shares may affect the
performance of each class.

To obtain more information and a combined prospectus for Class A Shares, Class B
Shares and Class C Shares, investors may call 1-800-341-7400 or contact their
financial institution.

APPENDIX

MUNICIPAL BOND RATING DEFINITIONS

STANDARD & POOR'S

AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). 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.

MOODY'S INVESTORS SERVICE, INC.

Ba -- Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

[LOGO OMITTED] FEDERATED INVESTORS

FEDERATED MUNICIPAL
OPPORTUNITIES FUND, INC.

Class F Shares

PROSPECTUS
OCTOBER 31, 1997

A Diversified, Open-End,

Management Investment Company

FEDERATED MUNICIPAL OPPORTUNITIES FUND, INC.
Class F 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

Federated Investors Tower
Pittsburgh, PA 15222-3779

1-800-341-7400

WWW.federatedinvestors.com

Cusip 313910101
G00570-02-F (10/97)

[RECYCLE LOGO]
RECYCLED PAPER

Federated Municipal Opportunities Fund, Inc.
Class A Shares
Class B Shares
Class C Shares
Class F Shares

Statement of Additional Information

This Statement of Additional Information should be read with the
prospectuses of Federated Municipal Opportunities Fund, Inc. (the
"Fund"), dated October 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 October 31, 1997

Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.

Cusips 313910200
313910309
313910408
313910101
8092709B (10/97)

<PAGE>

Table of Contents

<PAGE>

General Information About the Fund 1

Investment Objective and Policies 1

Acceptable Investments 1
When-Issued and Delayed Delivery Transactions 1
Futures Transactions 1
Temporary Investments 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Portfolio Turnover 2
Investment Limitations 3

Federated Municipal Opportunities Fund, Inc.
Management 6

Fund Ownership 10
Directors Compensation 10
Director Liability 11
Investment Advisory Services 11

Adviser to the Fund 11
Advisory Fees 11
Brokerage Transactions 11

Other Services 11

Fund Administration 11
Custodian and Portfolio Accountant 12
Transfer Agent 12
Independent Auditors 12
Purchasing Shares 12

Quantity Discounts and Accumulated
Purchases 12
Concurrent Purchases 12
Letter of Intent 13
Reinvestment Privilege 13
Conversion of Class B Shares 13
Distribution Plan and Shareholder Services 13
Conversion to Federal Funds 14
Purchases by Sales Representatives, Fund
Directors, and Employees 14

Determining Net Asset Value 14

Valuing Municipal Bonds 14
Use of Amortized Cost 14
Redeeming Shares 15

Redemption in Kind 15
Contingent Deferred Sales Charge 15
Tax Status 16

The Fund's Tax Status 16
Shareholders' Tax Status 16
Total Return 16

Yield 16

Tax-Equivalent Yield 17

Tax-Equivalency Table 17
Performance Comparisons 19

Economic and Market Information 19
About Federated Investors 19

Financial Statements 20

<PAGE>

General Information About the Fund

The Fund was incorporated under the laws of the State of Maryland on November
26, 1986. It is qualified to do business as a foreign corporation in
Pennsylvania. As of March 31, 1996, the Fund changed its name from Fortress
Municipal Income Fund, Inc. to Federated Municipal Opportunities Fund, Inc.
Shares of the Fund are offered in four classes, known as Class A Shares, Class B
Shares, Class C Shares and Class F Shares (individually and collectively
referred to as "Shares" as the context may require.) This Statement of
Additional Information relates to all four of the above-mentioned classes of
Shares.

Investment Objective and Policies

The Fund's investment objective is to provide a high level of current income
which is generally 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

The municipal bonds in which the Fund invests have the characteristics
set forth in the prospectus.

If a 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 may consider doing so. If ratings made by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's ("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 or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.

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
municipal securities, 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.
Temporary Investments
The Fund may also invest in temporary investments from time to time for
defensive purposes. The Fund does not presently intend to invest in temporary
investments other than repurchase agreements.

The Fund might invest in temporary investments:

o as a reaction to market conditions;

o while waiting to invest proceeds of sales of shares or portfolio
securities, although generally proceeds from sales of shares will
be invested in municipal bonds as quickly as possible; or

o in anticipation of redemption requests.

The Fund will not purchase temporary investments (other than securities of the
U.S. government, its agencies or instrumentalities) if, as a result of the
purchase, 25% or more of the value of its total assets would be invested in any
one industry. However, the Fund may, for temporary defensive purposes, invest
25% or more of the value of its assets in cash or cash items, U.S. Treasury
bills or securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or instruments secured by these money market instruments,
such as repurchase agreements.

Repurchase Agreements

Repurchase agreements are arrangements in which banks, broker/dealers and other
recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price within one year from the date of
acquisition. 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 Board of
Directors. From time to time, such as when suitable municipal bonds are not
available, the Fund may retain 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.

Reverse Repurchase Agreements

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

When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction is settled. Portfolio
Turnover The Fund will not attempt to set or meet a portfolio turnover rate
since any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objective. For the fiscal years ended
August 31, 1997, and August 31, 1996, the portfolio turnover rates were 20% and
22%, respectively.

<PAGE>

Investment Limitations

Buying on Margin

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

Issuing Senior Securities and Borrowing Money

The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.

The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings are outstanding. During the period any reverse repurchase
agreements are outstanding, but only to the extent necessary to assure
completion of the reverse repurchase agreements, the Fund will restrict
the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements.

Pledging Assets

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing. Neither the deposit of underlying securities and other
assets in escrow in connection with the writing of put or call options
on municipal bonds nor margin deposits for the purchase and sale of
financial futures contracts and related options are deemed to be a
pledge.

The preceding limitations regarding buying on margin, borrowing money, and
pledging assets do not apply to intra-day cash advances made by the Fund's
custodian, or the grant of a security interest in securities by the Fund to its
custodian to collateralize such intra-day cash advances, in order to enable the
Fund to settle securities purchases or to redeem shares of the Fund.

Investing in Real Estate

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

Investing in Commodities

The Fund will not purchase or sell commodities, except that the Fund
may purchase and sell financial futures contracts and related options.

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 restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.

Lending Cash or Securities

The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. This shall not prevent
the purchase or holding of municipal bonds, repurchase agreements, or
other transactions which are permitted by the Fund's investment
objective and policies.

Selling Short

The Fund will not sell securities short.

Restricted Securities

The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Directors.

Investing in Securities of Other Investment Companies

The Fund will not purchase securities of other investment companies
except as part of a merger, consolidation, or other acquisition.

Diversification of Investments
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments,
securities issued or guaranteed by the U.S. government, its agencies,
or instrumentalities or instruments secured by money market instruments
such as repurchase agreements).

Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its
own assets and revenues. Industrial development bonds backed only by
the assets and revenues of a non-governmental user are considered to be
issued solely by that user.

Private activity bonds backed only by the assets and revenues of a
non-governmental user are considered to be issued solely by that user.
If, in the case of a private activity bond or government-issued
security, a governmental or other entity guarantees the security, such
guarantee would be considered a separate security issued by the
guarantor as well as the other issuer, subject to limited exclusions
allowed by the Investment Company Act of 1940.

Criteria for Liquidity of Restricted Securities

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

o the frequency of trades and quotes for the security;

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

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

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

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

During the past fiscal year, the Fund did not (1) purchase or sell options on
securities, as permitted by the investment limitations, without first notifying
shareholders; (2) purchase "liquidity puts" or "standby commitments" as
described in the prospectus, engage in reverse repurchase agreements, or borrow
money in excess of 5% of the value of its total assets; or (3) lend portfolio
securities. The Fund does not expect to engage in any of the above activities
during the coming fiscal year.

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."

<PAGE>

Federated Municipal Opportunities Fund, Inc. Management
Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Municipal Opportunities 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, Executive Vice President 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.

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

Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Retired from
the law firm of Miller, Ament, Henny & Kochuba; 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.

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

Executive Vice President

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.

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.

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

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

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

<PAGE>

Fund Ownership

Officers and Directors own less than 1% of the Fund's outstanding shares.

As of October 6, 1997, there were no Class A shareholders owning 5% or more of
the Fund.

As of October 6, 1997, the following shareholders of record owned 5% or more of
the outstanding Class B Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, for the sole benefit of its customers, owned
approximately 79,533 shares (5.11%).

As of October 6, 1997, the following shareholders of record owned 5% or more of
the outstanding Class C Shares of the Fund: BHC Securities, Inc. owned
approximately 137,434 shares (76.31%), Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, for the sole benefit of its customers, owned
approximately 11,465 shares (6.37%).

As of October 6, 1997, the following shareholders of record owned 5% or more of
the outstanding Class F Shares of the Fund: Merrill Lynch Pierce Fenner & Smith,
Jacksonville, Florida, for the sole benefit of its customers, owned
approximately 8,038,549 shares (26.32%).

Directors Compensation

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

John F. Donahue $ -0- $-0- for the Corporation and
Chairman and Director 56 other investment companies in the Fund Complex
Thomas G. Bigley $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
John T. Conroy, Jr. $1496.00 $119,615 for the Corporation and
Director 56 other investment companies in the Fund Complex
William J. Copeland $1496.00 $119,615 for the Corporation and
Director 56 other investment companies in the Fund Complex
James E. Dowd $1496.00 $119,615 for the Corporation and
Director 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
Richard B. Fisher $-0- $-0- for the Corporation and
President and Director 6 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $1496.00 $119,615 for the Corporation and
Director 56 other investment companies in the Fund Complex
Peter E. Madden $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
Gregor F. Meyer $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
John E. Murray, Jr. $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
Wesley W. Posvar $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
Marjorie P. Smuts $1360.00 $108,725 for the Corporation and
Director 56 other investment companies in the Fund Complex
</TABLE>

*Information is furnished for the fiscal year ended August 31, 1997.

#The aggregate compensation is provided for the Corporation which is comprised
of one portfolio.

+The information is provided for the last calendar year.

<PAGE>

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 of the voting securities 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
August 31, 1997, 1996, and 1995, the Fund's Adviser earned $2,610,540,
$2,475,132, and $2,576,669, 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.
For the fiscal years ended August 31, 1997, 1996, and 1995, the Fund paid no
brokerage commissions on brokerage transactions.

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. Prior to March 1, 1994, Federated
Administrative Services, Inc. served as the Fund's Administrator. Both former
Administrators are subsidiaries of Federated Investors. 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 August 31, 1997, 1996, and 1995,
the Administrators earned $328,575, $311,976, and $325,090.

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 on the size, type and
number of accounts and transactions made by shareholders.

Independent Auditors

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

Purchasing Shares
Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge on Class A Shares
and Class F Shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing Shares is explained in the respective
prospectuses under "Investing in the Fund" and "Purchasing Shares."

Quantity Discounts and Accumulated Purchases

As described in the prospectuses, larger purchases reduce or eliminate the sales
charge paid. The Fund will combine purchases of Class A Shares and Class F
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 and Class F 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%.

In addition, the Fund will also combine purchases for the purpose of reducing
the contingent deferred sales charge imposed on Class F Share redemptions. For
example, if a shareholder already owns Class F Shares having current value at
the public offering price of $1 million and purchases an additional $1 million
at the current public offering price, the applicable contingent deferred sales
charge would be reduced to 0.50% of those additional Class F Shares.

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 or Class F 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 or elimination, a
shareholder has the privilege of combining concurrent purchases of Class A
Shares or Class F Shares of two or more funds for which affiliates of Federated
Investors serve as investment adviser and principal underwriter (the "Federated
Funds"), the purchase prices of which include 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 Class A Shares of this
Fund, the sales charge would be reduced.

To receive this sales charge reduction or elimination, 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
or eliminate 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 or at
least $1 million of Class F 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% (in the
case of Class A Shares) or 1.00% (in the case of Class F Shares) 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
sales charge.

The letter of intent for Class F Shares also includes a provision for reductions
in the contingent deferred sales charge and holding period depending on the
amount actually purchased within the 13-month period.

While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F 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 or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90 days. 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, Class C Shares or Class F 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, Class C or Class F
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.

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

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; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.

For the fiscal period ending August 31, 1997, the Fund paid distribution fees on
behalf of Class B and Class C Shares in the amounts of $60,402 and $10,616,
respectively. In addition, for this period, the Fund paid shareholder services
fees on behalf of Class A Shares, Class B Shares, Class C Shares, and Class F
Shares in the amounts of $170,894, $20,118, $3,539, and $893,271, respectively.
The Fund waived shareholder services fees in the amount of $26,976 for Class F
Shares.

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

Purchases by Sales Representatives, Fund Directors, and Employees

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

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

o Federated Life Members (Class A Shares only); and

o 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.

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.

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 issuer, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.

Use of Amortized Cost

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

Redeeming Shares

The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Shareholder redemptions may be subject to a
contingent deferred sales charge. Redemption procedures are explained in the
respective prospectuses 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 Corporation has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Corporation 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 for
shares subject to a holding period, 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, one full year from the date
of purchase with respect to Class C Shares, and four full years from the date of
purchase with respect to Class F Shares; (3) Shares held for fewer than six
years with respect to Class B Shares, for less than one full year from the date
of purchase with respect to Class C Shares, and less than four full years from
the date of purchase with respect to Class F 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 the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:

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

o invest in securities within certain statutory limits; and

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

Shareholders' Tax Status

No portion of any income dividend paid by the Fund is eligible for the dividends
received deduction available to corporations.

Capital Gains

Capital gains or losses may be realized on the sale of portfolio
securities and as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:

o the availability of higher relative yields;

o differentials in market values;

o new investment opportunities;

o changes in creditworthiness of an issuer; or

o an attempt to preserve gains or limit losses.

Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested and regardless of the length of time
the shareholder has owned the shares. Any loss by a shareholder on
Shares held for less than six months and sold after a capital gains
distribution will be treated as a long-term capital loss to the extent
of the capital gains distribution.

Total Return

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

Date of Initial
Public
Share Class Investment One-Year Five-Years Ten-Years Since Inception

Class A 8/5/96 4.13% -- -- 3.54%
Class B 8/5/96 2.39% -- -- 2.64%
Class C 8/5/96 7.16% -- -- 7.26%
Class F 4/10/87 7.01% 5.50% 7.14% 7.22%
</TABLE>

The average annual total return for all classes 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 offering price 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
charge, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.

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

Share Class Yield

Class A 4.30%
Class B 3.75%
Class C 3.75%
Class F 4.46%

The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by any class of
Shares over a thirty-day period by the maximum offering price per Share of any
class of Shares 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
twelve-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by any class of Shares 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 August 31,
1997, were:

Share Class Yield

Class A 5.97%
Class B 5.21%
Class C 5.21%
Class F 6.19%

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 and assuming that income is 100%
tax-exempt.

Tax-Equivalency Table

The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds 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 below indicates, a "tax-exempt"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.

<PAGE>

TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:

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

Tax-Exempt

Yield Taxable Yield Equivalent

1.00% 1.18% 1.39% 1.45% 1.56% 1.66%

1.50% 1.76% 2.08% 2.17% 2.34% 2.48%

2.00% 2.35% 2.78% 2.90% 3.13% 3.31%

2.50% 2.94% 3.47% 3.62% 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.

<PAGE>

Performance Comparisons

The Fund's performance depends upon such variables as:

o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

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

o changes in Fund expenses; and

o various other factors.

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

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

o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the high yield
municipal bond funds category in advertising and sales literature.

o Lehman Brothers Revenue Bond Index is a total return performance
benchmark for the long-term, investment grade, revenue bond
market. Returns and attributes for the index are calculated
semi-monthly.

o Morningstar, Inc., an independent rating service, is the
publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values
rates more than 1,000 NASDAQ-listed mutual funds of all types,
according to their risk-adjusted returns. The maximum rating is
five stars, and ratings are effective for two weeks.

Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
represent the historic change in the value of an investment in the Fund based on
monthly reinvestment of dividends over a specified period of time.

Advertisements may quote performance information which does not reflect the
effect of the sales charge.

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

Economic and Market Information

Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the 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 portfolios.

Mutual Fund Market

Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available.*

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

Institutional 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.

Trust Organizations

Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by 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--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. Federated's service to
financial professionals and institutions has earned it high rankings in several
DALBAR Surveys. The marketing effort to these firms is headed by James F. Getz,
President, Broker/Dealer Division.

Financial Statements

The Financial Statements for the fiscal year ended August 31, 1997, are
incorporated herein by reference to the Annual Report to Shareholders of the
Fund dated October 31, 1997 (File Nos. 33-11410 and 811-4533). A copy of this
report may be obtained without charge by contacting the Fund.

*Source: Investment Company Institute