LIBERTY UTILITY FUND INC, 497, 1995-05-30

LIBERTY UTILITY FUND INC
497, 1995-05-30

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LIBERTY UTILITY FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

COMBINED PROSPECTUS

The shares of Liberty Utility Fund, Inc. (the "Fund") offered by this prospectus
represent interests in the Fund which is an open-end, diversified management
investment company (a mutual fund).

The Fund invests in a diversified portfolio comprised primarily of equity
securities to achieve current income and long-term growth of income. Capital
appreciation is a secondary objective.

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 RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

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

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

Prospectus dated May 31, 1995

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

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

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

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

Liberty Family of Funds........................................................8
Federated LifeTrack(TM) Program
(Class A Shares and Class C Shares).......................................9

Investment Information........................................................10
Investment Objectives.......................................................10
Investment Policies.........................................................10
Investment Risks............................................................12
Investment Limitations......................................................15

Net Asset Value...............................................................17

Investing in the Fund.........................................................17

How To Purchase Shares........................................................18

Investing in Class A Shares...................................................19
Reducing or Eliminating
the Sales Load...........................................................20
Special Purchase Features...................................................22

Exchange Privilege............................................................23

How To Redeem Shares..........................................................25
Special Redemption Features.................................................26
Contingent Deferred Sales Charge............................................27
Elimination of Contingent
Deferred Sales Charge....................................................28

Account and Share Information.................................................29

Fund Information..............................................................30
Management of the Fund......................................................30
Distribution of Shares......................................................31
Administration of the Fund..................................................32
Brokerage Transactions......................................................33

Shareholder Information.......................................................34
Voting Rights...............................................................34

Tax Information...............................................................34
Federal Income Tax..........................................................34
Pennsylvania Personal Property Taxes........................................34

Performance Information.......................................................35

- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES
LIBERTY UTILITY FUND, INC.
<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)...................................... 5.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................................................................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)...................................................... 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................... None
Exchange Fee..................................................................................................... None

ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................ 0.58%
12b-1 Fee........................................................................................................ None
Total Other Expenses............................................................................................. 0.56%
Shareholder Services Fee (after waiver) (3)....................................................... 0.24%
Total Class A Shares Operating Expenses (4)............................................................. 1.14%

</TABLE>

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

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.

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

(4) The total Class A Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending February 28, 1996. The
total Class A Shares operating expenses were 1.10% for the fiscal year
ended February 28, 1995, and were 1.31% absent the voluntary waiver of a
portion of the management fee.

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

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period.......................................................... $71 $89 $114 $186
You would pay the following expenses on the same investment,
assuming no redemption....................................................... $66 $89 $114 $186
</TABLE>

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

- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES
LIBERTY UTILITY FUND, INC.
<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)............................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)....................................................... 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................................ None
Exchange Fee...................................................................................................... None

ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................. 0.58%
12b-1 Fee......................................................................................................... 0.75%
Total Other Expenses.............................................................................................. 0.57%
Shareholder Services Fee........................................................................... 0.25%
Total Class B Shares Operating Expenses (3)(4)............................................................ 1.90%

</TABLE>

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

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

(4) The total Class B Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending February 28, 1996. The total
Class B Shares operating expenses were 1.87% for the fiscal year ended
February 28, 1995 and were 2.12% absent the voluntary waiver of a portion of
the management fee.

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

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

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period............................................................ $76 $104
You would pay the following expenses on the same investment, assuming no redemption.................. $19 $60
</TABLE>

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

- --------------------------------------------------------------------------------

SUMMARY OF FUND EXPENSES
LIBERTY UTILITY FUND, INC.
<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....................................... None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)............................ None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1)....................................................... 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)................................................ None
Exchange Fee...................................................................................................... None

ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2)................................................................................. 0.58%
12b-1 Fee......................................................................................................... 0.75%
Total Other Expenses.............................................................................................. 0.52%
Shareholder Services Fee (3)....................................................................... 0.20%
Total Class C Shares Operating Expenses (4)............................................................... 1.85%

</TABLE>

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

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

(4) The total Class C Shares operating expenses in the table above are based on
expenses expected during the fiscal year ending February 28, 1996. The total
Class C Shares operating expenses were 1.86% for the fiscal year ended
February 28, 1995, and were 2.07% absent the voluntary waiver of a portion
of the management fee.

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

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

<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period........... $29 $58 $100 $217
You would pay the following expenses on the same investment, assuming no
redemption....................................................................... $19 $58 $100 $217
</TABLE>

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

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS A SHARES
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report, dated April 18, 1995, on the Fund's
financial statements for the year ended February 28, 1995, and on the following
table for each of the periods presented, is included in the Annual Report, which
is incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
PERIOD ENDED FEBRUARY 28, OR 29,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1990 1989 1988(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.24 $ 12.29 $ 11.03 $ 10.13 $ 9.82 $ 9.15 $ 9.15 $ 9.30
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.55 0.60 0.58 0.68 0.71 0.71 0.72 0.55
- ----------------------------------------
Net realized and unrealized gain (loss)
on investments (0.69) -- 1.44 0.92 0.43 0.79 (0.02) (0.31)
- ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----
Total from investment operations (0.14) 0.60 2.02 1.60 1.14 1.50 0.70 0.24
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Distributions from net investment
income (0.66) (0.61) (0.66) (0.64) (0.70) (0.76) (0.70) (0.39)
- ----------------------------------------
Distributions from net realized gain
on investment transactions (0.12) (0.04) (0.10) (0.06) (0.13) (0.07) -- --
- ----------------------------------------
Tax return of capital distribution (0.34) -- -- -- -- -- -- --
- ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----
Total distributions (1.12) (0.65) (0.76) (0.70) (0.83) (0.83) (0.70) (0.39)
- ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----
NET ASSET VALUE, END OF PERIOD $ 10.98 $ 12.24 $ 12.29 $ 11.03 $ 10.13 $ 9.82 $ 9.15 $ 9.15
- ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- -----
TOTAL RETURN(B) (0.98%) 4.93% 19.26% 16.48% 12.41% 16.72% 8.00% 3.25%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.10% 1.12% 1.04% 1.05% 1.02% 1.02% 1.00% 1.56%(c)
- ----------------------------------------
Net investment income 4.95% 4.81% 5.98% 6.31% 7.41% 7.17% 8.04% 8.24%(c)
- ----------------------------------------
Expense waiver/reimbursement (d) 0.21% 0.17% 0.01% 0.19% 0.51% 0.74% 0.40% 0.38%(c)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $742,274 $877,513 $739,511 $375,656 $125,599 $48,050 $410,575 $52,947
- ----------------------------------------
Portfolio turnover 55% 24% 18% 35% 45% 37% 34% 17%
- ----------------------------------------
</TABLE>

(a) Reflects operations for the period from June 5, 1987 (date of initial
public investment) to February 29, 1988.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated February 28, 1995, which can be obtained free of charge.

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS B SHARES
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report, dated April 18, 1995, on the Fund's
financial statements for the year ended February 28, 1995, and on the following
table for the period presented, is included in the Annual Report, which is
incorporated by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained from the
Fund.

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
<S> <C>
1995(A)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.92
- ----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income 0.22
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.04)
- ---------------------------------------------------------------------------------------------------- -------
Total from investment operations 0.18
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------
Distributions from net investment income (0.08)
- ----------------------------------------------------------------------------------------------------
Tax return of capital distribution (0.04)
- ---------------------------------------------------------------------------------------------------- -------
Total distributions (0.12)
- ---------------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 10.98
- ---------------------------------------------------------------------------------------------------- -------
TOTAL RETURN(B) 2.16%
- ----------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------------
Expenses 1.87%(c)
- ----------------------------------------------------------------------------------------------------
Net investment income 4.53%(c)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.25%(c)
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 18,780
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 55%
- ----------------------------------------------------------------------------------------------------
</TABLE>

(a) Reflects operations for the period from October 12, 1994 (date of initial
public investment) to February 28, 1995.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated February 28, 1995, which can be obtained free of charge.

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CLASS C SHARES
LIBERTY UTILITY FUND, INC.
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1995 1994(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.23 $ 12.27
- -------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------
Net investment income 0.42 0.48
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.64) (0.07)
- ------------------------------------------------------------------------------------------------- --------- -----------
Total from investment operations (0.22) 0.41
- -------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------
Distributions from net investment income (0.60) (0.41)
- -------------------------------------------------------------------------------------------------
Distributions from net realized gain on investment transactions (0.13) (0.04)
- -------------------------------------------------------------------------------------------------
Tax return of capital distribution (0.30) --
- ------------------------------------------------------------------------------------------------- --------- -----------
Total distributions (1.03) (0.45)
- ------------------------------------------------------------------------------------------------- --------- -----------
NET ASSET VALUE, END OF PERIOD $ 10.98 $ 12.23
- ------------------------------------------------------------------------------------------------- --------- -----------
TOTAL RETURN(B) (1.66)% 3.28%
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------------
Expenses 1.86% 1.87%(c)
- -------------------------------------------------------------------------------------------------
Net investment income 4.19% 4.02%(c)
- -------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (d) 0.21% 0.17%(c)
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 58,800 $ 64,409
- -------------------------------------------------------------------------------------------------
Portfolio turnover 55% 24%
- -------------------------------------------------------------------------------------------------
</TABLE>

(a) Reflects operations for the period from April 30, 1993 (date of initial
public investment) to February 28, 1994.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated February 28, 1995, which can be obtained free of charge.

- --------------------------------------------------------------------------------

SYNOPSIS

The Fund was incorporated under the laws of the State of Maryland on April 20,
1987. From the date of the Fund's initial public offering in 1987 until May 27,
1988, the Fund was operated as a closed-end investment company. On May 16, 1988,
the shareholders of the Fund approved the conversion of the Fund from a
closed-end investment company to an open-end investment company. Shareholders of
the Fund, at a meeting held January 18, 1990, approved the Fund's name change
from Progressive Income Equity Fund, Inc. to Liberty Utility Fund, Inc. The
Fund's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. The Articles of Incorporation permit the Fund to offer separate
series of shares representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. With respect
to the Fund, as of the date of this prospectus, the Board of Directors (the
"Directors") has established three classes of shares, known as Class A Shares,
Class B Shares and Class C Shares (individually and collectively as the context
requires, "Shares").

Shares of the Fund are designed to give institutions and individuals a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio comprised primarily of equity securities.

For information on how to purchase Shares of the Fund, please refer to "How to
Purchase Shares." The minimum initial investment for Class A Shares is $500. The
minimum initial investment for Class B Shares and Class C Shares is $1500.
However, the minimum initial investment for a retirement account in any class is
$50. Subsequent investments in any class must be in amounts of at least $100,
except for retirement plans which must be in amounts of at least $50.

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

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

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

In addition, the Fund also pays a shareholder services fee at an annual rate not
to exceed 0.25% of average daily net assets.

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

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

Investors should be aware of the following general observations. The Fund may
make certain investments and employ certain investment techniques that involve
risks, including entering into repurchase agreements, lending portfolio
securities, investing in restricted and illiquid securities, investing in
when-issued and delayed delivery securities, selling or writing call options and
investing in foreign securities. In addition,

utility securities have special risk considerations. These risks are described
under "Investment Policies."

The Fund's current net asset value and offering price can be found in the mutual
funds section of local newspapers under "Federated Liberty."

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

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

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

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

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

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

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

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

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

Liberty Municipal Securities Fund, Inc., providing a high level of current
income exempt from federal regular income tax through municipal bonds;

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

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

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

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

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

Strategic Income Fund, providing a high level of current income, primarily
through domestic and foreign corporate debt obligations;
Tax-Free Instruments Trust, providing current income consistent with the
stability of principal and exempt from federal income tax, through
high-quality, short-term municipal securities; and

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

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

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

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

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

FEDERATED LIFETRACK(TM) PROGRAM (CLASS A SHARES AND CLASS C SHARES)

The Fund is also a member of the Federated LifeTrack(TM) Program sold through
financial representatives. The Federated LifeTrack(TM) Program is an integrated
program of investment options, plan recordkeeping, and consultation services for
401(k) and other participant-directed benefit and savings plans. Under the
Federated LifeTrack(TM) Program, employers or plan trustees may select a group
of investment options to be offered in a plan which also uses the Federated
LifeTrack(TM) Program for recordkeeping and administrative services. Additional
fees are charged to participating plans for these services. As part of the
Federated LifeTrack(TM) Program, exchanges may readily be made between
investment options selected by the employer or a plan trustee.

Other funds participating in the Federated LifeTrack(TM) Program are: American
Leaders Fund, Inc., Capital Growth Fund, Capital Preservation Fund, Fund for
U.S. Government Securities, Inc., International Equity Fund, International
Income Fund, Liberty Equity Income Fund, Inc., Liberty High Income Bond Fund,
Inc., Prime Cash Series, Stock and Bond Fund, Inc., and Strategic Income Fund.

With respect to Class A Shares, no sales load is imposed on purchases made by
qualified retirement plans with over $l million invested in funds participating
in the Federated LifeTrack(TM) Program.

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

INVESTMENT OBJECTIVES

The primary investment objectives of the Fund are current income and long-term
growth of income. Capital appreciation is a secondary objective. While there is
no assurance that the Fund will achieve its investment objectives, it endeavors
to do so by following the policies described in this prospectus. The investment
objectives cannot be changed without approval of shareholders.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund will seek to achieve its investment objectives by investing primarily
in common stocks, preferred stocks, units of participation in master limited
partnerships which are traded on national securities exchanges, securities
convertible into stock, and debt securities issued by companies in the utilities
industry. Under normal conditions, with respect to 65% of its assets, the Fund
will invest in utility companies that derive 50% of their revenues from
utilities or assets relating to utility industries. Securities issued by
companies in the utilities industry include companies engaged in the production,
transmission or distribution of electric energy or gas, or in communications
facilities such as telephone or telegraph services.

Debt obligations in the portfolio, at the time they are purchased, shall be
limited to those which fall in one of the following categories: (i) rated
investment grade by either Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("S&P"), or (ii) determined by the Adviser to be
of investment grade and not rated by either of the aforementioned rating
services, or (iii) the subordinated debt of

issuers whose senior debt obligations are deemed to be investment grade by
either of the aforementioned rating services. These subordinated debt securities
may be unrated or rated below investment grade by Moody's Investors Service,
Inc. or Standard and Poor's Ratings Group. Securities rated in the lowest
category of investment grade have speculative characteristics. Changes in
economic or other circumstances are more likely to lead to weakened capacity to
make principal and interest payments than higher rated bonds. The prices of
fixed income securities fluctuate inversely to the direction of interest rates.

For temporary or defensive purposes, the Fund may be primarily invested in
short-term money market instruments including certificates of deposit,
obligations issued or guaranteed by the United States government or its agencies
or instrumentalities, commercial paper rated not lower than A-1 by S&P or
Prime-1 by Moody's or repurchase agreements.

The investment policies described above cannot be changed without shareholder
approval.

Downgraded securities will be evaluated on a case by case basis by the Adviser.
The Adviser will determine whether or not the security continues to be an
acceptable investment. If not, the security will be sold. The Directors do not
consider this limitation to apply to debt securities of an issuer convertible
into stock of that issuer.

REPURCHASE AGREEMENTS

Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the Fund may lend its portfolio
securities, on a short-term or long-term basis, to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will limit the amount of
portfolio securities it may lend to not more than one-third of its total assets.
The Fund will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors and will receive collateral in cash or
United States government securities that will be maintained in an amount equal
to at least 100% of the current market value of the securities loaned.

There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest up to 10% of its total assets in restricted securities.
Restricted securities are any securities in which the Fund may otherwise invest
pursuant to its investment objectives and policies but which are subject to
restriction on resale under federal securities law. To the extent these
securities are deemed to be illiquid, the Fund will limit its purchases together
with other securities considered to be illiquid to 15% of its net assets.

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. Accordingly, the Fund may pay more
or less than the market value of the securities on the settlement date.

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

COVERED CALL OPTIONS

The Fund may also write call options on all or any portion of its portfolio to
generate income for the Fund. Call options written by the Fund give the holder
the right to buy the underlying securities of the Fund at the stated exercise
price. The Fund will write call options only on securities either held in its
portfolio, or for which it has the right to obtain without payment of further
consideration, or for which it has segregated cash in the amount of any
additional consideration. The call options which the Fund writes and sells must
be listed on a recognized options exchange. The Fund's investment in call
options shall not exceed 5% of the Fund's total assets.

SECURITIES OF FOREIGN ISSUERS

The Fund may purchase American Depository Receipts ("ADRs") issued by U.S. Banks
as a substitute for direct ownership of securities of foreign companies in the
utilities industry. ADRs are traded in the United States on stock exchanges and
in the over-the-counter markets like stocks of domestic companies.

INVESTMENT RISKS

The Fund will attempt to meet its investment objectives by being at least 65%
invested in securities issued by companies in the domestic and foreign utilities
industries. There are certain risks associated with the utilities industries and
with foreign securities of which investors in the Fund should be aware.

CONSIDERATIONS OF UTILITY SECURITIES

There are certain risks and considerations affecting utility companies, and the
holders of utility company securities, which an investor should take into
account when investing in those securities. Factors which may adversely affect
utility companies include: difficulty in financing large construction programs
during inflationary periods; technological innovations which may cause existing
plants, equipment, or products to become less competitive or obsolete; the
impact of natural or man-made disasters (especially on regional utilities);
increased costs or reductions in production due to the unavailability of
appropriate types of fuel; seasonally or occasionally reduced availability or
higher cost of natural gas; and reduced demand due to energy conservation among
consumers. The revenues of domestic and foreign utility companies generally
reflect the economic growth and developments in the geographic areas in which
they do business. Furthermore, utility securities tend to be interest rate
sensitive.

In addition, most utility companies in the United States and in foreign
countries are subject to government regulation. Generally, the purpose of such
regulation is to ensure desirable levels of service and adequate capacity to
meet public demand. To this end, prices are often regulated to enable consumers
to obtain service at what is perceived to be a fair price, while attempting to
provide utility companies with a rate of return sufficient to attract capital
investment necessary for continued operation and necessary growth. Recently,
utility regulators have permitted utilities to diversify outside of their
original geographic regions and their traditional lines of business. While the
Adviser believes that these opportunities will permit certain utility companies
to earn more than their traditional regulated rates of return, other companies
may be forced to defend their core business and may be less profitable. Of
course, there can be no assurance that all of the regulatory policies described
in this paragraph will continue in the future.

In addition to the effects of regulation described in the previous paragraph,
utility companies may also be adversely affected by the following regulatory
considerations: the development and implementation of a national energy policy;
the differences between regulatory policies of different jurisdictions (or
different regulators which have concurrent jurisdiction); shifts in regulatory
policies; adequacy of rate increases; and future regulatory legislation.

Foreign utility companies may encounter different risks and opportunities than
those located in the United States. Foreign utility companies may be more
heavily regulated than their United States counterparts. Many foreign utility
companies currently use fuels which cause more pollution than fuels used by
United States utilities; in the future, it may be necessary for such foreign
utility companies to invest heavily in pollution control equipment or otherwise
meet pollution restrictions. Rapid growth in certain foreign economies may
encourage the growth of utility industries in those countries. Although many
foreign utility companies are currently government-owned, the Adviser believes
that it is likely that some foreign governments will seeks "privatize" their
utility companies, i.e., transfer ownership to private investors.

In addition to the foregoing considerations which affect most utility companies,
there are specific considerations which affect specific utility industries:

ELECTRIC

The electric utility industry is made up of companies that are engaged in the
generation, transmission, and sale of electric energy. Domestic electric utility
companies have generally been favorably affected by lower fuel and financing
costs and the completion of major construction programs. Some electric utilities
are able to sell power outside of their traditional geographic areas. Electric
utility companies have historically been subject to increases in fuel and other
operating costs, high interest costs on borrowings needed for capital
construction programs, compliance with environmental and safety regulations, and
changes in the regulatory climate.

In the United States, the construction and operation of nuclear power facilities
is subject to a high degree of regulatory oversight by the Nuclear Regulatory
Commission and state agencies with concurrent jurisdiction. In addition, the
design, construction, licensing, and operation of nuclear power facilities are
often subject to lengthy delays and unanticipated costs due to changes in
regulatory policy, regional political actions, and lawsuits. Furthermore, during
rate authorizations, utility regulators may disallow the inclusion in electric
rates of the higher operating costs and expenditures resulting from these delays
and unanticipated costs, including the costs of a nuclear facility which a
utility company may never be able to use.

TELECOMMUNICATIONS

The telephone industry is large and highly concentrated. The greatest portion of
this segment is comprised of companies which distribute telephone services and
provide access to the telephone networks. While many telephone utility companies
have diversified into other businesses in recent years, the profitability of
telephone utility companies could be adversely affected by increasing
competition, technological innovations, and other structural changes in the
industry.

Cable television companies are typically local monopolies, subject to scrutiny
by both utility regulators and municipal governments. Emerging technologies and
legislation encouraging local competition are combining to threaten these
monopolies and may slow future growth rates of these companies. The radio
telecommunications segment of this industry, including cellular telephone, is in
its early developmental phases and is characterized by emerging, rapidly growing
companies.

GAS

Gas transmission and distribution companies are undergoing significant changes.
In the United States, the Federal Energy Regulatory Commission is reducing its
regulation of interstate transmission of gas. While gas utility companies have
in the recent past been adversely affected by disruptions in the oil industry,
increased concentration, and increased competition, the Adviser believes that
environmental considerations should benefit the gas industry in the future.

WATER

Water utility companies purify, distribute, and sell water. This industry is
highly fragmented because most of the water supplies are owned by local
authorities. Water utility companies are generally mature and are experiencing
little or no per capita volume growth. The Adviser believes that favorable
investment opportunities may result if anticipated consolidation and foreign
participation in this industry occurs.

REDUCING RISKS OF UTILITY SECURITIES

The Adviser believes that the risks of investing in utility securities can be
reduced. The professional portfolio management techniques used by the Fund to
attempt to reduce these risk include credit research and diversification
techniques. The Adviser will perform its own credit analysis in addition to
using recognized rating agencies and other sources, including discussions with
the issuer's management, the judgment of other investment analysts, and its own
informed judgment. The Adviser's credit analysis will consider the issuer's
financial soundness, its responsiveness to changes in interest rates and
business conditions, and its anticipated cash flow, interest or dividend
coverage, and earnings. In evaluating an issuer, the Adviser places special
emphasis on the estimated current value of the issuer's assets rather than
historical costs.

SECURITIES OF FOREIGN ISSUERS

Investing in non-U.S. securities carries substantial risks in addition to those
associated with domestic investments. In an attempt to reduce some of these
risks, the Fund diversifies its investments broadly among foreign countries,
including both developed and developing countries.

The Fund occasionally takes advantage of the unusual opportunities for higher
returns available from investing in developing countries. These investments,
however, carry considerably more volatility and risk because they are associated
with less mature economies and less stable political systems.

EXCHANGE RATES

Foreign securities are denominated in foreign currencies. Therefore, the value
in U.S. dollars of the Fund's assets and income may be affected by changes in
exchange rates and regulations.

Although the Fund values its assets daily in U.S. dollars, it will not convert
its holding of foreign currencies to U.S. dollars daily.

When the Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers realize a profit on the difference between the
prices at which they buy and sell securities.

FOREIGN COMPANIES

Other differences between investing in foreign and U.S. companies include:

less publicly available information about foreign companies;

the lack of uniform financial accounting standards applicable to foreign
companies;

less readily available market quotations on foreign companies;

differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;

generally lower foreign stock market value;

the likelihood that foreign securities may be less liquid or more volatile;

foreign brokerage commissions may be higher;

unreliable mail service between countries; and

political or financial changes which adversely affect investments in some
countries.

U.S. GOVERNMENT POLICIES

In the past, U.S. government policies have discouraged or restricted certain
investments abroad by investors such as the Fund. Although the Fund is unaware
of any current restrictions, investors are advised that these policies could be
reinstituted.

INVESTMENT LIMITATIONS

The Fund will not change any of the investment limitations described below
without approval of shareholders. The Fund will not:

invest more than 25% of its total assets (valued at time of investment) in
securities of companies engaged principally in any one industry other than the
utilities industry, except that this restriction does not apply to cash or cash
items and securities issued or guaranteed by the United States government or
its agencies or instrumentalities;

invest more than 5% of the value of its total assets in securities of
companies, including their predecessors, which have been in operation for less
than three years;

invest more than 5% of its total assets (valued at the time of investment) in
the securities of any one issuer, except that this restriction does not apply
to cash and cash items, repurchase agreements, and securities issued or
guaranteed by the United States government or its agencies or
instrumentalities;

acquire more than 10% of the outstanding voting securities of any one issuer
(at the time of acquisition);

borrow money, issue senior securities, or pledge assets, except that under
certain circumstances the Fund may borrow money and engage in reverse
repurchase transactions in amounts up to one-third of the value of its net
assets, including the amounts borrowed, and pledge up to 10% of the value of
those assets to secure such borrowings. The Fund will not borrow money or
engage in reverse repurchase agreements for investment leverage, but rather as
a temporary, extraordinary, or emergency measure 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 any such borrowings are
outstanding. However, 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;

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
corporate bonds, debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements, or other transactions which are
permitted by the Fund's investment objectives and policies;

write call options on securities unless the securities are held in the Fund's
portfolio or unless the Fund is entitled to them in deliverable form without
further payment or after segregating cash in the amount of any further payment.
The Fund's investment in put or call options, straddles, spreads, or any
combination thereof shall not exceed 5% of the Fund's total assets;

invest more than 5% of its net assets in warrants, not more than 2% of which
can be warrants not listed on recognized exchanges; or

invest more than 15% of total assets in securities of foreign issuers not
listed on recognized exchanges.

If a percentage restriction set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from changes in
value or in the number of outstanding securities of an issuer will not be
considered a violation.

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

The Fund's net asset value per Share fluctuates. The net asset value for Shares
is determined by adding the interest of each class of Shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of Shares in the liabilities of the Fund and those attributable to each
class of Shares, and dividing the remainder by the total number of each class of
Shares outstanding. The net asset value for each class of Shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.

The net asset value of each class of Shares of the Fund is determined at 4:00
p.m. (Eastern time), Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities that
it's net asset value might be materially affected; (ii) days during which no
Shares are tendered for redemption and no orders to purchase Shares are
received; or (iii) the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

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

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

CLASS A SHARES

An investor who purchases Class A Shares pays a maximum sales load of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed (except for special programs offered under "Purchases
with Proceeds From Redemptions of Unaffiliated Investment Companies.") Certain
purchases of Class A Shares qualify for reduced sales loads. See "Reducing or
Eliminating the Sales Load." Class A Shares have no conversion feature.

CLASS B SHARES

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

CLASS C SHARES

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

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

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)

In connection with any sale, Federated Securities Corp. may from time to time
offer certain items of nominal value to any shareholder or investor. The Fund
reserves the right to reject any purchase request. An account must be
established at a financial institution or by completing, signing, and returning
the new account form available from the Fund before Shares can be purchased.

- --------------------------------------------------------------------------------

INVESTING IN CLASS A SHARES

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

<TABLE>
<CAPTION>
DEALER
SALES LOAD SALES LOAD CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
AMOUNT OF OFFERING AMOUNT OFFERING
TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less
than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.50% 2.56% 2.25%
$500,000 but less
than $1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "DEALER CONCESSION."

No sales load is imposed for Class A Shares purchased through bank trust
departments, investment advisers registered under the Investment Advisers Act of
1940, as amended, or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or to shareholders designated as Liberty Life Members. However,
investors who purchase Shares through a trust department, investment adviser, or
retirement plan may be charged an additional service fee by the institution.
Additionally, no sales load is imposed for Class A Shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee or fees for
services.

No sales load is imposed on purchases made by retirement plans with over $1
million invested in funds available through the Federated LifeTrack(TM) Program.

DEALER CONCESSION

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

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

Effective June 1, 1995, and until further notice, the entire amount of the
applicable sales load will be reallowed to dealers. In addition, the distributor
will pay dealers additional bonus payments in an amount equal to 0.50 of 1% of
the public offering price of Shares sold.

REDUCING OR ELIMINATING THE
SALES LOAD

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

quantity discounts and accumulated purchases;

concurrent purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

purchases with proceeds from redemptions of unaffiliated investment company
shares.

QUANTITY DISCOUNTS AND
ACCUMULATED PURCHASES

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

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

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales load reduction, a shareholder has the
privilege of combining concurrent purchases of two or more funds in the Liberty
Family of Funds, the purchase price of which includes a sales load. For example,
if a shareholder concurrently invested $30,000 in one of the other funds in the
Liberty Family of Funds with a sales load, and $20,000 in this Fund, the sales
load would be reduced.

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

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of shares of the funds in
the Liberty Family of Funds (excluding money market funds) over the next 13
months, the sales load may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales load adjustment
depending on the amount actually purchased within the 13-month period and a
provision for the custodian to hold up to 5.50% of the total amount intended to
be purchased in escrow (in shares) until such purchase is completed.

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

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

be aggregated to provide a purchase credit towards fulfillment of the letter of
intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

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

PURCHASES WITH PROCEEDS FROM
REDEMPTIONS OF UNAFFILIATED
INVESTMENT COMPANIES

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

INVESTING IN CLASS B SHARES

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

CONVERSION OF CLASS B SHARES

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

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

INVESTING IN CLASS C SHARES

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

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

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

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

PURCHASING SHARES BY WIRE

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

PURCHASING SHARES BY CHECK

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

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

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

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

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

CLASS A SHARES

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the Liberty Family of Funds at net asset value. Neither the
Fund nor any of the funds in the Liberty Family of Funds imposes any additional
fees on exchanges. Participants in a retirement plan under the Federated
LifeTrack(TM) Program may exchange all or some of their Shares for Class A
Shares of other funds offered under the plan at net asset value.

CLASS B SHARES

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

CLASS C SHARES

Class C shareholders may exchange all or some of their Shares for Class C Shares
in other funds in the Liberty Family of Funds at net asset value without a
contingent deferred sales charge. (Not all funds in the Liberty Family of Funds
currently offer Class C Shares. Contact your financial institution regarding the
availability of other

Class C Shares in the Liberty Family of Funds.) Participants in a retirement
plan under the Federated LifeTrack(TM) Program may exchange some or all of their
Shares for Class C Shares of other funds offered under their plan at net asset
value without a contingent deferred sales charge. To the extent that a
shareholder exchanges Shares for Class C Shares in other funds in the Liberty
Family of Funds, the time for which the exchanged-for Shares are to be held will
be added to the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period. For more information, see "Contingent
Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE

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

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

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

TAX CONSEQUENCES

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

MAKING AN EXCHANGE

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

Instructions for exchanges for retirement plans participating in the Federated
LifeTrack(TM) Program should be given to the plan administrator.

TELEPHONE INSTRUCTIONS

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

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

the following business day. This privilege may be modified or terminated at any
time.

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

Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the redemption
request. Redemptions will be made on days on which the Fund computes its net
asset value. Redemption requests must be received in proper form and can be made
as described below. Redemptions of Shares held through retirement plans
participating in the Federated LifeTrack(TM) Program will be governed by the
requirements of the respective plans.

REDEEMING SHARES THROUGH A
FINANCIAL INSTITUTION

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

REDEEMING SHARES BY TELEPHONE

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

Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming Shares By Mail" should be considered. If at any time the
Fund shall determine it necessary to terminate or modify the telephone
redemption privilege, shareholders would be promptly notified.

REDEEMING SHARES BY MAIL

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

The written request should state: Fund Name and the Class designation; the
account name as registered with the Fund; the account number; and the number of
Shares to be redeemed or the dollar amount requested. All owners of the account
must sign the request exactly as the Shares are registered. It is recommended
that any share certificates be sent by registered or certified mail with the
written request.

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

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

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

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

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

Depending upon the amount of the withdrawal payments, the amount of dividends
paid and capital gains distributions with respect to Shares, and the fluctuation
of the net asset value of Shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in the Fund. For
this reason, payments under this program should not be considered as yield or
income on the shareholder's investment in the

Fund. To be eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for participation in
this program through his financial institution. Due to the fact that Class A
Shares are sold with a sales load, it is not advisable for shareholders to
continue to purchase Class A Shares while participating in this program. A
contingent deferred sales charge may be imposed on Class B Shares and Class C
Shares.

CONTINGENT DEFERRED SALES CHARGE

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

CLASS A SHARES

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

CLASS B SHARES

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

<TABLE>
<CAPTION>
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one full
year of the purchase date of those Shares will be charged a contingent deferred
sales charge by the Fund's distributor of 1.00%. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value of
the redeemed Shares at the time of purchase or the net asset value of the
redeemed Shares at the time of redemption. No contingent deferred sales charge
will be charged for redemptions of Class C Shares from the Federated
LifeTrack(TM) Program.

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

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than six
full years from the date of purchase with respect to Class B Shares and one full
year from the date of purchase with respect to Class C Shares and applicable
Class A Shares. Redemptions will be processed in a manner intended to maximize
the amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount

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

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Liberty Family Funds or the
Federated LifeTrack(TM) Program funds or redemptions from the Federated
LifeTrack(TM) Program.

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

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

CERTIFICATES AND CONFIRMATIONS

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

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

DIVIDENDS

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

CAPITAL GAINS

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

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the Class A Share required
minimum value of $500 or the required minimum value of $1,500 for Class B Shares
and Class C Shares. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset value
of the respective Share Class. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.

- --------------------------------------------------------------------------------

FUND INFORMATION

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

The Fund is managed by a Board of Directors. The Directors are responsible for
managing the Fund's business affairs and for exercising all the Fund's powers
except those reserved for the shareholders. An Executive Committee of the Board
of Directors handles the Board's responsibilities between meetings of the Board.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Passport Research Ltd., the Fund's
investment adviser, subject to direction by the Directors. Passport Research,
Ltd. is located at Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. The Adviser continually conducts investment research and supervision
for the Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the Fund.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to .75 of 1% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by many mutual funds with similar objectives and policies. The Adviser may
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser can terminate this voluntary waiver at any time
at its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain states.

ADVISER'S BACKGROUND

Passport Research, Ltd. is a Pennsylvania limited partnership organized in 1981.
Federated Advisers is the general partner of the Adviser and has a 50.5%
interest in the Adviser. Federated Advisers is a subsidiary of Federated
Investors. Edward D. Jones & Co. L.P. is the limited partner of the Adviser and
has a 49.5% interest in the Adviser. Passport Research, Ltd. has also acted as
investment adviser for Edward D. Jones & Co. Daily Passport Cash Trust since
1982. Employees of the Adviser are also employees of other advisers which are
affiliates of Federated Investors.

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

Christopher H. Wiles has been the Fund's portfolio manager since May, 1990. Mr.
Wiles joined Federated Investors in 1990 and has been a Vice President of
Federated Advisers since 1992. Mr. Wiles served as Assistant Vice President of
Federated Advisers from 1990 until 1992. Mr. Wiles was a portfolio manager at
Mellon Bank from 1986 until 1990. Mr. Wiles is a Chartered Financial Analyst and
received his M.B.A. in Finance from Cleveland State University.

Linda A. Duessel has been the Fund's co-portfolio manager since April 1, 1995.
Ms. Duessel joined Federated Investors in 1991 as an Assistant Vice President of
Federated Advisers. Ms. Duessel was employed at Westinghouse Credit Corporation
from 1983 to 1991, serving in a variety of positions which culminated in her
being named Vice President/Portfolio Manager in the Merchant Banking Group in
1990. Ms. Duessel served as a Senior Staff Accountant at Arthur Young & Company
from 1979 to 1982. Ms. Duessel received her M.S.I.A. from Carnegie Mellon
University. Ms. Duessel is a Certified Public Accountant and a Chartered
Financial Analyst.

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for Shares of the Fund.
Federated Securities Corp. is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a Pennsylvania corporation organized on November
14, 1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

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

The distributor will pay dealers an amount equal to 5.50% of the net asset value
of Class B Shares purchased by their clients or customers. These payments will
be made directly by the distributor from its assets, and will not be made from
the assets of the Fund. Dealers may voluntarily waive receipt of all or any
portion of these payments. The distributor may pay a portion of the distribution
fee discussed below to financial institutions that waive all or any portion of
the advance payments.

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

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

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

from future payments made by Shares under the Plan.

In addition, the Fund has adopted a Shareholder Services Plan (the "Services
Plan") under which it may make payments up to 0.25 of 1% of the average daily
net asset value of Class A Shares, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts ("Shareholder Services"). The Fund has entered into a
Shareholder Services Agreement with Federated Shareholder Services, a subsidiary
of Federated Investors, under which Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.

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

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

OTHER PAYMENTS TO FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to .50 of 1% of the net asset value
of Class A Shares purchased by their clients or customers under the Federated
LifeTrack(TM) Program or by certain qualified plans as approved by Federated
Securities Corp. (Such payments are subject to a reclaim from the financial
institution should the assets leave the program within 12 months after
purchase.)

Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of Shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Administrative
Services provides these at an annual rate which

relates to the average aggregate daily net assets of all Federated Funds as
specified below:

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

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

CUSTODIAN

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

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT

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

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, One Oxford Centre,
Pittsburgh, Pennsylvania 15219.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling Shares of the Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Directors.

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

VOTING RIGHTS

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

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

Directors may be removed by a two-thirds vote of the number of Directors prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding Shares of all series entitled to vote.

- --------------------------------------------------------------------------------
TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received. This applies whether dividends and distributions are received in cash
or as additional Shares. Distributions representing long-term capital gains, if
any, will be taxable to shareholders as long-term capital gains no matter how
long the shareholders have held the Shares. No federal income tax is due on any
dividends earned in an IRA or qualified retirement plan until distributed.

PENNSYLVANIA PERSONAL PROPERTY TAXES

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

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

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

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

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

The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of Shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of Shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders.

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

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

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

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

LIBERTY UTILITY
FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

COMBINED PROSPECTUS

An Open-End, Diversified
Management Investment Company

May 31, 1995

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

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

531545101
531545309
531545200
G01154-01 (5/95)

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

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

FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED
INVESTORS
GENERAL INFORMATION ABOUT THE
FUND 1
INVESTMENT OBJECTIVES AND
POLICIES 1
Temporary Investments 1
Units of Master Limited
Partnerships 2
Convertible Securities 2
Repurchase Agreements 2
Lending of Portfolio Securities 2
Restricted Securities 2
When-Issued and Delayed
Delivery Transactions 3
Reverse Repurchase Agreements 3
Covered Call Options 3
Portfolio Turnover 3
INVESTMENT LIMITATIONS 3
LIBERTY UTILITY FUND, INC.,
MANAGEMENT 5
Directors Compensation 9
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 10
ADMINISTRATIVE SERVICES 11
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT 11
BROKERAGE TRANSACTIONS 11
PURCHASING SHARES 11
Distribution and Shareholder
Services Plans 12
Conversion to Federal Funds 12
Purchases by Sales
Representatives, Fund
Directors, and Employees 12
Determining Market Value of
Securities 12
REDEEMING SHARES 13
Redemption in Kind 13
TAX STATUS 13
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
YIELD 14
PERFORMANCE COMPARISONS 14
ABOUT FEDERATED INVESTORS 15
Mutual Fund Market 16
Institutional 16
Trust Organizations 16
Broker/Dealers and Bank
Broker/Dealer Subsidiaries 16
FINANCIAL STATEMENTS 16
APPENDIX 17

GENERAL INFORMATION ABOUT THE FUND
The Fund was incorporated under the laws of the State of Maryland on
April 20, 1987. It is qualified to do business as a foreign corporation
in Pennsylvania. Shareholders of the Fund, at a meeting held January 18,
1990, approved the Fund's name change from "Progressive Income Equity
Fund, Inc." to "Liberty Utility Fund, Inc."
Shares of the Fund are offered in three classes, known as Class A
Shares, Class B Shares, and Class C Shares (individually and
collectively referred to as "Shares," as the context may require). This
Combined Statement of Additional Information relates to all classes of
Shares of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objectives of the Fund are current income and
long-term growth of income. Capital appreciation is a secondary
objective. The Fund will seek to achieve its investment objectives by
investing in a diversified portfolio comprised primarily of equity
securities. The investment objectives cannot be changed without approval
of shareholders.
The Fund's investment approach is based on the conviction that over the
long term the economy will continue to expand and develop and that this
economic growth will be reflected in the growth of the revenues and
earnings of utility companies.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
Money Market Instruments
The Fund may invest in the following money market instruments:
o instruments of domestic and foreign banks and savings and loans
if they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund ("SAIF"),
which is administered by the FDIC; and
o prime commercial paper (rated A-1 by Standard and Poor's
Ratings Group, Prime-1 by Moody's Investors Service, Inc., or F-
1 by Fitch Investors Service).
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may
invest generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes, and bonds) and obligations
issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
o Federal Land Banks;
o Central Bank for Cooperatives;
o Federal Intermediate Credit Banks;
o Federal Home Loan Banks;
o Farmers Home Administration; and
o Federal National Mortgage Association.
UNITS OF MASTER LIMITED PARTNERSHIPS
The Fund may invest in units of participation in master limited
partnerships. Master limited partnerships are generally partnerships
with a large number of limited partners whose ownership interests are
publicly traded. The Fund will not invest in partnerships investing in
real estate or real estate investments. The Fund will invest only in
units of participation in master limited partnerships that are traded on
a national securities exchange.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible security is
a fixed income security (a bond or preferred stock) which may be
converted at a stated price within a specified period of time into a
certain quantity of common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's
capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock
but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through
its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's
underlying common stock.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are 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 will only enter into repurchase agreements
with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Fund's adviser, Passport
Research, Ltd., (the "Adviser"), to be creditworthy pursuant to
guidelines established by the Board of Directors (the "Directors").
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are
subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker. The
Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
RESTRICTED SECURITIES
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Section 4(2) paper is restricted as to disposition under
federal securities law, and is generally sold to institutional
investors, such as the Fund, who agree that they are purchasing the
paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other
institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2)
paper, thus providing liquidity.
The ability of the Directors to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission 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 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 Rule 144A. The
Fund believes that the Staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all restricted
securities (eligible for resale under Rule 144A) for determination by
the Directors. The Directors 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 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.
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.
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
securities are marked to market daily and maintained until the
transaction is settled.
COVERED CALL OPTIONS
The Fund will receive a premium for writing a call option which
increases the Fund's return in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect,
among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the
option and the volatility of the market price of the underlying
security. By writing a call option, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security
above the exercise price of the option.
The Fund may terminate a call option it has written prior to expiration
of the option by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written. The
Fund will realize a gain or loss from such transaction if the cost of
such transaction is less or more than the premium received from writing
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security, any loss resulting from repurchase of a call option is likely
to be offset in whole or in part by the unrealized appreciation of the
underlying security owned by the Fund.
PORTFOLIO TURNOVER
The Adviser does not anticipate that portfolio turnover will result in
adverse tax consequences. However, relatively high portfolio turnover
may result in high transaction costs to the Fund. For the fiscal years
ended February 28, 1995, and 1994, the portfolio turnover rates were 55%
and 24%, respectively.
INVESTMENT LIMITATIONS
The Fund will not change any of the investment limitations described
below without approval of shareholders.
Concentration of Investments
The Fund will not invest more than 25% of its total assets (valued
at the time of investment) in securities of companies engaged
principally in any one industry other than the utilities industry,
except that this restriction does not apply to cash or cash items
and securities issued or guaranteed by the United States
government or its agencies or instrumentalities.
Selling Short and Buying on Margin
The Fund will not purchase securities on margin, or make short
sales of securities, except for the use of short-term credit
necessary for the clearance of purchases and sales of portfolio
securities.
Issuing Senior Securities and Borrowing Money
The Fund will not borrow money, issue senior securities, or pledge
assets, except that under certain circumstances the Fund may
borrow money and engage in reverse repurchase transactions in
amounts up to one-third of the value of its net assets, including
the amounts borrowed, and pledge up to 10% of the value of those
assets to secure such borrowings.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure 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 any such borrowings are outstanding. However,
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 pledge, mortgage, or hypothecate its assets,
except to secure permitted borrowings. In those cases, it may
pledge, mortgage, or hypothecate up to 10% of the value of assets
to secure such borrowings (the deposit in escrow of securities in
connection with the writing of call options or collateralizing
loans of securities is not deemed to be a pledge or hypothecation
for any purpose).
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 New Issuers
The Fund will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors,
which have been in operation for less than three years.
Underwriting
The Fund will not underwrite any issue of securities, except as it
may 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 objectives, policies,
and limitations.
Diversification of Investments
The Fund will not invest more than 5% of its total assets (valued
at the time of investment) in the securities of any one issuer,
except that this restriction does not apply to cash and cash
items, repurchase agreements, and securities issued or guaranteed
by the United States government or its agencies or
instrumentalities; or acquire more than 10% of any class of voting
securities of any one issuer (at time of acquisition).
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 corporate bonds,
debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements, or other
transactions which are permitted by the Fund's investment
objectives and policies.
Restricted Securities
The Fund will not invest more than 10% of its total assets in
securities subject to restrictions on resale under federal
securities law (except for commercial paper issued under Section
4(2) of the Securities Act of 1933).
Writing Covered Call Options
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment. The
Fund's investment in put or call options, straddles, spreads, or
any combination thereof shall not exceed 5% of the Fund's total
assets.
Investing in Warrants
The Fund will not invest more than 5% of its assets in warrants,
not more than 2% of which can be warrants which are not listed on
recognized exchanges.
Investing in Securities of Foreign Issuers
The Fund will not invest more than 15% of its total assets in
securities of foreign issuers not listed on recognized exchanges.
Investing in Illiquid Securities
The Fund will not invest more than 10% of its total assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice.
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Fund
The Fund will not purchase or retain the securities of any issuer
if the officers and Directors of the Fund or its Adviser owning
individually 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
Investing in Minerals
The Fund will not purchase interests in oil, gas, or mineral
exploration or development programs, except it may purchase the
securities of issuers which invest in or sponsor such programs.
Investing in Real Estate
The Fund will not purchase or sell real estate or any interest
therein, except that the Fund may invest in securities secured by
real estate or interests therein, such as mortgage pass-throughs,
pay-throughs, collateralized mortgage obligations, and securities
issued by companies that invest in real estate or interests
therein. The Fund will not invest in limited partnerships
investing in real estate or real estate investments.
Investing in Securities of Other Investment Companies
The Fund will not purchase or retain shares of any open-end
investment company (exclusive of shares acquired as a result of
merger, consolidation, or other plan of reorganization).
Purchasing Securities to Exercise Control
The Fund will not invest for the purpose of exercising control
over or management of any company.
Investing in Commodities
The Fund will not purchase or sell commodities or commodity
contracts.
If a percentage restriction set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from
changes in value or in the number of outstanding securities of an issuer
will not be considered a violation.
In addition, in order to comply with certain state restrictions, the
Fund will not invest in oil, gas, or mineral leases. If state
requirements change, this limitation may be amended without notice to
shareholders.
The Fund will not purchase any securities while borrowings in excess of
5% of the value of its total assets are outstanding.
The Fund did not borrow money or invest in reverse repurchase agreements
in excess of 5% of the value of its net assets during the last fiscal
year and has no present intention to do so in the current 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 association having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
LIBERTY UTILITY FUND, INC., MANAGEMENT
Officers and Directors are listed with their addresses, principal
occupations, and present positions.

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

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

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

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

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

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

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

Peter E. Madden
70 Westcliff Road
Westin, MA
Birthdate: March 16, 1942
Director
Consultant; State Representative, Commonwealth of Massachusetts;
Director, Trustee, or Managing General Partner of the Funds; formerly,
President, State Street Bank and Trust Company and State Street Boston
Corporation.

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

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

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

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

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

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Vice President and Secretary
Dir
Director, Federated Securities Corp.; Vice President and Secretary of
the Funds.

* This Director is deemed to be an "interested person" as defined
in the Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of
the Board of Directors handles the responsibilities of the
Board of Directors between meetings of the Board.
Officers and Directors own less than 1% of the Fund's outstanding
Shares.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust; Automated
Government Money Trust; California Municipal Cash Trust; Cash Trust
Series II; Cash Trust Series, Inc.; DG Investor Series; Edward D. Jones
& Co. Daily Passport Cash Trust; Federated ARMs Fund; Federated Exchange
Fund, Ltd.; Federated GNMA Trust; Federated Government Trust; Federated
Growth Trust; Federated High Yield Trust; Federated Income Securities
Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Intermediate Government Trust; Federated
Master Trust; Federated Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government Trust; Federated
Stock Trust; Federated Tax-Free Trust; Federated U.S. Government Bond
Fund; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Adjustable Rate U.S. Government Fund, Inc.; Fortress Municipal Income
Fund, Inc.; Fortress Utility Fund, Inc.; Fund for U.S. Government
Securities, Inc.; Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal Securities
Fund, Inc.; Liberty U.S. Government Money Market Trust; Liberty Term
Trust, Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash Trust;
Managed Series Trust; The Medalist Funds; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Trust; Municipal Securities
Income Trust; Newpoint Funds; New York Municipal Cash Trust; 111
Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO Monument
Funds; The Shawmut Funds; Short-Term Municipal Trust; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free Instruments Trust;
Trademark Funds; Trust for Financial Institutions; Trust For Government
Cash Reserves; Trust for Short-Term U.S. Government Securities; Trust
for U.S. Treasury Obligations; The Virtus Funds; and World Investment
Series, Inc.
Fund Ownership
As of May 5, 1995, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class A Shares for
its clients), Jacksonville, Florida, owned approximately 4,640,451
Class C Shares (6.93%).
As of May 5, 1995, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: Merrill Lynch
Pierce Fenner & Smith (as record owner holding Class C Shares for
its clients), Jacksonville, Florida, owned approximately 2,027,183
Class C Shares (38.46%).
DIRECTORS COMPENSATION

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

John F. Donahue, $0 $0 for the Fund and
Chairman and Director 68 other investment companies in the
Fund Complex
Thomas G. Bigley $0 $20,688 for the Fund and
49 other investment companies in the
Fund Complex
John T. Conroy, Jr., $2,064 $117,202 for the Fund and
Director 64 other investment companies in the
Fund Complex
William J. Copeland, $2,064 $117,202 for the Fund and
Director 64 other investment companies in the
Fund Complex
Richard B. Fisher, $0 $0 for the Fund and
Vice President and Director 8 other investment companies in
the Fund Complex
James E. Dowd, $2,064 $117,202 for the Fund and
Director 64 other investment companies in the
Fund Complex
Lawrence D. Ellis, M.D., $1,872 $106,460 for the Fund and
Director 64 other investment companies in the
Fund Complex
Edward L. Flaherty, Jr., $2,064 $117,202 for the Fund and
Director 64 other investment companies in the
Fund Complex
Peter E. Madden, $1,594 $90,563 for the Fund and
Director 64 other investment companies in the
Fund Complex
Gregor F. Meyer, $1,872 $106,460 for the Fund and
Director 64 other investment companies in the
Fund Complex
John E. Murray, Jr., $0 $0 for the Fund and
Director 64 other investment companies in the
Fund Complex
Wesley W. Posvar, $1,872 $106,460 for the Fund and
Director 64 other investment companies in the
Fund Complex
Marjorie P. Smuts, $1,872 $106,460 for the Fund and
Director 64 other investment companies in the
Fund Complex

*Information is furnished for the fiscal year ended February 28, 1995.
+The information is provided for the last calendar year.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUND
The Fund's investment adviser, Passport Research, Ltd., was organized as
a Pennsylvania limited partnership in 1981. Federated Advisers is the
general partner of the Adviser and has a 50.5% interest in the Adviser.
The limited partner of the Adviser is Edward D. Jones & Co., which owns
a 49.5% interest in the Adviser. Federated Advisers is owned by FII
Holdings, Inc., 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.
At any time, Edward D. Jones & Co. can require Federated Investors to
repurchase all of its partnership interest in the Adviser at the then
current book value. Edward D. Jones & Co. cannot transfer, sell, or
assign its partnership interest in the Adviser without first offering it
to Federated Investors.
As long as Edward D. Jones & Co. owns a partnership interest in the
Adviser, it cannot acquire, organize, or cause the organization of any
other money market mutual fund or enter into arrangements with an
investment adviser or underwriter of any other money market mutual fund
in which Edward D. Jones & Co. will offer the shares of the other money
market mutual fund. Edward D. Jones & Co. has agreed not to solicit
proxies in opposition to management of the Fund unless a court of
competent jurisdiction finds the conduct of a majority of the Board of
Directors constitutes willful misfeasance, bad faith, gross negligence,
or reckless disregard of its duties.
All of the officers of the Fund, except Daniel A. Burkhardt, are
officers of the Adviser. The relationships are described under "Liberty
Utility Fund, Inc. Management."
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, Passport Research, Ltd. receives an annual
investment advisory fee as described in the prospectus. During the
fiscal years ended February 28, 1995, 1994, and 1993, the Adviser earned
$6,347,619, $6,774,071, and $4,017,913, respectively, which were reduced
by $1,683,310, $1,510,782, and $22,320, respectively.
State Expense Limitations
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose
shares are registered for sale in those states. If the Fund's
normal operating expenses (including the investment advisory fee,
but not including brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year of the first $30
million of average net assets, 2% per year of the next $70 million
of average net assets, and 1 1/2% per year of the remaining
average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
expense limitation, the investment advisory fee paid will be
reduced by the amount of the excess, subject to an annual
adjustment. If the expense limitation is exceeded, the amount to
be reimbursed by the Adviser will be limited, in any single fiscal
year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the combined prospectus. Prior to March 1, 1994, Federated
Administrative Services, Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. For the fiscal years ended February
28, 1995, Federated Administrative Services earned $640,686. For the
fiscal year ended February 28, 1994 and 1993, Federated Administrative
Services, Inc., earned $959,208 and $576,939. Dr. Henry J. Gailliot, an
officer of the Adviser to the Fund, holds approximately 20% of the
outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Administrative Services.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company serves as transfer agent and dividend
disbursing agent for the Fund. The fee paid to the transfer agent is
based upon the size, type, and number of accounts and transactions made
by shareholders.
Federated Services Company also maintains the Fund's accounting records.
The fee is paid for this service is based upon the level of the Fund's
average net assets for the period plus out-of-pocket expenses.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund
or to the Adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions
charged by such persons are reasonable in relation to the value of the
brokerage and research services provided. The Fund anticipates that
Edward D. Jones & Co., which is the limited partner of the Adviser, may
upon occasion, subject to certain restrictions, act as broker or dealer
in connection with portfolio transactions for the Fund.
Research services provided by brokers may be used by the Adviser or by
affiliates of Federated Investors in advising certain 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.
For the fiscal years ended February 28, 1995, 1994, and 1993, the Fund
paid $1,201,969, $636,925, and $540,200, respectively, in brokerage
commissions on brokerage transactions.
PURCHASING SHARES
Except under certain circumstances described in the respective
prospectuses, Shares are sold at their net asset value (plus a sales
load on Class A Shares only) on days the New York Stock Exchange is open
for business. The procedure for purchasing Shares is explained in the
prospectuses under "How to Purchase Shares."
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services, to stimulate
distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office
space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic investments of client
account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and
addresses.
By adopting the Distribution Plan (Class B and Class C Shares only), the
Directors expects that the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management
and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to
curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail;
(3) enhancing shareholder recordkeeping systems; and (4) responding
promptly to shareholders' requests and inquiries concerning their
accounts.
During the period from October 12, 1994 to February 28, 1995, payments
in the amount of $21,567 were made pursuant to the Distribution Plan for
Class B Shares. For the fiscal year ended February 28, 1995, payments in
the amount of $453,766 were made pursuant to the Distribution Plan for
Class C Shares. In addition, for the fiscal year ended February 28,
1995, payments in the amount of $2,058,688 were made pursuant to a
Shareholder Services Plan adopted by the Fund.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal funds
before shareholders begin to earn dividends. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them
to federal funds.
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES
Directors, employees, and sales representatives of the Fund, the
Adviser, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities
Corp., and their spouses and children under 21, may buy Shares at net
asset value without a sales load and are not subject to a contingent
deferred sales charge (Class B Shares and Class C Shares only) to the
extent the financial institution through which the Shares are sold
agrees to waive any initial payment to which it might otherwise be
entitled. Shares may also be sold without a sales loads to trusts or
pension or profit-sharing plans for these persons and to persons who
elect to sweep into the Fund (i.e., directly invest) the dividends
payable on shares of common and preferred stock, unit investment trusts,
and closed-end investment companies, owned directly or indirectly of
such persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the respective
prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as
follows:
o according to the last sale price on a national securities
exchange, if available;
o in the absence of recorded sales for equity securities, according
to the mean between the last closing bid and asked prices, and for
bonds and other fixed income securities as determined by an
independent pricing service; or
o for short-term obligations, according to the prices as furnished
by an independent pricing service or for short-term obligations
with remaining maturities of 60 days or less at the time of
purchase, at amortized cost, or at fair value as determined in
good faith by the Directors.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider yield,
quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data.
REDEEMING SHARES
The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions of Class B
Shares and Class C Shares may be subject to a contingent deferred sales
charge. Redemption procedures are explained in the prospectuses under
"How to Redeem Shares."
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 Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in
a manner the Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem Shares
for any shareholder in cash up to the lesser of $250,000 or 1% of a
class of Shares' 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.
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, as amended,
applicable to regulated investment companies and to receive the special
tax treatment afforded to such companies. To qualify for this treatment,
the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from gains on the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. Only a nominal portion of
any income dividend paid by the Fund is expected to be eligible for the
dividends received deduction available to corporations. These dividends,
and any short-term capital gains, are taxable as ordinary income.
Capital Gains
Shareholders will pay federal tax at capital gains rates on long-
term capital gains distributed to them regardless of how long they
have held Fund Shares.
TOTAL RETURN
The Fund's average annual total returns for Class A Shares for the one-
year and five-year periods ended February 28, 1995, and for the period
from June 5, 1987 to February 28, 1995, were (6.41%), 8.93% and 10.80%,
respectively.
The Fund's cumulative total return for Class B Shares, for the period
from October 12, 1994 to February 28, 1995, was (3.42%).
The Fund's average annual total return for Class C Shares for the fiscal
year ended February 28, 1995 and the period from April 30, 1993 (date of
initial public offering), to February 28, 1995, were (2.64%) and 0.85%,
respectively.
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 load,
adjusted over the period by any additional Shares, assuming the
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.
Cumulative total return reflects Class B Shares' total performance over
a specific period of time. This total return assumes and is reduced by
the payment of the maximum sales load, if applicable. The Class B
Shares' total return is representative of only six months of investment
activity since the date of initial public offering.
YIELD
The Fund's yields for Class A Shares, Class B Shares, and Class C
Shares, were 4.38%, 3.87% and 3.87%, respectively, for the thirty-day
period ended February 28, 1995.
The yield for all classes of Shares of the Fund is determined by
dividing the net investment income per Share (as defined by the
Securities and Exchange Commission) earned by any class of Shares over a
thirty-day period by the maximum offering price per Share of 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 12-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.
PERFORMANCE COMPARISONS
The Fund's performance of each class of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's or a class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition
of any index used, prevailing market conditions, portfolio compositions
of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC., for example, makes comparative
calculations for one month, three month, one year, and five year
periods which assume the reinvestment of all capital gains
distributions and income dividends.
o DOW JONES INDUSTRIAL AVERAGE ('DJIA') represents share prices of
selected blue-chip industrial corporations as well as public
utility and transportation companies. The DJIA indicates daily
changes in the average price of stocks in any of its categories.
It also reports total sales for each group of industries. Because
it represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation,
financial, and public utility companies, compares total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on its index. Taxes due on any of
these distributions are not included, nor are brokerage or other
fees calculated in Standard & Poor's figures.
o STANDARD & POOR'S UTILITY INDEX is an unmanaged index of common
stocks from forty different utilities. This index indicates daily
changes in the price of the stocks. The index also provides
figures for changes in price from the beginning of the year to
date, and for a twelve month period.
o DOW JONES UTILITY INDEX is an unmanaged index comprised of fifteen
utility stocks that tracks changes in price daily and over a six
month period. The index also provides the highs and lows for each
of the past five years.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for any class of Shares may
quote total returns which are calculated on nonstandardized base
periods. These total returns also represent the historic change in the
value of an investment in any class of Shares based on quarterly
reinvestment of dividends over a specified period of time.
From time to time, the Fund may advertise the performance of any class
of Shares using charts, graphs and descriptions, compared to federally
insured bank products including certificates of deposit and time
deposits and to money market funds using the Lipper Analytical Services
money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of a sales load or contingent deferred sales charge, as
applicable.
ABOUT FEDERATED INVESTORS
Federated is dedicated to meeting investor needs which is reflected in
its investment decision making structured, straightforward, and
consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio
managers, analysts, and traders dedicated to specific market sectors.
In the equity sector, Federated has more than 25 years' experience. As
of December 31, 1994, Federated managed 15 equity funds totaling
approximately $4 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated's value-
oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system
that was developed in the 1970s.
In the corporate bond sector, as of December 31, 1994, Federated managed
8 money market funds, 5 investment grade and 4 high yield bond funds
with assets approximating $7.4 billion, $.9 billion and $.8 billion,
respectively. Federated's corporate bond decision making-based on
intensive, diligent credit analysis-is backed by over 20 years of
experience in the corporate bond sector. In 1972, Federated introduced
one of the first high-yield bond funds in the industry. In 17 years
ending December 1994, Federated's high-yield portfolios experienced a
default rate of just 1.86%, versus 3.10% for the market as a whole. In
1983, Federated was one of the first fund managers to participate in the
asset-backed securities market, a market totaling more than $200
billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity
and high yield corporate bond management while William D. Dawson,
Executive Vice President, oversees Federated's domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the
management of Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing
their financial goals through mutual funds. These
investors, as well as businesses and institutions, have
entrusted over $2 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes
mutual funds for a variety of investment applications.
Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate
accounts and mutual funds for a variety of applications,
including defined benefit and defined contribution
programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds,
tax-exempt entities, foundations/endowments, insurance
companies, and investment and financial advisors. The
marketing effort to these institutional clients is headed
by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships
with more than 1,500 banks and trust organizations.
Virtually all of the trust divisions of the top 100 bank
holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed
by Mark R. Gensheimer, Executive Vice President, Bank
Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major
brokerage firms nationwide-including 200 New York Stock Exchange
firms-supported by more wholesalers than any other mutual fund
distributor. The marketing effort to these firms is headed by James F.
Getz, President, Broker/Dealer Division.
*source: Investment Company Institute
FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended February 28, 1995,
are incorporated herein by reference to the Annual Report of the Fund
dated February 28, 1995 (File Nos. 33-13388 and 811-5114). A copy of
this report may be obtained without charge by contacting the Fund.
APPENDIX
DESCRIPTION OF BOND RATINGS
A rating by a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are
general and are not absolute standards of quality or guarantees as to
the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of fixed income
securities in which the Fund invests should be continuously reviewed and
that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a recommendation to
purchase, sell, or hold a security, because it does not take into
account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating
is evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed, suspended,
or withdrawn as a result of changes in or unavailability of such
information, or for other reasons.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
BAA-Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
STANDARD AND POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA-Debt rated "AAA" has the highest rating assigned by Standard &
Poor's Ratings Group. Capacity to pay interest and repay principal is
extremely strong.
AA-Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effect
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1-Issuers rated Prime-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1-This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
531545101
531545309
531545200
G01154-02 (5/95)