FEDERATED UTILITY FUND INC, N-30D, 1998-04-23

FEDERATED UTILITY FUND INC
N-30D, 1998-04-23

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President's Message
- --------------------------------------------------------------------------------

[PHOTO APPEARS HERE]

Dear Fellow Shareholder:

This is the 10th anniversary of Federated Utility Fund, Inc., and I am pleased
to present its annual report.

Utility stocks continue to be the most widely held securities by individuals and
institutional investors alike. Utility stocks are purchased today for the same
reasons as 10 years ago--generous current income, downside protection, and yes,
capital appreciation.

At the end of 1988, there were only 13 utility funds and their assets totaled $4
billion. Today, investors seeking income and downside protection have entrusted
more than $22 billion in more than 100 utility funds--both domestic and
international, according to Lipper Analytical Services, Inc. These utility funds
have attracted assets from conservative investors who recognize the vital nature
of utilities' products and services.

Over the decades, gas, electrics, and water have rotated in and out of
investors' spotlight. Today, the stocks of telecommunication corporations are
popular with many investors worldwide.

The utility sector includes hundreds of companies facing deregulation and fierce
competition amid ever-increasing demands for their products and services, both
domestic and international. Never before have so many people worldwide sought a
higher standard of living, a standard based on the availability of light, heat,
water and telecommunications.

Alexander Graham Bell could never have imagined his invention's myriad of uses--
not just telephone calls, but also other data transmissions such as the daily
processing of credit card purchases. Nor could he have imagined the millions and
millions of cellular phones in use today.

Furthermore, natural gas, which used to be burned off as a waste product when
drilling for oil, is today used in homes, factories, power plants, and even as a
clean-burning fuel for buses and automobiles.

Recently, many emerging and developed countries have privatized their utility
companies, spurring stock prices on exchanges around the world. In fact,
Federated Utility Fund, Inc. shareholders have indirectly owned utility stocks
in Italy, Argentina, Brazil and the United Kingdom.*

These facts bode well for the investor in domestic and international utility
stocks. Since 1988, utility stocks have not moved in lock-step with either the
Dow Jones Industrial Average or the Standard & Poor's ("S&P") 500 Index.**
However, the performance of Federated Utility Fund, Inc., following the upward
trend of the market, has been good+--it has performed competitively against its
benchmark, the S&P Utility Index, over the year ended February 28, 1998.**

For more information on these points, please review the fund's enclosed
performance records, as well as the fund's largest holdings--all recognizable
corporations providing their customers with the essentials for comfortable and
enjoyable living.

In the following Investment Review, portfolio managers Steven J. Lehman, Vice
President of Passport Research, Ltd. and Linda A. Duessel, Vice President of
Passport Research, Ltd. explain how they have managed the fund and give their
outlook for the utility industry.

As always, we welcome your comments.

Best regards,

/s/ Richard B. Fisher

Richard B. Fisher
President
April 15, 1998

* Foreign investing involves special risks including currency risk, increased
volatility of foreign securities, and differences in auditing and other
financial standards.

** The S&P 500 Index is comprised of common stocks in industry, transportation,
and financial and public utility companies. The S&P Utility Index is
comprised of electric and natural gas utilities that track daily changes in
the price of stocks. These indices are unmanaged, and investments cannot be
made in an index.

+ Past performance is not indicative of future results.

Investment Review

[PHOTO APPEARS HERE]
Steven J. Lehman
Vice President
Passport Research, Ltd.

[PHOTO APPEARS HERE]
Linda A. Duessel
Vice President
Passport Research, Ltd.

Today, in the utility environment of deregulation and fierce competition, what
factors do you seek in selecting utility stocks for your portfolio?

We look for: 1) Astute managers who anticipate change and reinvest their capital
to gain a competitive advantage; 2) managers whose compensation is tied to
company's profitability or to the share price; 3) stocks that are cheap, based
on cash flows, book value, revenues, and dividend yields and where a positive
change may occur at the company; and 4) companies with growing service
territories or strategically located assets as industry consolidation occurs.

For the past 10 years, Federated Utility Fund, Inc. has always had a portion of
its assets invested away from utility stocks to reduce the interest rate risk
associated with utility stocks. With the current lower interest rate
expectations, what is your strategy to enhance and/or protect the fund's share
value?

Other sectors of the market seem unattractive compared to utilities after the
recent rise in share prices. Electric and gas utilities seem particularly
attractive, and our forecast of lower interest rates and slower economic growth
is conducive to good utility stock performance. A broad market decline poses
more risk to investors, in our opinion, than the potential impact of rising
interest rates on utility stock prices.

What is your outlook for international utilities?

Prospects for rapid growth in Asia and Latin America have diminished since last
fall, but the long-term demand for power and telecommunications services should
still be attractive compared to the developed countries. European companies are
just beginning the "restructuring" process that has been so important to profit
growth in the U.S. International utilities this year, however, have had a sharp
rise in share prices. We intend to increase our exposure over the longer term,
but are not attracted by current valuations.

Where do you seek the best yields: gas, electrics, telecommunications, water?

Electrics have the highest dividend yields of nearly 5%, and they seem the
cheapest relative to the broad market as shown by the S&P 500 Index. The
transition to competition, while bumpy, is progressing better than many had
expected, and the recovery of "stranded costs" will provide large amounts of
cash, some of which will be used for corporate share repurchases. Gas companies
have excellent prospects, partly because of their takeover appeal as the
electric and gas sectors converge. Telecommunications stocks have risen sharply
because of strong demand for their services. As a result, their dividend yields
have fallen, but they still are higher that those of the overall market. We are
emphasizing electric and gas companies because of their attractive valuations
and better prospects. Water stocks have risen sharply because of takeover
speculation, and their small size makes it difficult for a large fund to
participate.

Why do you think utility stocks are a good, sound investment today?

Utility stocks offer exceptionally good value based on dividend yields, cash
flows, book values, revenues, and earnings. Fundamental business prospects seem
better than they have in years, while prospects for other sectors are slowing.
We expect earnings growth for this sector to exceed that of the S&P 500 Index
this year for the first time in years. Finally, utilities are a defensive sector
with an almost unprecedented dividend yield advantage relative to the broad
market that is in the late state of the strongest bull market ever.

What are your concerns about electrics, gas, telecommunications and water
companies in the future?

The electric utility business could decline as "micro generation" of power
advances and improvements in gas turbines make it feasible for an apartment
building, for example, to have its own power generator. Natural gas prospects
seem excellent, though a breakthrough in an alternative fuel source, such as
fuel cells, could change that. Telecommunications companies face fierce
competition and rapid technological change, similar to that of technology
companies. This sector has become more unpredictable and volatile.

Could you describe this fund as a single utility, and what would be its
characteristics?

Solid prospective returns, particularly in a challenging environment, with
relatively low risk. Moderate growth, good income, and very low risk.

How did Federated Utility Fund, Inc. perform compared to the overall market?

For the fiscal year ended February 28, 1998, Federated Utility Fund, Inc. Class
A Shares returned 23.05% based on net asset value,* compared to the return of
24.25% for the S&P Utility Index and 40.90% for the S&P Communications Index.**
With total returns of 22.10%, 22.03% and 23.09% based on net asset value, the
fund's Class B, C and F Shares also were competitive with both indices. Our
foreign utility holdings generally did not perform as well as the domestic
utility indexes.

How were the fund's assets allocated on February 28, 1998?

The fund's assets were allocated as follows:

<TABLE>
<CAPTION>
1998 1997
Percentage Number Percentage Number
Sector of portfolio of issues of portfolio of issues
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electrics 44% 31 33% 16
Non-Utility 12% 16 24% 25
Telecommunications 16% 10 20% 9
Natural Gas 9% 8 10% 8
Foreign Utilities 2% 2 10% 10
</TABLE>

What were the top five holdings of Federated Utility Fund, Inc. as of
February 28, 1998?

Our top holdings were:

<TABLE>
<CAPTION>
Percentage
Company Sector of Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
El Paso Natural Gas Gas Transmission 3.2%
Sprint Corp. Telecommunications 3.0%
Consolidated Natural Gas Natural Gas 2.8%
Texas Utilities Co. Electric 2.7%
MCN Corp. Natural Gas 2.6%
</TABLE>

* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Total returns for the period based on offering price for Class
A, B, C and F Shares were 16.31%, 15.77%, 20.90% and 20.77%, respectively.

** The S&P Utility Index is an unmanaged index comprising electric and natural
gas utilities that track daily changes in the price of stocks. The S&P
Communications Index is an unmanaged index comprising telephone and other
communications-oriented utilities that track daily changes in the price of
stocks. These indices are unmanaged, and investments cannot be made in an
index.

Two Ways You May Seek to Invest for Success in
Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Initial Investment:

If you had made an initial investment of $10,000 in the Class A Shares of
Federated Utility Fund, Inc. on 5/27/88, reinvested your dividends and capital
gains, and did not redeem any shares, your account would be worth $36,197 on
2/28/98. You would have earned a 14.09%* average annual total return for the 10-
year investment life span.

One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.

As of 3/31/98, the Class A Shares' average annual 1-year, 5-year, and since
inception (5/27/88) total returns were 27.33%, 11.83%, and 13.98%, respectively.
Class B Shares' average annual 1-year and since inception (9/28/94) total
returns were 27.46% and 17.67%, respectively. Class C Shares' average annual 1-
year and since inception (4/27/93) total returns were 32.59% and 12.64%,
respectively. Class F Shares' average annual 1-year and since inception (6/1/96)
total returns were 32.41% and 22.68%, respectively.**

"Graphic representation "A" omitted. See Appendix."

* Total return represents the change in the value of an investment in Class A
Shares after reinvesting all income and capital gains, and takes into account
the 5.50% sales charge applicable to an initial investment in Class A Shares.

Data quoted represents past performance and does not guarantee future
results. Investment return and principal value will fluctuate so an
investor's shares, when redeemed, may be worth more or less than their
original cost.

** The total return stated takes into account the 5.50% sales charge for Class A
Shares, the 5.50% contingent deferred sales charge for Class B Shares, the
1.00% contingent deferred sales charge for Class C Shares and the 1.00% sales
charge and contingent deferred sales charge for Class F Shares.

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

One Step at a Time:

$1,000 invested each year for 10 years (reinvesting all dividends and capital
gains) grew to $20,329.

With this approach, the key is consistency.
-----------

If you had started investing $1,000 annually in the Class A Shares of Federated
Utility Fund, Inc. on 5/27/88, reinvested your dividends and capital gains, and
did not redeem any shares, you would have invested only $10,000, but your
account would have reached a total value of $20,329* by 2/28/98. You would have
earned an average annual total return of 13.12%.

A practical investment plan helps you pursue long-term performance from utility
securities. Through systematic investing, you buy shares on a regular basis and
reinvest all earnings. This investment plan works for you even if you invest
only $1,000 annually. You can take it one step at a time. Put time, money, and
compounding to work.

"Graphic representation "B" omitted. See Appendix."

* This chart assumes that the subsequent annual investments are made on the
last day of each anniversary month. No method of investing can guarantee a
profit or protect against loss in down markets. However, by investing
regularly over time and buying shares at various prices, investors can
purchase more shares at lower prices. All accumulated shares have the
ability to pay income to the investor.

Because such a plan involves continuous investment, regardless of changing price
levels, the investor should consider whether or not to continue purchases
through periods of low price levels.

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Dividends Taken in Cash:

If you had made an initial investment of $10,000 in Class A Shares of Federated
Utility Fund, Inc. on 5/27/88, and received dividends as cash and reinvested
capital gains, your account would be worth $21,080 on 2/28/98. You would have
earned a 14.13%* average annual total return for the 10-year investment life
span.

One key to investing wisely is to reinvest all distributions in fund shares.
This increases the number of shares on which you can earn future dividends, and
you gain the benefit of compounding.

"Graphic representation "C" omitted. See Appendix."

* Total return represents the change in the value of an investment in Class A
Shares after receiving all dividends in cash and reinvesting capital gains,
and takes into account the 5.50% sales charge applicable to an initial
investment in Class A Shares.

Data quoted represents past performance and does not guarantee future results.
Investment return and principal value will fluctuate so an investor's shares,
when redeemed, may be worth more or less than their original cost.

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Systematic Investing Over Time:

If you had made an initial investment of $5,000 in the Class A Shares of
Federated Utility Fund, Inc. on 5/27/88 with subsequent monthly investments of
$500 with all dividends and capital gains reinvested, your account would be
worth $136,373* on 2/28/98. You would have earned 14.07% average annual total
return for the 10-year investment life span.

"Graphic representation "D" omitted. See Appendix."

Because such a plan involves continuous investment, regardless of changing price
levels, the investor should consider whether or not to continue purchases
through periods of low price levels.

Federated Utility Fund, Inc.
(Class A Shares)
- --------------------------------------------------------------------------------

Growth of $10,000 Invested in Federated Utility Fund, Inc. (Class A Shares)

The graph below illustrates the hypothetical investment of $10,000* in the
Federated Utility Fund, Inc. (Class A Shares) (the "Fund") from May 27, 1988
(start of performance) to February 28, 1998 compared to the Standard & Poor's
500 Index (S&P500), the Standard & Poor's Utility Index (S&PUI) and the Dow
Jones Utility Average (DJUA)+.

"Graphic representation "E" omitted. See Appendix."

Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate, so when shares are redeemed, they may be
worth more or less than their original cost. Mutual funds are not obligations of
or guaranteed by any bank and are not federally insured.

* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 4.50% (The $10,000 investment minus $450 sales
charge = $9,550). As of October 1, 1994, the maximum sales charge is 5.50%.
The Fund's performance assumes the reinvestment of all dividends and
distributions.

** Total return quoted reflects all applicable current sales charges.

+ The S&P500, the S&PUI and the DJUA are not adjusted to reflect sales charges,
expenses, or other fees that the SEC requires to be reflected in the Fund's
performance. The S&P500, the S&PUI and the DJUA have been adjusted to reflect
reinvestment of dividends on securities in the indices and the average. The
indices are unmanaged.

Federated Utility Fund, Inc.
(Class B Shares)
- --------------------------------------------------------------------------------

Growth of $10,000 Invested in Federated Utility Fund, Inc. (Class B Shares)

The graph below illustrates the hypothetical investment of $10,000* in the
Federated Utility Fund, Inc. (Class B Shares) (the "Fund") from September 28,
1994 (start of performance) to February 28, 1998 compared to the Standard &
Poor's 500 Index (S&P500), the Standard & Poor's Utility Index (S&PUI) and the
Dow Jones Utility Average (DJUA)+.

"Graphic representation "F" omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 3.00% contingent deferred sales charge on any
redemptions less than 4 years from the purchase date. The maximum contingent
deferred sales charge is 5.50% on any redemption less than 1year from the
purchase date. The Fund's performance assumes the reinvestment of all
dividends and distributions.

** Total return quoted reflects all applicable contingent deferred sales
charges.

Federated Utility Fund, Inc.
(Class C Shares)
- --------------------------------------------------------------------------------

Growth of $10,000 Invested in Federated Utility Fund, Inc. (Class C Shares)

The graph below illustrates the hypothetical investment of $10,000* in the
Federated Utility Fund, Inc. (Class C Shares) (the "Fund") from April 27, 1993
(start of performance) to February 28, 1998 compared to the Standard & Poor's
500 Index (S&P500), the Standard & Poor's Utility Index (S&PUI) and the Dow
Jones Utility Average (DJUA)+.

"Graphic representation "G" omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 1.00% contingent deferred sales charge on any
redemptions less than 1 year from purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions.

** Total return quoted reflects all applicable contingent deferred sales
charges.

Federated Utility Fund, Inc.
(Class F Shares)
- --------------------------------------------------------------------------------

Growth of $10,000 Invested in Federated Utility Fund, Inc. (Class F Shares)

The graph below illustrates the hypothetical investment of $10,000* in the
Federated Utility Fund, Inc. (Class F Shares) (the "Fund") from June 1, 1996
(start of performance) to February 28, 1998 compared to the Standard & Poor's
500 Index (S&P500), the Standard & Poor's Utility Index (S&PUI) and the Dow
Jones Utility Average (DJUA)+.

"Graphic representation "H" omitted. See Appendix."

* Represents a hypothetical investment of $10,000 in the Fund after deducting
the maximum sales charge of 1.00% ($10,000 investment minus $100 sales charge
= $9,900). The ending value of the Fund reflects a contingent deferred sales
charge of 1.00% on any redemption less than 4 years from the purchase date.
The Fund's performance assumes the reinvestment of all dividends and
distributions.
** Total return quoted reflects all applicable sales charges and contingent
deferred sales charges.

Federated Utility Fund, Inc.
Portfolio of Investments
- --------------------------------------------------------------------------------
February 28, 1998

Shares Value
Common Stocks--88.9%
Basic Industry--1.2%
990,300 Barrick Gold Corp. $ 19,125,169
Electric Utilities: US
Central--9.5%
540,600 Ameren Corp. 20,779,312
880,100 CMS Energy Corp. 38,944,425
588,400 Cinergy Corp. 20,483,675
1,190,950 DPL, Inc. 21,660,403
167,200 Illinova Corp. 4,639,800
1,350,200 NIPSCO Industries, Inc. 34,683,262
236,800 Utilicorp United, Inc. 8,524,800
Total 149,715,677
Electric Utilities: US
East--7.6%
90,400 Boston Edison Co. 3,508,650
770,900 DQE, Inc. 25,584,243
751,400 New England Electric System 31,652,725
1,534,700 Peco Energy Co. 30,310,325
634,700 Potomac Electric Power Co. 15,946,837
428,200 Public Service Enterprises
Group, Inc. 13,809,450
Total 120,812,230
Electric Utilities: US
South--17.8%
314,100 Central & SouthWest Corp. 8,421,806
476,000 Dominion Resources, Inc. 18,980,500
559,135 Duke Energy Corp. 31,066,938
1,281,600 Entergy Corp. 37,086,300
657,600 FPL Group, Inc. 38,181,900
422,800 Florida Progress Corp. 16,357,075
592,100 Houston Industries, Inc. 15,320,587
334,700 LG&E Energy Corp. 8,011,881
584,900 SCANA Corp. 16,815,875
1,046,100 Southern Co. 25,825,594
898,000 TECO Energy, Inc. 23,628,625
1,044,900 Texas Utilities Co. 42,253,144
Total 281,950,225
Electric Utilities: US
West--9.5%
727,300 Montana Power Co. 23,273,600
401,000 New Century Energies, Inc. 18,696,625

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Shares Value
Common Stocks--continued
Electric Utilities: US
West--continued
773,700 P G & E Corp. $ 23,356,069
1,492,900 Pacificorp 36,109,519
651,800 Pinnacle West Capital Corp. 26,601,587
794,400 Puget Sound Energy, Inc. 21,548,100
Total 149,585,500
Energy Minerals--2.3%
96,100 Atlantic Richfield Co. 7,471,775
439,800 Burlington Resources, Inc. 19,681,050
270,800 Ultramar Diamond Shamrock Corp. 9,664,175
Total 36,817,000
Finance--7.3%
635,100 Associated Estates Realty Corp. 13,019,550
472,500 Avalon Properties, Inc. 13,584,375
102,200 BRE Properties, Inc., Class A 2,772,175
472,300 Boston Properties, Inc. 16,058,200
362,500 Duke Realty Investments, Inc. 8,314,844
290,200 Equity Residential Properties Trust 13,911,462
450,600 Liberty Property Trust 11,969,062
582,482 Meditrust Corp. 17,911,322
165,800 Merry Land and Investment Co. 3,844,488
599,300 Security Capital Pacific Trust 13,746,444
Total 115,131,922
Foreign Utilities--1.0%
29,800 (a)Viag AG 16,132,528
Major U.S. Telecommunications--15.9%
190,500 AT&T Corp. 11,596,688
370,200 Ameritech Corp. 15,432,713
359,000 Bell Atlantic Corp. 32,220,250
355,900 BellSouth Corp. 21,709,900
708,900 GTE Corp. 38,369,213
164,000 MCI Communications Corp. 7,841,250
489,600 SBC Communications, Inc. 37,026,000
712,900 Sprint Corp. 47,051,400
763,300 U.S. West, Inc. 39,739,306
Total 250,986,720

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------
Shares or
Principal
Amount Value
Common Stocks--continued
Natural Gas Distribution--9.0%
136,600 AGL Resources, Inc. $ 2,774,688
762,100 Consolidated Natural Gas Co. 43,820,750
335,500 Keyspan Energy Corp. 11,931,219
1,123,500 MCN Corp. 41,358,844
254,100 National Fuel Gas Co. 11,847,413
743,300 Pacific Enterprises 26,991,081
124,400 UGI Corp. 3,560,950
Total 142,284,945
Oil/Gas Transmission--7.0%
118,200 Columbia Gas System, Inc. 9,020,138
758,400 El Paso Natural Gas 50,338,800
673,576 Enron Corp. 31,658,072
482,000 NGC Corp. 7,471,000
292,400 Sonat, Inc. 12,609,750
Total 111,097,760
Other Telephone/Communications--0.3%
143,700 Cincinnati Bell, Inc. 4,598,400
Producer Manufacturing--0.5%
362,800 Federal Signal Corp. 8,525,800
Total Common Stocks
(identified cost $1,095,914,382) 1,406,763,876
Convertible Corporate Bonds--1.0%
Telecommunications--1.0%
$15,495,000 (b)Bell Atlantic Financial Services,
Inc., Conv. Bond,
(New Zealand Telecom) 5.75%, 4/1/2003
(identified cost $15,758,882) 16,017,956
Convertible Preferred Stocks--2.8%
Finance--0.7%
184,500 Cincinnati Bell, DECS, $3.48 11,392,875
Natural Gas Distribution--0.4%
105,500 MCN Corp., PRIDES, $8.00 6,250,875
Oil/Gas Transmission--1.7%
177,700 (a)Williams Cos., Inc. (The), Conv.
Pfd., $3.50 27,334,702
Total Convertible Preferred Stocks
(identified cost $25,853,215) 44,978,452

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Principal
Amount Value
(c) Repurchase Agreements--7.7%
$122,530,000 BT Securities Corp., 5.64%, dated 2/27/1998,
due 3/2/1998 (at amortized cost) $ 122,530,000
Total Investments (identified cost
$1,260,056,479)(d) $1,590,290,284

(a) Non-income producing security.
(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At February 28, 1998, these securities
amounted to $16,017,956 which represents 1.0% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.
(d) The cost of investments for federal tax purposes amounts $1,260,262,699. The
net unrealized appreciation of investments on a federal tax basis amounts to
$330,027,585 which is comprised of $334,914,445 appreciation and $4,886,860
depreciation at February 28, 1998.

Note: The categories of investments are shown as a percentage of net assets
($1,582,760,328) at February 28, 1998.

The following acronyms are used throughout this portfolio:

DECS --Dividend Enhanced Convertible Stock
PRIDES --Preferred Redeemable Increased Dividend Equity Securities

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
February 28, 1998

<TABLE>
<S> <C> <C>
Assets:
Total investments in securities, at value (identified cost $1,260,056,479, and tax cost $1,260,262,699) $1,590,290,284
Cash 60,012
Income receivable 3,927,993
Receivable for investments sold 17,294,257
Receivable for shares sold 5,272,158
Total assets 1,616,844,704
Liabilities:
Payable for investments purchased $ 30,627,743
Payable for shares redeemed 1,864,968
Income distribution payable 893,149
Payable for taxes withheld 12,990
Accrued expenses 685,526
Total liabilities 34,084,376
Net Assets for 112,488,131 shares outstanding $1,582,760,328
Net Assets Consist of:
Paid in capital $1,161,950,169 Net unrealized appreciation of investments and
translation of assets and liabilities in foreign currency 330,233,805
Accumulated net realized gain on investments and foreign currency transactions
86,283,209 Undistributed net investment income 4,293,145
Total Net Assets $1,582,760,328
Net Asset Value, Offering Price and Redemption Proceeds Per Share:
Class A Shares:
Net Asset Value Per Share ($778,059,339 / 55,289,668 shares outstanding) $ 14.07
Offering Price Per Share (100/94.50 of $14.07)* $ 14.89
Redemption Proceeds Per Share $ 14.07
Class B Shares:
Net Asset Value Per Share ($121,549,173 / 8,632,979 shares outstanding) $ 14.08
Offering Price Per Share $ 14.08
Redemption Proceeds Per Share (94.50/100 of $14.08)** $ 13.31
Class C Shares:
Net Asset Value Per Share ($58,010,243 / 4,122,529 shares outstanding) $ 14.07
Offering Price Per Share $ 14.07
Redemption Proceeds Per Share (99.00/100 of $14.07)** $ 13.93
Class F Shares:
Net Asset Value Per Share ($625,141,573 / 44,442,955 shares outstanding) $ 14.07
Offering Price Per Share (100/99.00 of $14.07)* $ 14.21
Redemption Proceeds Per Share (99.00/100 of $14.07)** $ 13.93
</TABLE>
* See "Investing in the Fund" in the Prospectuses.
** See "Contingent Deferred Sales Charge" in the Prospectuses.

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended February 28, 1998
<TABLE>
<S> <C> <C> <C>
Investment Income:
Dividends (net of foreign taxes withheld of $533,606) $ 57,992,228
Interest 5,257,066
Total income 63,249,294
Expenses:
Investment advisory fee $11,382,447
Administrative personnel and services fee 1,145,447
Custodian fees 151,927
Transfer and dividend disbursing agent fees and expenses 1,871,833
Directors'/Trustees' fees 19,592
Auditing fees 18,101
Legal fees 15,464
Portfolio accounting fees 188,823
Distribution services fee--Class B Shares 790,560
Distribution services fee--Class C Shares 413,098
Shareholder services fee--Class A Shares 1,849,198
Shareholder services fee--Class B Shares 263,520
Shareholder services fee--Class C Shares 137,699
Shareholder services fee--Class F Shares 1,543,803
Printing and postage 302,543
Insurance premiums 12,111
Taxes 216,112
Miscellaneous 37,697
Total expenses 20,359,975
Waivers and reimbursements--
Waiver of investment advisory fee $(1,543,801)
Waiver of shareholder services fee--Class A Shares (44,381)
Waiver of shareholder services fee--Class F Shares (185,256)
Total waivers (1,773,438)
Net expenses 18,586,537
Net investment income 44,662,757
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency:
Net realized gain on investments and foreign currency transactions 232,780,131
Net change in unrealized appreciation of investments and translation of
assets and liabilities in foreign currency 34,989,912
Net realized and unrealized gain on investments and foreign currency 267,770,043
Change in net assets resulting from operations $312,432,800
</TABLE>

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended February 28,
1998 1997
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations--
Net investment income $ 44,662,757 $ 50,788,136
Net realized gain on investments and foreign currency transactions
($233,067,415 and $77,187,780, respectively, as computed for
federal tax purposes) 232,780,131 78,584,029
Net change in unrealized appreciation of investments and translation
of assets and liabilities in foreign currency 34,989,912 76,927,979
Change in net assets resulting from operations 312,432,800 206,300,144
Net equalization credits (debits)-- (129,486) (349,136)
Distributions to Shareholders--
Distributions from net investment income
Class A Shares (21,703,957) (30,916,720)
Class B Shares (2,300,377) (2,917,172)
Class C Shares (1,194,406) (1,924,467)
Class F Shares (18,218,120) (19,257,898)
Distributions from net realized gains on investments and
foreign currency transactions
Class A Shares (88,374,637) (43,588,717)
Class B Shares (12,860,900) (5,277,792)
Class C Shares (6,491,544) (3,542,933)
Class F Shares (72,181,134) (18,303,689)
Change in net assets resulting from distributions to shareholders (223,325,075) (125,729,388)
Share Transactions--
Proceeds from sale of shares 211,193,471 115,531,852
Proceeds from shares issued in connection with the acquisition -- 730,686,278(a)
Net asset value of shares issued to shareholders in payment of
distributions declared 184,280,449 101,834,448
Cost of shares redeemed (483,421,097) (415,745,469)
Change in net assets resulting from share transactions (87,947,177) 532,307,109
Change in net assets 1,031,062 612,528,729
Net Assets:
Beginning of period 1,581,729,266 969,200,537
End of period (including undistributed net investment income of
$4,293,145 and $3,263,663, respectively) $1,582,760,328 $1,581,729,266
</TABLE>
(a) Includes $93,019,447 of unrealized appreciation.

Federated Utility Fund, Inc.
Financial Highlights--Class A Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended February 28 or 29,
1998 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 13.27 $ 12.79 $ 10.98 $ 12.24 $ 12.29 $ 11.03 $ 10.13
Income from investment
operations
Net investment income 0.42 0.52 0.48 0.55 0.60 0.58 0.68
Net realized and
unrealized gain (loss) on
investments and foreign
currency 2.52 1.22 1.82 (0.69) -- 1.44 0.92
Total from investment
operations 2.94 1.74 2.30 (0.14) 0.60 2.02 1.60
Less distributions
Distributions from net
investment income (0.41) (0.52) (0.48) (0.66) (0.61) (0.66) (0.64)
Distributions from net
realized gain on
investments and foreign
currency transactions (1.73) (0.74) -- (0.12) (0.04) (0.10) (0.06)
Distributions in excess
of net investment
income (a) -- -- (0.01) -- -- -- --
Tax return of capital
distribution -- -- -- (0.34) -- -- --
Total distributions (2.14) (1.26) (0.49) (1.12) (0.65) (0.76) (0.70)
Net asset value,
end of period $ 14.07 $ 13.27 $ 12.79 $ 10.98 $ 12.24 $ 12.29 $ 11.03
Total return (b) 23.05% 14.34% 21.47% (0.98%) 4.93% 19.26% 16.48%
Ratios to average net
assets
Expenses 1.14% 1.15% 1.14% 1.10% 1.12% 1.04% 1.05%
Net investment income 3.01% 3.52% 4.09% 4.95% 4.81% 5.98% 6.31%
Expense waiver/
reimbursement (c) 0.11% 0.12% 0.15% 0.21% 0.17% 0.01% 0.19%
Supplemental data
Net assets, end of
period (000 omitted) $778,059 $759,732 $816,687 $742,274 $877,513 $739,511 $375,656
Average commission
rate paid (d) $ 0.0411 $ 0.0003 -- -- -- -- --
Portfolio turnover 118% 44% 76% 55% 24% 18% 35%

<CAPTION>
Year Ended February 28 or 29,
1991 1990 1989
<S> <C> <C> <C>
Net asset value,
beginning of period $ 9.82 $ 9.15 $ 9.15
Income from investment
operations
Net investment income 0.71 0.71 0.72
Net realized and
unrealized gain (loss) on
investments and foreign
currency 0.43 0.79 (0.02)
Total from investment
operations 1.14 1.50 0.70
Less distributions
Distributions from net
investment income (0.70) (0.76) (0.70)
Distributions from net
realized gain on
investments and foreign
currency transactions (0.13) (0.07) --
Distributions in excess
of net investment
income (a) -- -- --
Tax return of capital
distribution -- -- --
Total distributions (0.83) (0.83) (0.70)
Net asset value,
end of period $ 10.13 $ 9.82 $ 9.15
Total return (b) 12.41% 16.72% 8.00%
Ratios to average net
assets
Expenses 1.02% 1.02% 1.00%
Net investment income 7.41% 7.17% 8.04%
Expense waiver/
reimbursement (c) 0.51% 0.74% 0.40%
Supplemental data
Net assets, end of
period (000 omitted) $ 125,599 $48,050 $ 410,575
Average commission
rate paid (d) -- -- --
Portfolio turnover 45% 37% 34%
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Financial Highlights--Class B Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended February 28 or 29,
1998 1997 1996 1995(a)
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.28 $ 12.77 $ 10.98 $ 10.92
Income from investment operations
Net investment income 0.30 0.44 0.43 0.22
Net realized and unrealized gain (loss)
on investments and foreign currency 2.53 1.21 1.77 (0.04)
Total from investment operations 2.83 1.65 2.20 0.18
Less distributions
Distributions from net investment income (0.30) (0.40) (0.41) (0.08)
Distributions from net realized gain on
investments and foreign currency transactions (1.73) (0.74) -- --
Tax return of capital distribution -- -- -- (0.04)
Total distributions (2.03) (1.14) (0.41) (0.12)
Net asset value, end of period $ 14.08 $ 13.28 $ 12.77 $ 10.98
Total return (b) 22.10% 13.60% 20.45% 2.16%
Ratios to average net assets
Expenses 1.90% 1.90% 1.90% 1.87%*
Net investment income 2.25% 2.81% 3.19% 4.53%*
Expense waiver/reimbursement (c) 0.10% 0.12% 0.14% 0.25%*
Supplemental data
Net assets, end of period (000 omitted) $121,549 $101,619 $85,650 $18,780
Average commission rate paid (d) $ 0.0411 $ 0.0003 -- --
Portfolio turnover 118% 44% 76% 55%
</TABLE>
* Computed on an annualized basis.
(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 charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Financial Highlights--Class C Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended February 28 or 29,
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.28 $ 12.77 $ 10.98 $ 12.23 $ 12.27
Income from investment operations
Net investment income 0.31 0.42 0.39 0.42 0.48
Net realized and unrealized gain (loss)
on investments and foreign currency 2.51 1.23 1.80 (0.64) (0.07)
Total from investment operations 2.82 1.65 2.19 (0.22) 0.41
Less distributions
Distributions from net investment income (0.30) (0.40) (0.39) (0.60) (0.41)
Distributions from net realized gain on investments
and foreign currency transactions (1.73) (0.74) -- (0.13) (0.04)
Distributions in excess of net investment income (b) -- -- (0.01) -- --
Tax return of capital distribution -- -- -- (0.30) --
Total distributions (2.03) (1.14) (0.40) (1.03) (0.45)
Net asset value, end of period $ 14.07 $ 13.28 $ 12.77 $ 10.98 $ 12.23
Total return (c) 23.03% 13.58% 20.43% (1.66%) 3.28%
Ratios to average net assets
Expenses 1.90% 1.90% 1.87% 1.86% 1.87%*
Net investment income 2.25% 2.77% 3.35% 4.19% 4.02%*
Expense waiver/reimbursement (d) 0.10% 0.12% 0.17% 0.21% 0.17%*
Supplemental data
Net assets, end of period (000 omitted) $58,010 $58,196 $66,864 $56,800 $64,409
Average commission rate paid (e) $0.0411 $0.0003 -- -- --
Portfolio turnover 118% 44% 76% 55% 24%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from April 30, 1993 (date of initial
public investment) to February 28, 1994.
(b) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(e) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Financial Highlights--Class F Shares
- --------------------------------------------------------------------------------
(For a share outstanding throughout each period)

<TABLE>
<CAPTION>
Year Ended Period ended
February 28, February 28,
1998 1997(a)
<S> <C> <C>
Net asset value, beginning of period $ 13.27 $ 12.37
Income from investment operations
Net investment income 0.43 0.42
Net realized and unrealized gain (loss) on investments and foreign currency 2.51 1.20
Total from investment operations 2.94 1.62
Less distributions
Distributions from net investment income (0.41) (0.36)
Distributions from net realized gain on investments and foreign
currency transactions (1.73) (0.36)
Total distributions (2.14) (0.72)
Net asset value, end of period $ 14.07 $ 13.27
Total return (b) 23.09% 13.39%
Ratios to average net assets
Expenses 1.12% 1.12%*
Net investment income 3.03% 3.79%*
Expense waiver/reimbursement (c) 0.13% 0.15%*
Supplemental data
Net assets, end of period (000 omitted) $625,142 $662,182
Average commission rate paid (d) $ 0.0411 $ 0.0003
Portfolio turnover 118% 44%
</TABLE>

* Computed on an annualized basis.
(a) Reflects operations for the period from June 1, 1996 (date of initial public
investment) to February 28, 1997.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(See Notes which are an integral part of the Financial Statements)

Federated Utility Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
February 28, 1998

1. Organization

Federated Utility Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund offers four classes of shares: Class A
Shares, Class B Shares, Class C Shares and Class F Shares. The primary
investment objective of the Fund is current income and long-term growth of
income.

On June 1, 1996, the Fund acquired all the net assets of the Fortress Utility
Fund, Inc. ("Acquired Fund") pursuant to a plan of reorganization approved by
the Acquired Fund's shareholders. The acquisition was accomplished by a tax-free
exchange of 59,078,573 shares of the Fund (valued at $730,686,278) for the
52,727,413 shares of the Acquired Fund outstanding on June 1, 1996. The Acquired
Fund's net assets of $730,686,278 which consisted of $637,666,831 of Paid in
Capital and $93,019,447 of Unrealized Appreciation, at that date were combined
with those of the Fund. The aggregate net assets of the Fund and the Acquired
Fund immediately before the acquisition were $925,114,464 and $730,686,278,
respectively.

2. Significant Accounting Policies

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

Investment Valuations--Listed corporate bonds, other fixed income securities,
unlisted securities and private placement securities are generally valued at
the mean of the latest bid and asked price as furnished by an independent
pricing service. Listed equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are valued
at the prices provided by an independent pricing service. However, short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be valued at amortized cost, which approximates fair market
value. The Fund's restricted securities are valued at the price provided by
dealers in the secondary market or, if no market prices are available, at the
fair value as determined by the Fund's pricing committee.

Repurchase Agreements--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.

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 to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral securities.

Investment Income, Expenses and Distributions--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions and equalization The following
reclassifications have been made to the financial statements.

Increase (Decrease)
Accumulated Undistributed Net
Paid-In Capital Net Realized Gain Investment Income
$(129,486) $216,415 $(86,929)

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

Federal Taxes--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.

Withholding taxes on foreign interest and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax
rules and rates.

Equalization--The Fund follows the accounting practice known as equalization.
With equalization, a portion of the proceeds from sales and costs of
redemptions of fund shares (equivalent, on a per share basis, to the amount
of undistributed net investment income on the date of the transaction) is
credited or charged to undistributed net investment income. As a result,
undistributed net investment income per share is unaffected by sales or
redemptions of fund shares.

When-Issued and Delayed Delivery Transactions--The Fund may engage in when-
issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.

Foreign Exchange Contracts--The Fund may enter into foreign currency
commitments for the delayed delivery of securities or foreign currency
exchange transactions. Purchase contracts are used to acquire exposure to
foreign currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon entering these
transactions from the potential inability of counter-parts to meet the terms
of their commitments and from unanticipated movements in security prices or
foreign exchange rates. The foreign currency transactions are adjusted by the
daily exchange rates of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the settlement
date. At February 28, 1998, the Fund had no outstanding foreign currency
commitments.

Restricted Securities--Restricted securities are securities that may only be
resold upon registration under federal securities laws or in transactions
exempt from such registration. In some cases, the issuer of restricted
securities has agreed to register such securities for resale, at the issuer's
expense either upon demand by the Fund or in connection with another
registered offering of the securities. Many restricted securities may be
resold in the secondary market in transactions exempt from registration. Such
restricted securities may be determined to be liquid under criteria
established by the Board of Directors. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.

Additional information on each restricted security held at February 28, 1998
is as follows:

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Security Acquisition Date Acquisition Cost
Bell Atlantic Financial Services, Inc.,
Conv. Bond, (New Zealand Telecom)
5.75%, 4/1/2003 2/26/98 $15,758,881

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.

Other--Investment transactions are accounted for on the trade date.

3. Capital Stock

At February 28, 1998, par value shares ($0.000 per share) authorized were as
follows:

# of Par Value
Class Capital Stock
Name Authorized
Class A 250,000,000
Class B 250,000,000
Class C 250,000,000
Class F 250,000,000

Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
Year Ended,
February 28, 1998 February 28, 1997
Class A Shares Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 11,139,849 $ 157,664,167 3,938,897 $ 50,196,432
Shares issued to shareholders in
payment of distributions declared 6,883,799 95,222,748 4,955,544 62,992,760
Shares redeemed (19,973,736) (277,807,321) (15,487,709) (196,650,542)
Net change resulting from Class A share transactions (1,950,088) $ (24,920,406) (6,593,268) $ (83,461,350)

<CAPTION>
Year Ended,
February 28, 1998 February 28, 1997
Class B Shares Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 1,894,637 $ 26,364,096 2,075,501 $ 26,214,023
Shares issued to shareholders in
payment of distributions declared 930,693 12,887,739 539,077 6,855,719
Shares redeemed (1,845,279) (25,406,190) (1,666,470) (21,106,138)
Net change resulting from Class B share transactions 980,051 $ 13,845,645 948,108 $ 11,963,604
</TABLE>

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended,
February 28, 1998 February 28, 1997
Class C Shares Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 409,037 $ 5,630,519 530,050 $ 6,672,539
Shares issued to shareholders in
payment of distributions declared 481,773 6,666,429 358,805 4,561,299
Shares redeemed (1,151,464) (15,690,298) (1,739,743) (22,066,913)
Net change resulting from Class C share transactions (260,654) $ (3,393,350) (850,888) $ (10,833,075)

<CAPTION>
Year Ended,
February 28, 1998 February 28, 1997(a)
Class F Shares Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 1,568,259 $ 21,534,689 2,557,611 $ 32,448,858
Shares issued in connection with the acquisition 59,078,573 730,686,278
Shares issued to shareholders in
payment of distributions declared 5,029,031 69,503,533 2,150,921 27,424,670
Shares redeemed (12,056,394) (164,517,288) (13,885,046) (175,921,876)
Net change resulting from Class F share transactions (5,459,104) $ (73,479,066) 49,902,059 $ 614,637,930
Net change resulting from share transactions (6,689,795) $ (87,947,177) 43,406,011 $ 532,307,109
</TABLE>
(a) For the period from June 1, 1996 (date of initial public investment) to
February 28, 1997.

4. Investment Advisory Fee and Other Transactions with Affiliates

Investment Advisory Fee--Passport Research Ltd., the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.75% of the Fund's average daily net assets.

Administrative Fee--Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.

Distribution Services Fee--The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp., the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Corporation's Class B and Class C Shares. The
Plan provides that the Fund may incur distribution expenses according to the
following schedule annually, to compensate Federated Securities Corp.

Percentage of
Average Daily Net
Share Class Assets of Class
Class B Shares 0.75%
Class C Shares 0.75%

Federated Utility Fund, Inc.
- --------------------------------------------------------------------------------

Shareholder Services Fee--Under the terms of a Shareholder Services Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to
0.25% of average daily net assets of the Fund shares for the period. The fee
paid to FSS is used to finance certain services for shareholders and to
maintain shareholder accounts. FSS may voluntarily choose to waive any
portion of its fee. FSS can modify or terminate this voluntary waiver at any
time at its sole discretion.

Transfer and Dividend Disbursing Agent Fees and Expenses--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the
Fund. The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.

Portfolio Accounting Fees--Federated Services Company maintains the Fund's
accounting records for which it receives a fee. The fee is based on the level
of the Fund's average daily net assets for the period, plus out-of-pocket
expenses.

General--Certain of the Officers and Directors of the Corporation are
Officers and Directors or Trustees of the above companies.

5. Investment Transactions

Purchases and sales of investments, excluding short-term securities (and in-kind
contributions), for the period ended February 28, 1998, were as follows:

Purchases $1,304,361,288
Sales $1,621,827,089

Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------------------------

To the Directors and Shareholders of FEDERATED UTILITY FUNDS, INC.:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Utility Fund, Inc. as of February 28,
1998, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and financial highlights for the periods presented therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 28, 1998, by correspondence with the custodian and brokers or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Federated Utility Fund, Inc. at February 28, 1998, and the results of its
operations for the year then ended, changes in its net assets for each of the
two years in the period then ended, and financial highlights for the periods
presented therein, in conformity with generally accepted accounting principles.

ERNST&YOUNG LLP

Pittsburgh, Pennsylvania
April 15, 1998

Directors
- --------------------------------------------------------------------------------
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Richard B. Fisher
Edward L. Flaherty, Jr.
Peter E. Madden
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts

Officers
- --------------------------------------------------------------------------------
John F. Donahue
Chairman

Richard B. Fisher
President

J. Christopher Donahue
Executive Vice President

Edward C. Gonzales
Executive Vice President

John W. McGonigle
Executive Vice President,

Treasurer, and Secretary

Nicholas J. Seitanakis
Assistant Secretary

Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.

This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectuses, which contain facts
concerning its objective and policies, management fees, expenses and other
information.

A. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 5/27/88
to 2/28/98. The "y" axis is measured in increments of $10,000 ranging from $0 to
$50,000 and indicates that the ending value of hypothetical initial investment
of $10,000 in the Fund's Class A Shares, assuming a 5.50% sales charge and the
reinvestment of all capital gains and dividends, would have grown to $36,197 on
2/28/98.

B. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 5/27/88
to 2/28/98. The "y" axis is measured in increments of $3,000 ranging from $0 to
$21,000 and indicates that the ending value of hypothetical yearly investments
of $1,000 in the Fund's Class A Shares, assuming the reinvestment of all capital
gains and dividends, would have grown to $29,329 on 2/28/98.

C. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 5/27/88
to 2/28/98. The "y" axis is measured in increments of $5,000 ranging from $0 to
$30,000 and indicates that the ending value of a hypothetical initial investment
of $10,000 in the Fund's Class A Shares, assuming dividends received as cash and
capital gains reinvested, would have grown to $21,080 on 2/28/98.

D. The graphic presentation here displayed consists of a boxed legend in the
upper left quadrant indicating the components of the corresponding mountain
chart. The color-coded mountain chart is a visual representation of the
narrative text above it. The "x" axis reflects computation periods from 5/27/88
to 2/28/98. The "y" axis is measured in increments of $10,000 ranging from $0 to
$140,000 and indicates that the ending value of a hypothetical initial
investment of $5,000 and subsequent monthly investments of $500 over ten years
in the Fund's Class A Shares would have grown to $136,373 on 2/28/98.

E. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class A
Shares of the Fund based on a 4.50% sales charge is represented by a solid line.
The Standard & Poor's 500 Index ("S&P500") is represented by a broken line, the
Standard & Poor's Utility Index ("S&PUI") is represented by a dotted line, and
the Dow Jones Utility Average ("DJUA") is represented by a broken dotted line.
The line graph is a visual representation of a comparison of change in value of
a $10,000 hypothetical investment in Class A Shares of the Fund and the S&P500,
S&PUI, and the DJUA. The "x" axis reflects computation periods from 5/27/88 to
2/28/98. The "y" axis reflects the cost of the investment. The right margin
reflects the ending value of the hypothetical investment in the Fund's Class A
Shares based on a 4.50% sales charge, as compared to the S&P500, the S&PUI, and
the DJUA; the ending values were $34,564; $52,768; $38,140; and $28,562,
respectively. The legend in the bottom quadrant of the graphic presentation
indicates the Fund's Class A Shares Average Annual Total Return for the
one-year, five-year, and Start of Performance periods ended 2/28/98, which were
16.31%, 10.90%, and 13.42%, respectively.

F. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class B
Shares of the Fund is represented by a solid line. The Standard & Poor's 500
Index ("S&P500") is represented by a broken line, the Standard & Poor's Utility
Index ("S&PUI") is represented by a dotted line, and the Dow Jones Utility
Average ("DJUA") is represented by a broken dotted line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in Class B Shares of the Fund and the S&P500, S&PUI, and
the DJUA. The "x" axis reflects computation periods from 9/28/94 to 2/28/98. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund's Class B Shares, as
compared to the S&P500, the S&PUI, and the DJUA; the ending values were $16,668;
$24,453; $18,108; and $18,098, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Class B Shares Average Annual
Total Return for the one-year and Start of Performance periods ended 2/28/98,
which were 15.77% and 16.09%, respectively.

G. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class C
Shares of the Fund is represented by a solid line. The Standard & Poor's 500
Index ("S&P500") is represented by a broken line, the Standard & Poor's Utility
Index ("S&PUI") is represented by a dotted line, and the Dow Jones Utility
Average ("DJUA") is represented by a broken dotted line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in Class C Shares of the Fund and the S&P500, S&PUI, and
the DJUA. The "x" axis reflects computation periods from 4/27/93 to 2/28/98. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund's Class C Shares, as
compared to the S&P500, the S&PUI, and the DJUA; the ending values were $16,953;
$26,747; $17,614; and $14,968, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Class C Shares Average Annual
Total Return for the one-year and Start of Performance periods ended 2/28/98,
which were 20.90% and 11.51%, respectively.

H. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Class F
Shares of the Fund is represented by a solid line. The Standard & Poor's 500
Index ("S&P500") is represented by a broken line, the Standard & Poor's Utility
Index ("S&PUI") is represented by a dotted line, and the Dow Jones Utility
Average ("DJUA") is represented by a broken dotted line. The line graph is a
visual representation of a comparison of change in value of a $10,000
hypothetical investment in Class F Shares of the Fund and the S&P500, S&PUI, and
the DJUA. The "x" axis reflects computation periods from 6/1/96 to 2/28/98. The
"y" axis reflects the cost of the investment. The right margin reflects the
ending value of the hypothetical investment in the Fund's Class F Shares, as
compared to the S&P500, the S&PUI, and the DJUA; the ending values were $13,699;
$16,206; $13,280; and $14,113, respectively. The legend in the bottom quadrant
of the graphic presentation indicates the Fund's Class F Shares Average Annual
Total Return for the one-year and Start of Performance periods ended 2/28/98,
which were 20.77% and 19.73%, respectively.