FEDERATED UTILITY FUND INC, 497, 1998-05-01

FEDERATED UTILITY FUND INC
497, 1998-05-01

Previous: JACOBS JAY INC, NT 10-K, 1998-05-01

Next: CENTURY BANCORP INC, S-2/A, 1998-05-01

Federated Utility Fund, Inc.

Class A Shares, Class B Shares, Class C Shares

PROSPECTUS

The shares of Federated 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 Class A Shares, Class B Shares, and Class C Shares of the Fund.
Keep this prospectus for future reference.

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, Class C Shares, and Class F Shares dated April 30, 1998,
with the Securities and Exchange Commission ("SEC"). The information contained
in the Statement of Additional Information is incorporated by reference into
this prospectus. You may request a copy of the Statement of Additional
Information, or a paper copy of this prospectus, if you have received it
electronically, free of charge by calling 1-800-341-7400. To obtain other
information or to make inquiries about the Fund, contact your financial
institution. The Statement of Additional Information, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated April 30, 1998

TABLE OF CONTENTS

Summary of Fund Expenses 1 Financial Highlights--Class A Shares 2 Financial
Highlights--Class B Shares 3 Financial Highlights--Class C Shares 4 General
Information 5 Calling the Fund 5 Investment Information 5 Investment Objective
5 Investment Policies 5 Investment Risks 7 Investment Limitations 10 Net Asset
Value 10 Investing in the Fund 11 Purchasing Shares 11 Purchasing Shares
Through a Financial Intermediary 11 Purchasing Shares by Wire 12 Purchasing
Shares by Check 12 Systematic Investment Program 12 Retirement Plans 12 Class A
Shares 12 Class B Shares 13 Class C Shares 13 Redeeming and Exchanging Shares
13 Redeeming or Exchanging Shares Through a Financial Intermediary 13 Redeeming
or Exchanging Shares by Telephone 13 Redeeming or Exchanging Shares by Mail 13
Requirements for Redemption 14 Requirements for Exchange 14 Systematic
Withdrawal Program 14 Contingent Deferred Sales Charge 14 Account and Share
Information 15 Confirmations and Account Statements 15 Dividends and
Distributions 15 Accounts with Low Balances 15 Fund Information 15 Management
of the Fund 15 Distribution of Shares 17 Administration of the Fund 18
Brokerage Transactions 18 Shareholder Information 18 Tax Information 18 Federal
Income Tax 18 State and Local Taxes 18 Performance Information 19 Other Classes
of Shares 19

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a 5.50% None None
percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividends (as None None None
a percentage of offering price)
Contingent Deferred Sales Charge (as a percentage of None 5.50%(1) 1.00%(2)
original purchase price or redemption proceeds, as
applicable)
Redemption Fee (as a percentage of amount redeemed, if None None None
applicable)
Exchange Fee None None None

<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C> <C> <C> <C> <C>
Management Fee 0.75% 0.75% 0.75%
12b-1 Fee None 0.75% 0.75%
Total Other Expenses 0.50% 0.51% 0.51%
Shareholder Services Fee (after waiver) 0.24%(3) 0.25% 0.25%
Total Operating Expenses 1.25%(4) 2.01%(5)(6) 2.01%(5)
</TABLE>

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

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

(3) The shareholder services fee for Class A Shares only has been reduced to
reflect the voluntary waiver. The shareholder service provider can terminate
this voluntary waiver at any time at its sole discretion. The maximum
shareholder services fee is 0.25%.

(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending February 28, 1999. The total
operating expenses were 1.14% for the fiscal year ended February 28, 1998,
and would have been 1.25% absent the voluntary waiver of portions of the
management fee and shareholder services fee.

(5) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending February 28, 1999. The total
operating expenses were 1.90% for the fiscal year ended February 28, 1998,
and would have been 2.00% absent the voluntary waiver of a portion of the
management fee.

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

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Class A Shares, Class B Shares, and
Class C Shares of the Fund will bear, either directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Investing in the
Fund," "Class A Shares," "Class B Shares," "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 CLASS A CLASS B CLASS C
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, (2) redemption at the end of
each time period, and (3) payment of the maximum sales charge
<S> <C> <C> <C>
1 Year $ 67 $ 77 $ 31
3 Years $ 92 $107 $ 63
5 Years $120 $131 $108
10 Years $198 $213 $234
<CAPTION>

You would pay the following expenses on the same investment,
assuming no redemption
<S> <C> <C>
1 Year $ 20 $ 20
3 Years $ 63 $ 63
5 Years $108 $108
10 Years $213 $234
</TABLE>

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

FINANCIAL HIGHLIGHTS--CLASS A SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report, dated April 15, 1998, on the Fund's
financial statements for the year ended February 28, 1998, and on the following
table for the periods presented, is included in the Annual Report, which is
incorporated herein by reference. This table should be read in conjunction with
the Fund's financial statements and notes thereto, which may be obtained from
the Fund.

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $13.27 $12.79 $10.98 $12.24 $12.29 $11.03 $10.13 $ 9.82 $ 9.15 $ 9.15
BEGINNING OF PERIOD
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.52 0.48 0.55 0.60 0.58 0.68 0.71 0.71 0.72
Net realized and 2.52 1.22 1.82 (0.69) -- 1.44 0.92 0.43 0.79 (0.02)
unrealized gain (loss)
on investments and
foreign currency
Total from investment 2.94 1.74 2.30 (0.14) 0.60 2.02 1.60 1.14 1.50 0.70
operations
LESS DISTRIBUTIONS
Distributions from net (0.41) (0.52) (0.48) (0.66) (0.61) (0.66) (0.64) (0.70) (0.76) (0.70)
investment income
Distributions from net (1.73) (0.74) -- (0.12) (0.04) (0.10) (0.06) (0.13) (0.07) --
realized gain on
investments and foreign
currency transactions
Distributions in -- -- (0.01) -- -- -- -- -- -- --
excess of net investment
income(a)
Tax return of capital -- -- -- (0.34) -- -- -- -- -- --
distribution
Total distributions (2.14) (1.26) (0.49) (1.12) (0.65) (0.76) (0.70) (0.83) (0.83) (0.70)
NET ASSET VALUE, END OF $14.07 $13.27 $12.79 $10.98 $12.24 $12.29 $11.03 $10.13 $ 9.82 $ 9.15
PERIOD
TOTAL RETURN(B) 23.05% 14.34% 21.47% (0.98%) 4.93% 19.26% 16.48% 12.41% 16.72% 8.00%
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.14% 1.15% 1.14% 1.10% 1.12% 1.04% 1.05% 1.02% 1.02% 1.00%
Net investment income 3.01% 3.52% 4.09% 4.95% 4.81% 5.98% 6.31% 7.41% 7.17% 8.04%
Expense 0.11% 0.12% 0.15% 0.21% 0.17% 0.01% 0.19% 0.51% 0.74% 0.40%
waiver/reimbursement(c)
SUPPLEMENTAL DATA
Net assets, end of $778,059 $759,732 $816,687 $742,274 $877,513 $739,511 $375,656 $125,599 $48,050 $410,575
period (000 omitted)
Average commission $0.0411 $0.0003 -- -- -- -- -- -- -- --
rate paid(d)
Portfolio turnover 118% 44% 76% 55% 24% 18% 35% 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.

(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.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED FEBRUARY 28, 1998, WHICH CAN BE OBTAINED FREE OF
CHARGE.

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 2.53 1.21 1.77 (0.04)
foreign currency
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 (1.73) (0.74) -- --
currency transactions
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.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED FEBRUARY 28, 1998, WHICH CAN BE OBTAINED FREE OF
CHARGE.

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 2.51 1.23 1.80 (0.64) (0.07)
and foreign currency
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 (1.73) (0.74) -- (0.13) (0.04)
foreign currency transactions
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.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED FEBRUARY 28, 1998, WHICH CAN BE OBTAINED FREE OF
CHARGE.

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on April 20,
1987. Class A Shares, Class B Shares, and Class C Shares of the Fund ("Shares")
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.

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

CALLING THE FUND

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The primary investment objective of the Fund is 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 objective, it endeavors
to do so by following the policies described in this prospectus. The investment
objective cannot be changed without approval of shareholders.

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund will seek to achieve its investment objective 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 ("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 or S&P. 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 Fund may invest up to 100% of
the value of its total assets as described above.

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 have
applied this limitation to the Fund's investments in debt convertible
securities.

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.

CONVERTIBLE SECURITIES

Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock. Convertible securities may include, but are
not limited to: convertible bonds or debentures; convertible preferred stock;
units consisting of usable bonds and warrants; or securities which cap or
otherwise limit returns to the convertible security holder, such as
DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable for Common
Stock when issued as a debt security), LYONS--(Liquid Yield Option Notes, which
are corporate bonds that are purchased at prices below par with no coupons and
are convertible into stock), PERCS--Preferred Equity Redemption Cumulative Stock
(an equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity), and PRIDES--(Preferred Redeemable
Increased Dividend Securities, which are essentially the same as DECS; the
difference is little more than who initially underwrites the issue).

Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. Convertible securities rated below
investment grade may be subject to some of the same risks as those inherent in
junk bonds. The Fund does not limit convertible securities by rating, and there
is no minimal acceptance rating for a convertible security to be purchased or
held in the Fund. Therefore, the Fund invests in convertible securities
irrespective of their ratings. This could result in the Fund purchasing and
holding, without limit, convertible securities rated below investment grade by
an NRSRO or in the Fund holding such securities where they have acquired a
rating below investment grade after the Fund has purchased it.

The Fund's investments in convertible securities will not be subject to the
quality rating limit on other securities in which the Fund invests.

REAL ESTATE INVESTMENT TRUSTS

The Fund may purchase interests in equity and mortgage real estate investment
trusts. Risks associated with real estate investment trusts include the fact
that equity and mortgage real estate investment trusts are dependent upon
management skill and are not diversified, and are, therefore, subject to the
risk of financing single projects or unlimited number of projects. They are also
subject to heavy cash flow dependency, defaults by borrowers, and
self-liquidation. Additionally, equity real estate investment trusts may be
affected by any changes in the value of the underlying property owned by the
trusts, and mortgage real estate investment trusts may be affected by the
quality of any credit extended. The investment adviser seeks to mitigate these
risks by selecting real estate investment trusts diversified by sector (shopping
malls, apartment building complexes, and health care facilities) and geographic
location.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest in restricted securities and, as a matter of fundamental
policy which may not be changed without shareholder approval, will limit such
investment to no more than 10% of its total assets. This restriction does not
apply to commercial paper issued under Section 4(2) of the Securities Act of
1933. 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.

The Fund may invest in illiquid securities and, as a matter of fundamental
policy which may not be changed without shareholder approval, will limit such
investment to no more than 10% of its total assets. This limit applies to
securities purchased by the Fund which are deemed to be illiquid by the
Directors, including certain restricted securities and repurchase agreements
providing for settlement in more than seven days after notice.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.

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

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.

AMERICAN DEPOSITARY RECEIPTS

The Fund may purchase American Depositary 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.

SECURITIES OF FOREIGN ISSUERS

The Fund may invest in securities of foreign issuers which are freely traded on
the United States securities exchanges or in the over-the-counter market in the
form of depositary receipts as well as securities of foreign issuers that trade
on foreign stock exchanges. Securities of a foreign issuer may present greater
risks in the form of nationalization, confiscation, domestic marketability, or
other national or international restrictions. As a matter of practice, the Fund
will not invest in the securities of a foreign issuer if any such risk appears
to the investment adviser to be substantial.

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 will take advantage of the unusual opportunities for higher returns
available from investing in developing countries and may invest in the utility
and other securities of such countries. These investments carry considerably
more volatility and risk because they are associated with less mature economies
and less stable political systems. (See "Risk Considerations in Developing
Countries.")

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. However,
utility companies in the United States are now faced with the possibility of
deregulation which would create competition between the companies. Utility
regulators also have permitted utilities to diversify outside of their original
geographic regions and their traditional lines of business. These opportunities
may permit certain utility companies to earn more than their traditional
regulated rates of return. Some companies, however, 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, foreign governments
may seek to "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 cellular
telecommunications segment of this industry 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. Gas utility
companies in the past have been adversely affected by disruptions in the oil
industry, increased concentration, and increased competition.

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. Investment opportunities from
consolidation and foreign participation in this industry occurs.

REDUCING RISKS OF UTILITY SECURITIES

The Fund's adviser will use professional portfolio management techniques,
including credit research and diversification, designed to reduce risk. 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.

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.

RISK CONSIDERATIONS IN DEVELOPING COUNTRIES

Securities prices in developing countries can be significantly more volatile
than in developed countries, reflecting the greater uncertainties of investing
in lesser developed markets and economies. In particular, developing countries
may have relatively unstable governments, and may present the risk of
nationalization of businesses, expropriation, confiscatory taxation or, in
certain instances, reversion to closed market, centrally planned economies. Such
countries may also have restrictions on foreign ownership or prohibitions on the
repatriation of assets, and may have less protection of property rights than
developed countries.

The economies of developing countries may be predominantly based on only a few
industries or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable to changes
in local or global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates. In addition, securities markets in developing
countries may trade a small number of securities and may be unable to respond
effectively to increased trading volume, potentially resulting in a lack of
liquidity and in volatility in the price of securities traded on those markets.
Also, securities markets in developing countries typically offer less regulatory
protection for investors.

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 its 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 ("NAV") per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV for each
class of Shares may differ due to the variance in daily net income realized by
each class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

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

INVESTING IN THE FUND

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

CLASS A CLASS B CLASS C
Minimum and Subsequent Investment Amounts $1500/$100 $1500/$100 $1500/$100
Minimum and Subsequent Investment Amount $250/$100 $250/$100 $250/$100
for Retirement Plans
Maximum Sales Charge 5.50%* None None
Maximum Contingent Deferred Sales None 5.50+ 1.00%#
Charge**
Conversion Feature No Yes++ No

* Class A Shares are sold at NAV, plus a sales charge as follows:

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

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

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

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

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

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

PURCHASING SHARES

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

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

PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY

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

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

PURCHASING SHARES BY WIRE

Shares may be purchased by Federal Reserve wire by calling the Fund. All
information needed will be taken over the telephone, and the order is considered
received when State Street Bank receives payment by wire. Federal funds should
be wired as follows: Federated Shareholder Services Company, c/o State Street
Bank and Trust Company, Boston, MA 02266-8600; Attention: EDGEWIRE; For Credit
to: (Fund Name) (Fund Class); (Fund Number--this number can be found on the
account statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution Name; and
ABA Number 011000028. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.

PURCHASING SHARES BY CHECK

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

SYSTEMATIC INVESTMENT PROGRAM

Under this program, funds in a minimum amount of $50 may be automatically
withdrawn periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund. Shareholders should
contact their financial intermediary or the Fund to participate in this program.

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.

CLASS A SHARES

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

NO SALES CHARGE IS IMPOSED FOR CLASS A SHARES PURCHASED:

* through financial intermediaries that do not receive sales charge
dealer concessions;
* by Federated Life Members; or
* through "wrap accounts" or similar programs under which clients pay a fee
for services.

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

* purchasing in quantity;
* combining concurrent purchases of:
* Shares by you, your spouse, and your children under age 21, or * Shares
of the same class of two or more Federated Funds (other than
money market funds);
* accumulating purchases. In calculating the sales charge on an
additional purchase, you may count the current value of previous Share
purchases still invested in the Fund;
* signing a letter of intent to purchase a specific dollar amount of
Shares within 13 months; or
* using the reinvestment privilege within 120 days of redeeming Shares of an
equal or lesser amount.

DEALER CONCESSION

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

Federated Securities Corp. may pay fees to banks out of the sales charge in
exchange for sales and/or administrative services performed on behalf of the
bank's customers in connection with the establishment of customer accounts
and purchases of Shares.

CLASS B SHARES

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

CONVERSION OF CLASS B SHARES

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

CLASS C SHARES

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

REDEEMING AND EXCHANGING SHARES

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

REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY

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

REDEEMING OR EXCHANGING SHARES BY TELEPHONE

Shares acquired directly from the Fund may be redeemed in any amount, or
exchanged, by calling 1-800-341-7400. Appropriate authorization forms for these
transactions must be on file with the Fund. Shares held in certificate form must
first be returned to the Fund as described in the instructions under "Redeeming
or Exchanging Shares by Mail." Redemption proceeds will either be mailed in the
form of a check to the shareholder's address of record or wire-transferred to
the shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed Shares purchased by check or through ACH will not be
wired until that method of payment has cleared.

Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or market
changes, a shareholder may experience difficulty in redeeming by telephone. If
this occurs, "Redeeming or Exchanging Shares by Mail" should be considered. The
telephone transaction privilege may be modified or terminated at any time.
Shareholders would be promptly notified.

REDEEMING OR EXCHANGING SHARES BY MAIL

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

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

REQUIREMENTS FOR REDEMPTION

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

REQUIREMENTS FOR EXCHANGE

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

Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. Signature guarantees will be required to exchange
between fund accounts not having identical shareholder registrations. The
exchange privilege may be modified or terminated at any time. Shareholders will
be notified of the modification or termination of the exchange privilege.

SYSTEMATIC WITHDRAWAL PROGRAM

Under this program, Shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder of not less than $100. To be
eligible to participate in this program, a shareholder must have an account
value of at least $10,000, other than retirement accounts subject to required
minimum distributions. A shareholder may apply for participation in this program
through his financial intermediary or by calling the Fund.

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

SYSTEMATIC WITHDRAWAL PROGRAM ("SWP") ON CLASS B SHARES

A contingent deferred sales charge will not be charged on SWP redemptions of
Class B Shares if:

* Shares redeemed are 12% or less of the account value in a single year; *
the account is at least one year old; * all dividends and capital gains
distributions are reinvested; and * the account has at least a $10,000
balance when the SWP is established;
(multiple Class B Share accounts cannot be aggregated to meet this minimum
balance.)

A contingent deferred sales charge will be charged on redemption amounts that
exceed the 12% annual limit. In measuring the redemption percentage, the account
is valued when the SWP is established and then annually at calendar year-end.
Redemptions can be made only at a rate of 1% monthly, 3% quarterly, or 6%
semi-annually.

CONTINGENT DEFERRED SALES CHARGE

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

ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

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

* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing minimum required distributions from an Individual Retirement
Account or other retirement plan to a shareholder who has attained the age
of 70 1/2;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;
* which are reinvested in the Fund under the reinvestment privilege;

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

* of Shares originally purchased through a bank trust department, an
investment adviser registered under the Investment Advisers Act of 1940 or
retirement plans where the third party administrator has entered into
certain arrangements with Federated Securities Corp. or its affiliates, or
any other financial intermediary, to the extent that no payments were
advanced for purchases made through such entities.

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

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND DISTRIBUTIONS

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

ACCOUNTS WITH LOW BALANCES

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

FUND INFORMATION

MANAGEMENT OF THE FUND

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 (the "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 0.75% of the
Fund's average daily net assets. The Adviser may voluntarily waive a portion
of its fee or reimburse the Fund for certain operating expenses. The Adviser
can terminate this voluntary waiver at any time at its sole discretion.

ADVISER'S BACKGROUND

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.

SUB-ADVISER

Under the terms of the Sub-Advisory Agreement between the Adviser and
Federated Global Research Corp. (the "Sub-Adviser"), the Sub-Adviser will
provide the Adviser such investment advice, statistical, and other factual
information as may, from time to time, be reasonably requested by the
Adviser.

SUB-ADVISORY FEES

For its services under the Sub-Advisory Agreement, the Sub-Adviser receives an
allocable portion of the Fund's advisory fee. Such allocation is based on the
amount of foreign securities which the Sub-Adviser manages for the Fund. This
fee is paid by the Adviser out of its resources and is not an incremental Fund
expense.

SUB-ADVISER'S BACKGROUND

Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is
a registered investment adviser under the Investment Advisers Act of 1940.

The Sub-Adviser is a subsidiary of Federated Investors. All of the Class A
(voting) Shares of Federated Investors are owned by a trust, the trustees of
which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr.
Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is
President and Trustee of Federated Investors.

Passport Research, Ltd., Federated Global Research Corp., 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
$120 billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1997, Federated
Investors is one of the largest mutual fund investment managers in the United
States. With more than 2,000 employees, Federated continues to be led by the
management who founded the company in 1955. Federated funds are presently at
work in and through 4,000 financial institutions nationwide.

Steven J. Lehman has been a portfolio manager of the Fund since July 1997.
Mr. Lehman joined the Fund's investment adviser in May 1997 as a Vice
President. From 1985 to May 1997, Mr. Lehman served as a Portfolio Manager,
then Vice President/Senior Portfolio Manager, at First Chicago NBD
Investment Management Company. Mr. Lehman is a Chartered Financial Analyst;
he received his M.A. from the University of Chicago.

Linda A. Duessel has been a portfolio manager of the Fund since April 1995.
Ms. Duessel joined Federated Investors in 1991 and has been a Vice President
of the Fund's investment adviser since 1995. Ms. Duessel was an Assistant
Vice President of the Fund's investment adviser from 1991 until 1995. Ms.
Duessel is a Chartered Financial Analyst and received her M.S. in Industrial
Administration from Carnegie Mellon University.

Drew J. Collins and Richard J. Lazarchic are the portfolio managers for
foreign securities.

Drew J. Collins has been a portfolio manager of the Fund since July 1997.
Mr. Collins joined Federated Investors in 1995 as a Senior Vice President of
the Fund's investment adviser. Mr. Collins served as Vice
President/Portfolio Manager of international equity portfolios at Arnold and
Bleichroeder, Inc. from 1994 to 1995. He served as an Assistant Vice
President/Portfolio Manager for international equities at the College
Retirement Equities Fund from 1986 to 1994. Mr. Collins is a Chartered
Financial Analyst and received his M.B.A. in finance from the Wharton School
of the University of Pennsylvania.

Richard J. Lazarchic has been a portfolio manager of the Fund since April 1,
1998. Mr. Lazarchic joined Federated Investors in March 1998 as a Vice
President of the Fund's investment adviser. From May 1979 through October
1997, Mr. Lazarchic was employed with American Express Financial Corp.,
initially as an Analyst and then as a Vice President/Senior Portfolio
Manager. Mr. Lazarchic is a Chartered Financial Analyst. He received his
M.B.A. from Kent State University.

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

DISTRIBUTION OF SHARES

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

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

The distributor will pay dealers an amount equal to 5.50% 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 AGREEMENT

Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a
fee to the distributor in an amount computed at an annual rate of 0.75% of the
average daily net assets of each class of Shares to finance any activity which
is principally intended to result in the sale of Shares subject to the
Distribution Plan. For Class C Shares, the distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales services or distribution-related
support services as agents for their clients or customers. With respect to Class
B Shares, because distribution fees to be paid by the Fund to the distributor
may not exceed an annual rate of 0.75% of each class of Shares' average daily
net assets, it will take the distributor a number of years to recoup the
expenses it has incurred for its sales services and distribution-related support
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 entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts. Under
the Shareholder Services Agreement, Federated Shareholders Services will either
perform shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon Shares owned by their clients or customers. The schedules of such fees and
the basis upon which such fees will be paid will be determined from time to time
by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase of Class A Shares, an amount equal to 0.50% of the net asset value of
Class A Shares purchased by their clients or customers under certain qualified
retirement 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,
in addition to payments made pursuant to the Distribution Plan and Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services. 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 Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at an annual rate which relates to the average aggregate daily
net assets of all funds advised by affiliates of Federated Investors as
specified below:

MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its fee.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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

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

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

As of April 8, 1998, the following shareholder of record owned 25% 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 1,208,921 Class C Shares (29.51%) and, therefore, may, for
certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet requirements
of the Internal Revenue Code, 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.

STATE AND LOCAL TAXES

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 including Class F 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 the maximum sales charge and
other similar non-recurring charges, such as the contingent deferred sales
charge, which, if excluded, would increase the total return and yield.

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

From time to time, advertisements for the Class A Shares, Class B Shares, Class
C Shares, and Class F 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, Class C Shares, and Class F
Shares to certain indices.

OTHER CLASSES OF SHARES

The Fund also offers another class of shares called Class F Shares. Class F
Shares are sold primarily to customers of financial institutions subject to a
front-end sales charge, a contingent deferred sales charge, a Shareholder
Services Agreement, and a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which the minimum investment is $50.

Class A Shares, Class B Shares, Class C Shares, and Class F Shares are subject
to certain of the same expenses; however, the front-end sales charge for Class F
Shares is lower than that for Class A Shares. Expense differences, however,
between Class A Shares, Class B Shares, Class C Shares, and Class F Shares may
affect the performance of each class.

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

NOTES

[Graphic]Federated Investors

Federated Utility Fund, Inc.

Class A Shares, Class B Shares, Class C Shares

PROSPECTUS

APRIL 30, 1998

AN OPEN-END, DIVERSIFIED MANAGEMENT INVESTMENT COMPANY

FEDERATED UTILITY FUND, INC.
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER
Passport Research, Ltd.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

SUB-ADVISER
Federated Global Research Corp.
175 Water Street
New York, NY 10038-4965

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

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

INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Center
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com

Cusip 314286105
Cusip 314286204
Cusip 314286303
G01154-01 (4/98)

[Graphic]

Federated Utility Fund, Inc.

Class F Shares

PROSPECTUS

The Class F Shares of Federated 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.

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

Prospectus dated April 30, 1998

TABLE OF CONTENTS

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

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price) 1.00% Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price
or redemption proceeds, as applicable(1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee 0.75%
12b-1 Fee None
Total Other Expenses 0.48%
Shareholder Services Fee (after waiver)(2) 0.22%
Total Operating Expenses(3) 1.23%
</TABLE>
(1) The contingent deferred sales charge is 1.00% of the lesser of the original
purchase price or the net asset value of shares redeemed within four years
of their purchase date.

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

(3) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending February 28, 1999. The total
operating expenses were 1.12% for the fiscal year ended February 28, 1998
and would have been 1.25% absent the voluntary waiver of portions of the
management fee and shareholder services fee.

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

EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period, and (3) payment of
the maximum sales charge

1 Year $ 33
3 Years $ 60
5 Years $ 77
10 Years $157

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

1 Year $ 22
3 Years $ 49
5 Years $ 77
10 Years $157

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

(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 2.51 1.20
and foreign currency
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 (1.73) (0.36)
foreign currency transactions
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.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED FEBRUARY 28, 1998, WHICH CAN BE OBTAINED FREE OF
CHARGE.

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on April 20,
1987. Class F Shares of the Fund ("Shares") 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.

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated" and the appropriate class
designation listing.

CALLING THE FUND

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The Fund will seek to achieve its investment objective 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 ("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 or S&P. 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.

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

REPURCHASE AGREEMENTS

LENDING OF PORTFOLIO SECURITIES

CONVERTIBLE SECURITIES

The Fund's investments in convertible securities will not be subject to the
quality rating limit on other securities in which the Fund invests.

REAL ESTATE INVESTMENT TRUSTS

The Fund may purchase interests in equity and mortgage real estate investment
trusts. Risks associated with real estate investment trusts include the fact
that equity and mortgage real estate investment trusts are dependent upon
management skill and are not diversified, and are, therefore, subject to the
risk of financing single projects or an unlimited number of projects. They are
also subject to heavy cash flow dependency, defaults by borrowers, and
self-liquidation. Additionally, equity real estate investment trusts may be
affected by any changes in the value of the underlying property owned by the
trusts, and mortgage real estate investment trusts may be affected by the
quality of any credit extended. The investment adviser seeks to mitigate these
risks by selecting real estate investment trusts diversified by sector (shopping
malls, apartment building complexes, and health care facilities) and geographic
location.

RESTRICTED AND ILLIQUID SECURITIES

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

COVERED CALL OPTIONS

AMERICAN DEPOSITARY RECEIPTS

SECURITIES OF FOREIGN ISSUERS

The Fund will take advantage of the unusual opportunities for higher returns
available from investing in developing countries and may invest in the
securities of such countries. These investments carry considerably more
volatility and risk because they are associated with less mature economies and
less stable political systems. (See "Risk Considerations in Developing
Countries.")

INVESTMENT RISKS

CONSIDERATIONS OF UTILITY SECURITIES

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 cellular
telecommunications segment of this industry 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. Gas utility companies in the past
have been adversely affected by disruptions in the oil industry, increased
concentration, and increased competition.

WATER

REDUCING RISKS OF UTILITY SECURITIES

The Fund's adviser will use professional portfolio management techniques,
including credit research and diversification designed to reduce risk. 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.

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.

FOREIGN COMPANIES

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

RISK CONSIDERATIONS IN DEVELOPING COUNTRIES

U.S. GOVERNMENT POLICIES

INVESTMENT LIMITATIONS

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

NET ASSET VALUE

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

INVESTING IN THE FUND

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

CLASS F
Minimum and Subsequent Investment Amount $1500/$100
Minimum and Subsequent Investment Amount for $250/$100
Retirement Plans
Maximum Sales Charge 1.00%*
Maximum Sales Charge as a Percentage of the 1.01%
Net Amount Invested
Maximum Contingent Deferred Sales Charge** 1.00%**

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

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

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

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

PURCHASING SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through a
financial intermediary (such as a bank or broker/dealer) or by sending a wire or
check directly to the Fund. Financial intermediaries may impose different
minimum investment requirements on their customers. An account must be
established with a financial intermediary or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased. Shareholders in Class F Shares of certain other funds advised and
distributed by affiliates of Federated Investors ("Federated Funds") may
exchange their Shares for Class F Shares of the Fund. The Fund reserves the
right to reject any purchase or exchange request.

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

PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY

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

PURCHASING SHARES BY WIRE

PURCHASING SHARES BY CHECK

SYSTEMATIC INVESTMENT PROGRAM

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.

ELIMINATING THE SALES CHARGE

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

NO SALES CHARGE IS IMPOSED FOR CLASS F SHARES PURCHASED:

* through bank trust departments or investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients;
* by sales representatives, Directors, and employees of the Fund,
Federated Advisers, Federated Securities Corp. or their affiliates and
their immediate family members;
* by any investment dealer who has a sales agreement with Federated
Securities Corp. and their immediate family members, or by any trusts or
pension or profit-sharing plans for these persons or retirement plans where
the third party administrator has entered into certain arrangements with
Federated Securities Corp. or its affiliates; or
* by shareholders of record in the Fortress Utility Fund on September 30,
1989.

IN ADDITION, THE SALES CHARGE CAN BE ELIMINATED BY:

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

DEALER CONCESSION

For sales of Shares, a dealer will normally receive up to 100% of the applicable
sales charge. Any portion of the sales charge which is not paid to a dealer will
be retained by the distributor. However, the distributor may offer to pay
dealers up to 100% of the sales charge retained by it. The sales charge for
Shares sold other than through registered broker/dealers will be retained by
Federated Securities Corp.

REDEEMING AND EXCHANGING SHARES

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

REDEEMING OR EXCHANGING SHARES THROUGH A FINANCIAL INTERMEDIARY

REDEEMING OR EXCHANGING SHARES BY TELEPHONE

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

REDEEMING OR EXCHANGING SHARES BY MAIL

REQUIREMENTS FOR REDEMPTION

REQUIREMENTS FOR EXCHANGE

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

SYSTEMATIC WITHDRAWAL PROGRAM

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

CONTINGENT DEFERRED SALES CHARGE

ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

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

* following the death or disability, as defined in Section 72(m)(7) of the
Internal Revenue Code of 1986, of the last surviving shareholder;
* representing a total or partial distribution from an Individual Retirement
Account, Keogh Plan, or a custodial account to a shareholder who has
attained the age of 701/2;
* representing a total or partial distribution from a qualified plan, other
than an Individual Retirement Account, Keogh Plan, or a custodial account
following retirement;
* which are involuntary redemptions of shareholder accounts that do not
comply with the minimum balance requirements;
* which are reinvested in the Fund under the reinvestment privilege;

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

ACCOUNT AND SHARE INFORMATION

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND DISTRIBUTIONS

ACCOUNTS WITH LOW BALANCES

FUND INFORMATION

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

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 0.75% of the
Fund's average daily net assets. The Adviser may voluntarily waive a portion of
its fee or reimburse the Fund for certain operating expenses. The Adviser can
terminate this voluntary waiver at any time at its sole discretion.

ADVISER'S BACKGROUND

SUB-ADVISER

Under the terms of the Sub-Advisory Agreement between the Adviser and Federated
Global Research Corp. (the "Sub-Adviser"), the Sub-Adviser will provide the
Adviser such investment advice, statistical, and other factual information as
may, from time to time, be reasonably requested by the
Adviser.

SUB-ADVISORY FEES

SUB-ADVISER'S BACKGROUND

Federated Global Research Corp., incorporated in Delaware on May 12, 1995, is a
registered investment adviser under the Investment Advisers Act of 1940.

Passport Research, Ltd., Federated Global Research Corp., 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 $120
billion invested across more than 300 funds under management and/or
administration by its subsidiaries, as of December 31, 1997, Federated Investors
is one of the largest mutual fund investment managers in the United States. With
more than 2,000 employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work in and
through 4,000 financial institutions nationwide.

Drew J. Collins and Richard J. Lazarchic are the portfolio managers for
foreign securities.

Richard J. Lazarchic has been a portfolio manager of the Fund since April 1,
1998. Mr. Larzarchic joined Federated Investors in March 1998 as a Vice
President of the Fund's investment adviser. From May 1979 through October
1997, Mr. Lazarchic was employed with American Express Financial Corp.,
initially as an Analyst and then as a Vice President/Senior Portfolio
Manager. Mr. Lazarchic is a Chartered Financial Analyst. He received his
M.B.A. from Kent State University.

DISTRIBUTION OF CLASS F SHARES

Federated Securities Corp. is the principal distributor for Class F 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.

SHAREHOLDER SERVICES

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the Fund
will make payments up to 0.25% of the average daily net asset value of Class F
Shares, computed at an annual rate, to obtain certain personal services for
shareholders and to provide the maintenance of shareholder accounts
("shareholder services"). From time to time and for such periods as deemed
appropriate, the amount stated may be reduced voluntarily. Under the Shareholder
Services Agreement, Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to perform
shareholder services. Financial institutions will receive fees based upon shares
owned by their clients or customers. The schedule of such fees and the basis
upon which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, for distribution
and/or administrative services, an amount equal to 1.00% of the offering price
of the Shares acquired by their clients or customers on purchases up to
$1,999,999, 0.50% of the offering price on purchases of $2,000,000 to
$4,999,999, and 0.25% of the offering price on purchases of $5,000,000 or more.
(This fee is in addition to the 1.00% sales charge on purchases of less that $1
million.) The 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.

Furthermore, with respect to Class F Shares, in addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may pay financial
institutions supplemental fees for the performance of sales services,
distribution-related support services, or shareholder services. 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 funds advised by subsidiaries of Federated Investors
("Federated Funds") as specified below:

MAXIMUM AVERAGE AGGREGATE
FEE DAILY NET ASSETS

0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% on assets in excess of $750 million

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

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. 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

Directors may be removed by the Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors upon
the written request of shareholders owning at least 10% of the Fund's
outstanding shares of all series entitled to vote.

TAX INFORMATION

FEDERAL INCOME TAX

STATE AND LOCAL TAXES

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 Class F
Shares.

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

The performance information reflects the effect of the maximum sales charge, and
the contingent deferred sales charge, 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, Class C Shares, and Class F Shares. Because Class B Shares and Class C
Shares are subject to Rule 12b-1 fees, the yield for Class A Shares and Class F
Shares, for the same period, may exceed that of Class B Shares and Class C
Shares. Because Class A Shares are subject to a higher maximum sales charge, the
total return for Class B Shares, Class C Shares, and Class F Shares, for the
same period, will exceed that of Class A Shares.

OTHER CLASSES OF SHARES

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

Class A Shares are sold subject to a front-end sales charge and a Shareholder
Services Plan. Investments in Class A Shares are subject to a minimum initial
investment of $500, unless the investment is in a retirement account, in which
case the minimum investment is $50.

Class B Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class B Shares are subject to a minimum initial investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.

Class C Shares are sold at net asset value subject to a contingent deferred
sales charge, a Rule 12b-1 Plan and a Shareholder Services Plan. Investments in
Class C Shares are subject to a minimum investment of $1,500, unless the
investment is in a retirement account, in which case the minimum investment is
$50.

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

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

[Graphic]Federated Investors

Federated Utility Fund, Inc.

Class F Shares

PROSPECTUS

APRIL 30, 1998

AN OPEN-END, DIVERSIFIED MANAGEMENT INVESTMENT COMPANY

FEDERATED UTILITY FUND, INC.
CLASS F SHARES
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER
Passport Research, Ltd.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779

SUB-ADVISER
Federated Global Research Corp.
175 Water Street
New York, NY 10038-4965

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

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

INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Center
Pittsburgh, PA 15219

Federated Securities Corp., Distributor
1-800-341-7400
www.federatedinvestors.com

Cusip 314286402
G01154-03-F (4/98)

[Graphic]

FEDERATED UTILITY FUND, INC.

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
CLASS F SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the prospectus for
Class A Shares, Class B Shares, and Class C Shares, and the prospectus for Class
F Shares of Federated Utility Fund, Inc. (the "Fund") each dated April 30, 1998.
This Statement is not a prospectus itself. You may request a copy of either
prospectus or a paper copy of this Statement, if you received it electronically,
free of charge by calling 1-800-341-7400.

FEDERATED UTILITY FUND, INC.
FEDERATED INVESTORS FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7000

Statement dated April 30, 1998

[Graphic]Federated Investors
Federated Securities Corp., Distributor
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM

Cusip 314286105
Cusip 314286204
Cusip 314286303
Cusip 314286402
G01154-02 (4/98)

[Graphic]

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVES AND POLICIES 1
Temporary Investments 1
Units of Master Limited Partnerships 2
Convertible Securities 2
Real Estate Investment Trusts 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 4
Concentration of Investments 4
Selling Short and Buying on Margin 4
Issuing Senior Securities and Borrowing Money 4
Pledging Assets 4
Investing in New Issuers 4
Underwriting 4
Diversification of Investments 4
Lending Cash or Securities 4
Writing Covered Call Options 5
Restricted Securities 5
Investing in Warrants 5
Investing in Securities of Foreign Issuers 5
Investing in Illiquid Securities 5
Investing in Issuers Whose Securities are Owned by Officers and
Directors of the Fund 5
Investing in Minerals 5
Investing in Real Estate 5
Investing in Securities of Other Investment Companies 5
Purchasing Securities to Exercise Control 5
Investing in Commodities 5
FEDERATED UTILITY FUND, INC. MANAGEMENT 6
Fund Ownership 9
Directors Compensation 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 11
Sub-Adviser to the Fund 11
Sub-Advisory Fees 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Fund Administration 11
Custodian and Portfolio Accountant 11
Transfer Agent 12
Independent Auditors 12
PURCHASING SHARES 12
Quantity Discounts and Accumulated Purchases 12
Concurrent Purchases 12
Letter of Intent 12
Reinvestment Privilege 13
Conversion of Class B Shares 13
Distribution Plan and Shareholder Services Agreement 13
Conversion to Federal Funds 14
Purchases by Sales Representatives, Fund
Directors, and Employees 14
Exchanging Securities for Fund Shares 14
DETERMINING NET ASSET VALUE 14
Determining Market Value of Securities 15
EXCHANGE PRIVILEGE 15
Reduced Sales Charge 15
Requirements for Exchange 15
Tax Consequences 15
Making an Exchange 15
REDEEMING SHARES 16
Redemption in Kind 16
Contingent Deferred Sales Charge 16
TAX STATUS 16
The Fund's Tax Status 16
Shareholders' Tax Status 17
TOTAL RETURN 17
YIELD 17
PERFORMANCE COMPARISONS 18
Economic and Market Information 19
ABOUT FEDERATED INVESTORS 19
Mutual Fund Market 19
Institutional Clients 19
Bank Marketing 19
Broker/Dealers and Bank Broker/Dealer Subsidiaries 19
FINANCIAL STATEMENTS 19
APPENDIX 20

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, shareholders
approved the Fund's name change from "Progressive Income Equity Fund, Inc." to
"Liberty Utility Fund, Inc." On March 30, 1996, the Fund's name was changed to
"Federated Utility Fund, Inc."

Shares of the Fund are offered in four classes, known as Class A Shares, Class B
Shares, Class C Shares, and Class F Shares (individually and collectively
referred to as "Shares," as the context may require). This Statement of
Additional Information relates to all classes of Shares of the Fund.

INVESTMENT OBJECTIVES AND POLICIES

The primary investment objective of the Fund is current income and long-term
growth of income. Capital appreciation is a secondary objective. The Fund will
seek to achieve its investment objective by investing in a diversified portfolio
comprised primarily of equity securities. The investment objective 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:

* instruments of domestic and foreign banks and savings associations 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
* prime commercial paper (rated A-1 by Standard and Poor's, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch IBCA, Inc.).

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:

* the full faith and credit of the U.S. Treasury;
* the issuer's right to borrow from the U.S. Treasury;
* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
* 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:

* Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives;
* Federal Home Loan Banks;
* Farmers Home Administration; and
* 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

DECS, or similar instruments marketed under different names, offer a substantial
dividend advantage with the possibility of unlimited upside potential if the
price of the underlying common stock exceeds a certain level. DECS convert to
common stock at maturity. The amount received is dependent on the price of the
common stock at the time of maturity. DECS contain two call options at different
strike prices. The DECS participate with the common stock up to the first call
price. They are effectively capped at that point unless the common stock rises
above a second price point, at which time they participate with unlimited upside
potential.

PERCS, or similar instruments marketed under different names, offer a
substantial dividend advantage, but capital appreciation potential is limited to
a predetermined level. PERCS are less risky and less volatile than the
underlying common stock because their superior income mitigates declines when
the common stock falls, while the cap price limits gains when the common stock
rises.

Certain convertible securities are of equivalent credit quality with corporate
debt obligations that are not determined to be investment-grade that are
high-yield, high-risk securities (i.e., "junk bonds"). Typically these
securities may be subject to greater market fluctuations and greater risk of
loss of income and principal due to an issuer's default. To a greater extent
than investment-grade securities, lower rated securities tend to reflect
short-term corporate, economic and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower-rated securities
may be more difficult to dispose of or to value than high-rated, lower-yielding
securities. The Fund intends to limit such investments to securities convertible
into equity securities.

REAL ESTATE INVESTMENT TRUSTS

The Fund may purchase interests in equity and mortgage real estate investment
trusts. Equity real estate investment trusts purchase or lease real estate and
generate income primarily from rental income, and realize capital gains or
losses from property that has appreciated or depreciated in value. Mortgage real
estate investment trusts are interests in real estate mortgages and generate
income from interest payments on mortgage loans.

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 Directors consider the following criteria in determining the liquidity of
certain restricted securities:

* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the security and the
number of potential buyers;
* dealer undertakings to make a market in the security; and * 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, 1998 and
1997, the portfolio turnover rates were 118% and 44%, 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.

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.

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).

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.

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

FEDERATED UTILITY FUND, INC. MANAGEMENT

Officers and Directors are listed with their addresses, birthdates, present
positions with Federated Utility Fund, Inc., and principal occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA

Birthdate: July 28, 1924

Chairman and Director

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds. Mr. Donahue is the father of J. Christopher Donahue, Executive Vice
President of the Company.

Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA

Birthdate: February 3, 1934

Director

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

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

Birthdate: June 23, 1937

Director

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

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

Birthdate: July 4, 1918

Director

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

James E. Dowd
571 Hayward Mill Road
Concord, MA

Birthdate: May 18, 1922

Director

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

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

Birthdate: October 11, 1932

Director

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

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

Birthdate: June 18, 1924

Director

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

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

Birthdate: March 16, 1942

Director

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

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

Birthdate: December 20, 1932

Director

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

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

Birthdate: September 14, 1925

Director

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Birthdate: June 21, 1935

Director

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

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Birthdate: May 17, 1923

President and Director

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

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA

Birthdate: April 11, 1949

Executive Vice President

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

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA

Birthdate: October 22, 1930

Executive Vice President

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

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA

Birthdate: October 26, 1938

Executive Vice President, Secretary, and Treasurer

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

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

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

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

FUND OWNERSHIP

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

As of April 8, 1998, 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 2,858,906 Shares (5.19%).

As of April 8, 1998, the following shareholder of record owned 5% or more of the
outstanding Class B Shares of the Fund:Merrill Lynch Pierce Fenner & Smith (as
record owner holding Class B Shares for its clients), Jacksonville, Florida,
owned approximately 739,216 Shares (8.39%).

As of April 8, 1998, 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 1,208,921 Class C Shares
(29.51%).

As of April 8, 1998, the following shareholder of record owned 5% or more of the
outstanding Class F Shares of the Fund:Merrill Lynch Pierce Fenner & Smith (as
record owner holding Class F Shares for its clients), Jacksonville, Florida,
owned approximately 9,701,953 Shares (22.22%).

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 56 other investment companies in
the Fund Complex

Thomas G. Bigley $2,141.95 $111,222 for the Fund and
Director 56 other investment companies in
the Fund Complex
John T. Conroy, Jr. $2,356.48 $122,362 for the Fund and
Director 56 other investment companies in
the Fund Complex
William J. Copeland $2,356.48 $122,362 for the Fund and
Director 56 other investment companies in
the Fund Complex
James E. Dowd $2,356.48 $122,362 for the Fund and
Director 56 other investment companies in
the Fund Complex
Lawrence D. Ellis, M.D. $2,141.95 $111,222 for the Fund and
Director 56 other investment companies in
the Fund Complex
Edward L. Flaherty, Jr. $2,356.48 $122,362 for the Fund and
Director 56 other investment companies in
the Fund Complex
Peter E. Madden $2,141.95 $122,362 for the Fund and
Director 56 other investment companies in
the Fund Complex
John E. Murray, Jr. $2,141.95 $111,222 for the Fund and
Director 56 other investment companies in
the Fund Complex
Wesley W. Posvar $2,141.95 $111,222 for the Fund and
Director 56 other investment companies in
the Fund Complex
Marjorie P. Smuts $2,141.95 $111,222 for the Fund and
Director 56 other investment companies in
the Fund Complex

* Information is furnished for the fiscal year ended February 28, 1998.

+ The information is provided for the last calendar year.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

The Fund's investment adviser, Passport Research, Ltd. (the "Adviser"), 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 "Federated 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, 1998 and 1997 and February 29, 1996, the Adviser earned
$11,382,447, $10,761,268, and $6,662,590, respectively, of which $1,543,801,
$1,691,837, and $1,225,393, respectively, were voluntarily waived.

SUB-ADVISER TO THE FUND

The Fund's sub-adviser is Federated Global Research Corp. (the
"Sub-Adviser").

SUB-ADVISORY FEES

For its sub-advisory services, the Sub-Adviser receives an allocable portion
of the Fund's advisory fee as described in the prospectus. For the period
from June 1, 1997 (effective date of sub-advisory contract between Federated
Global Research Corp. and Federated Utility Fund, Inc.) to February 28,
1998, Federated Global Research Corp. received no sub-advisory fees.

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: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The adviser and its
affiliates exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are reasonable
in relationship to the value of the brokerage and research services provided.
During the fiscal years ended February 28, 1998 and 1997 and February 29, 1996,
the Fund paid $3,580,504, $1,371,490, and $1,678,849, respectively, in brokerage
commissions.

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

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services served as the Fund's Administrator. For purposes of this Statement of
Additional Information, Federated Services Company and Federated Administrative
Services may hereinafter collectively be referred to as the "Administrators."
For the fiscal years ended February 28, 1998 and 1997 and February 29, 1996, the
Administrators earned $1,145,447, $1,084,280, and $672,236, respectively.

CUSTODIAN AND PORTFOLIO ACCOUNTANT

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

TRANSFER AGENT

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

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh, PA.

PURCHASING SHARES

Except under certain circumstances described in the respective prospectuses,
Shares are sold at their net asset value (plus a sales charge, if applicable) on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares is explained in the respective prospectuses under "Investing
in the Fund" and "Purchasing Shares." For further information on any of the
programs listed below, please contact your financial intermediary or Federated
Securities Corp.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES

As described in the prospectuses, larger purchases of the same Share class
reduce or eliminate the sales charge paid. For example, the Fund will combine
all Class A Shares purchases made on the same day, by the investor, the
investor's spouse, and the investor's children under age 21 when it calculates
the sales charge. This combined purchase option is available within Class F
Shares as well. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account.

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

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

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

CONCURRENT PURCHASES

Shareholders have the privilege of combining concurrent purchases of the same
Share class of two or more funds in the Federated Complex in calculating the
applicable sales charge.

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

LETTER OF INTENT

A shareholder can sign a letter of intent committing to purchase a certain
amount of the same Share class within a 13 month period in order to combine such
purchases in calculating the applicable sales charge. The Fund's custodian will
hold Shares in escrow equal to the maximum applicable sales charge. If the
shareholder completes the commitment, the escrowed Shares will be released to
their account. If the commitment is not completed within 13 months, the
custodian will redeem an appropriate number of escrowed Shares to pay for the
applicable sales charge.

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

While this letter of intent will not obligate the shareholder to purchase Class
A Shares or Class F Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares or Class F Shares of any Federated Funds, excluding money market
accounts, will be aggregated to provide a purchase credit towards fulfillment of
the letter of intent. The letter may be dated as of a prior date to include any
purchase made within the past 90 days. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

The reinvestment privilege is available for all Shares of the Fund within the
same Share Class.

Class A and Class F shareholders who redeem from the Fund may reinvest the
redemption proceeds back into the same Share class at the next determined net
asset value without any sales charge. The original Shares must have been subject
to a sales charge and the reinvestment must be within 120 days.

Similarly, Class C and Class F shareholders who redeem may reinvest their
redemption proceeds in the same Share class within 120 days. Class B Shares also
may be reinvested within 120 days of redemption, although such reinvestment will
be made into Class A Shares. Shareholders would not be entitled to a
reimbursement of the contingent deferred sales charge if paid at the time of
redemption on any Share class. However, reinvested Shares would not be subject
to a contingent deferred sales charge, if otherwise applicable, upon later
redemption.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around the
15th of the month eight full years from the purchase date and will no longer be
subject to a fee under the distribution plan. For purposes of conversion to
Class A Shares, Shares purchased through the reinvestment of dividends and
distributions paid on Class B Shares will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to Class A
Shares. The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B Shares to Class A Shares will not
occur if such a ruling or opinion is not available. In such event, Class B
Shares would continue to be subject to higher expenses than Class A Shares for
an indefinite period.

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT

With respect to Class B Shares and Class C Shares, the Fund has adopted a
Distribution Plan in accordance with Investment Company Act Rule 12b-1.
Additionally, the Fund has adopted a Shareholder Services Agreement with respect
to all classes of Shares.

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

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

Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.

For the fiscal year ended February 28, 1998, the Fund's Class B Shares and Class
C Shares incurred $790,560 and $413,098, respectively, in distribution services
fees, none of which were waived. In addition, for the fiscal year ended February
28, 1998, the Class A Shares, Class B Shares, Class C Shares, and Class F
Shares, paid shareholder services fees in the amount of $1,849,198, $263,520,
$137,699 and $1,543,803, respectively, of which $44,381, $0, $0, and $185,256,
respectively, were waived.

CONVERSION TO FEDERAL FUNDS

It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Federated Shareholder Services Company acts as the shareholder's
agent in depositing checks and converting them to federal funds.

PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND EMPLOYEES

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

* Directors, employees, and sales representatives of the Fund, Passport
Research, Ltd. and Federated Securities Corp. and its affiliates;
* Federated Life Members (Class A Shares only);
* any associated person of an investment dealer who has a sales agreement
with Federated Securities Corp.; and
* trusts, pensions, or profit-sharing plans for these individuals.

These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.

EXCHANGING SECURITIES FOR FUND SHARES

Investors may exchange convertible securities they already own for Shares, or
they may exchange a combination of convertible securities and cash for Shares.
Any securities to be exchanged must meet the investment objective and policies
of the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale.

The Fund will prepare a list of securities which are eligible for acceptance and
furnish this list to brokers upon request. The Fund reserves the right to reject
any security, even though it appears on the list, and the right to amend the
list of acceptable securities at any time without notice to brokers or
investors.

An investment broker acting for an investor should forward the securities in
negotiable form with an authorized letter of transmittal to Federated Securities
Corp. Federated Securities Corp. will determine that transmittal papers are in
good order and forward them to the Fund's custodian, State Street Bank and Trust
Company. The Fund will notify the broker of its acceptance and valuation of the
securities within five business days of their receipt by State Street Bank.

The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share will be issued
for each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription, conversion, or
other rights attached to the securities become the property of the Fund, along
with the securities.

TAX CONSEQUENCES

Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.

DETERMINING NET ASSET VALUE

The Fund's net asset value per Share fluctuates and is based on the market value
of all securities and other assets of the Fund. The net asset value for each
class of Shares may differ due to the variance in daily net income realized by
each class.

Net asset value is not determined on (i) days on which there are not sufficient
changes in the value of the Fund's portfolio securities that its net asset value
might be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; or (iii) the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

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

* according to the last sale price on a national securities exchange, if
available;
* 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
* 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.

EXCHANGE PRIVILEGE

This section relates only to Class F Shares of the Fund. For information
regarding the Exchange Privilege for Class A Shares, Class B Shares, and Class C
Shares of the Fund, please see the prospectus for these classes of Shares.

The Securities and Exchange Commission has issued an order exempting the Fund
from certain provisions of the Investment Company Act of 1940. As a result, Fund
shareholders are allowed to exchange all or some of their Class F Shares for
Class F Shares in other Federated Funds (which are sold with a sales charge
different from that of the Fund or with no sales charge and which are advised by
subsidiaries or affiliates of Federated Investors) without the assessment of a
contingent deferred sales charge on the exchanged Shares.

The order also allows certain other funds that are not advised by subsidiaries
or affiliates of Federated Investors, which do not have a sales charge, to
exchange their shares for Class F Shares on a basis other than their current
offering price. These exchanges may be made to the extent that such shares were
acquired in a prior exchange, at net asset value, for shares of a Federated Fund
carrying a sales charge.

REDUCED SALES CHARGE

If a shareholder making such an exchange qualifies for a reduction or
elimination of the sales charge, the shareholder must notify Federated
Securities Corp.

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Class F 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
fund shares being acquired may be sold. Upon receipt of proper instructions and
required supporting documents, shares submitted for exchange are redeemed and
the proceeds invested in shares of the other fund.

Further information on the exchange privilege and prospectuses for eligible
Federated Funds are available by calling the Fund.

TAX CONSEQUENCES

Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the circumstances, a short-term or long-term capital
gain or loss may be realized.

MAKING AN EXCHANGE

Instructions for exchanges for certain Federated Funds may be given in writing
or by telephone. Written instructions may require a signature guarantee.

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
or its agents. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the Fund or its
agents. Shares may be exchanged between two funds by telephone only if the two
funds have identical shareholder registrations.

Telephoned exchange instructions may be recorded. They must be received by the
transfer agent before 4:00 p.m. (Eastern time) for shares to be exchanged that
day. If reasonable procedures are not followed by the Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.

REDEEMING SHARES

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

REDEMPTION IN KIND

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

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

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

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

CONTINGENT DEFERRED SALES CHARGE

In computing the amount of the applicable Contingent Deferred Sales Charge,
redemptions are deemed to have occurred in the following order: (1) Shares
acquired through the reinvestment of dividends and long-term capital gains; (2)
Shares held for more than six full years from the date of purchase with respect
to Class B Shares and one full year from the date of purchase with respect to
Class C Shares; (3) Shares held for fewer than six years with respect to Class B
Shares and for less than one full year from the date of purchase with respect to
Class C Shares on a first-in, first-out basis.

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:

* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* invest in securities within certain statutory limits; and * 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 based on offering price for the
following periods ended February 28, 1998, were:

DATE OF INITIAL
PUBLIC
SHARE CLASS INVESTMENT ONE-YEAR FIVE-YEARS TEN-YEARS SINCE INCEPTION

Class A 6/5/87 16.31% 10.90% N/A 13.42%
Class B 10/12/94 15.77% N/A N/A 16.09%
Class C 4/30/93 20.90% N/A N/A 11.51%
Class F 6/1/96 20.77% N/A N/A 19.73%

The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the offering price per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge, adjusted over the period by any additional Shares, assuming a
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investments based
on the lesser of the original purchase price or the offering price of Shares
redeemed.

YIELD

The Fund's yields for the thirty-day period ended February 28, 1998, were:

SHARE CLASS YIELD

Class A 2.74%
Class B 1.99%
Class C 1.99%
Class F 2.76%

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 twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by any
class of Shares because of certain adjustments required by the Securities and
Exchange Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS

The Fund's performance of each class of Shares depends upon such variables as:

* portfolio quality;
* average portfolio maturity;
* type of instruments in which the portfolio is invested; * changes in
interest rates and market value of portfolio securities; * changes in the
Fund's or a class of Shares' expenses; and * various other factors.

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

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

* LIPPER ANALYTICAL SERVICES, INC., 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.

* 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.
* STANDARD & POOR'S RATINGS GROUP 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.

* STANDARD & POOR'S RATINGS GROUP 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.
* 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.

* 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 monthly 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.

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

ECONOMIC AND MARKET INFORMATION

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

ABOUT FEDERATED INVESTORS

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

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

In the equity sector, Federated Investors has more than 27 years' experience. As
of December 31, 1997, Federated managed 29 equity funds totaling approximately
$11.7 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.

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

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $4.4 trillion to the more than 6,700 funds available.*

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

INSTITUTIONAL CLIENTS

Federated Investors meets the needs of more than approximately 900 institutional
clients nationwide by managing and servicing separate accounts and mutual funds
for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisors. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division.

BANK MARKETING

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

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

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

FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended February 28, 1998, are
incorporated herein by reference to the Annual Report of the Fund dated February
28, 1998 (File Nos. 33-13388 and 811-5114). A copy of the Annual Report may be
obtained without charge by contacting the Fund.

* Source: Investment Company Institute

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 LONG TERM DEBT RATING DEFINITIONS

AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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:

* Leading market positions in well established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
* Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
* Well-established access to a range of financial markets and assured sources
of alternate liquidity.

STANDARD & POOR'S 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.