Federated Municipal Securities Fund, Inc. N-30D 5/25/01

N-30D 1 form.htm Federated Municipal Securities Fund, Inc. N-30D 5/25/01

Federated Investors
World-Class Investment Manager

Federated Municipal Securities Fund, Inc.

24TH ANNUAL REPORT

March 31, 2001

Established 1976

NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE

J. Christopher Donahue

President

Federated Municipal Securities Fund, Inc.

President's Message

Dear Shareholder:

Federated Municipal Securities Fund, Inc. was created in 1976, and I am pleased to present its 24th Annual Report. The fund has total net assets of more than $542.6 million. More than 85% of the fund's assets are invested in municipal bonds rated A or better. The fund holds over 115 issues, each of which provides tax-free income to shareholders.¹

This past year, shareholders in bond funds--both taxable and tax-free--have enjoyed a relatively safe harbor, as the equity markets (domestic and international) were buffeted by winds surrounding the technology sector. Income from bonds increased, and bond funds provided good performance in comparison to other investment vehicles.

This report covers the 12-month reporting period from April 1, 2000 through March 31, 2001. The report begins with an interview with J. Scott Albrecht, Vice President, who co-manages the fund with Mary Jo Ochson, Senior Vice President, both of Federated Investment Management Company. Following their discussion of the fund's performance and investment strategy are three additional items of shareholder interest. First is a series of graphs showing the fund's long-term investment performance. Second is a complete listing of the fund's municipal bond holdings, and third is the publication of the fund's financial statements.

1 Income may be subject to the federal alternative minimum tax, and state and local taxes.

The fund's fiscal year, which ended March 31, 2001, was a good time to be invested in high-quality municipal bonds, as favorable returns over this period were influenced by strong demand by retail investors and limited new municipal issuance. This limited issuance situation created a premium value for municipal bonds.

As of March 31, 2001, the fund produced a competitive stream of tax-free income, with a 30-day SEC yield of 3.79% for Class A Shares, based on offering price.² This translates into the equivalent of taxable yields of 5.49%, 5.92%, and 6.27% to investors in the 31%, 36%, and 39.6% federal tax brackets, respectively.³

Individual share class total return performance for the 12-month reporting period, including income distributions, follows.⁴

	Total Return	Income Distributions	Net Asset Value Increase
Class A Shares	10.60%	$0.472	$9.90 to $10.45 = 5.56%
Class B Shares	9.62%	$0.383	$9.90 to $10.45 = 5.56%
Class C Shares	9.63%	$0.383	$9.90 to $10.45 = 5.56%

Thank you for selecting Federated Municipal Securities Fund, Inc. as a convenient, diversified way to earn tax-free income. Of course, you have the option of receiving income from the fund or building your account by reinvesting your monthly dividends and compounding tax-free.

Sincerely yours,

J. Christopher Donahue

J. Christopher Donahue
President
May 15, 2001

2 The fund's 30-day SEC yields as of March 31, 2001 for Class B and C Shares were 3.10% and 3.10%, based on offering price, respectively (i.e., less any applicable sales charge).

3 The taxable equivalents for investors in the 31%, 36% and 39.6% tax brackets are : Class B Shares (4.49%, 4.84%, and 5.13%); and Class C Shares (4.49%, 4.84%, and 5.13%).

4 Performance quoted is based on net asset value, represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period, based on offering price (i.e., less any applicable sales charge), for Class A, B, and C Shares were 5.59%, 4.12%, and 8.63%. Mutual fund performance changes over time and may vary significantly from what is currently stated. To receive the most recent month-end performance, call 1-800-341-7400 or visit www.federatedinvestors.com.

J. Scott Albrecht

Vice President

Federated Investment Management
Company

Mary Jo Ochson

Senior Vice President

Federated Investment Management
Company

Investment Review

What is your review of the municipal bond marketplace over the reporting period?

The most significant factors that affected the relative performance of the municipal bond market were the supply of municipal debt brought to market and the demand for municipal debt from retail and institutional buyers. The relative balance of supply and demand in the municipal bond market can have a substantial impact on price performance. As a result of positive supply and demand throughout the reporting period, the municipal bond market performed very well on an after-tax basis relative to the taxable, fixed-income markets. A combination of increased equity market volatility, a limited supply of municipal bonds and bond-friendly economic reports provided the municipal bond market with the raw material to post solid total return numbers over the 12-month reporting period.

Municipal bond market yields continued to follow the declining trend in general interest rates over the reporting period. The Bond Buyer Municipal Index¹ moved from a high of 6.24% on May 19, 2000 to a low for the reporting period of 5.24% on March 21, 2001. The general decline in interest rates occurred as a result of concern over decelerating real economic growth, increasing volatility in the stock market, and potential Federal Reserve Board policy changes. Cash flows in municipal bond funds throughout the industry improved to a positive position over the reporting period, as investors began an asset allocation shift into less risky asset classes.

1 The Bond Buyer's Index is comprised of 40 actively quoted and traded long-term municipal bonds.

How has Federated Municipal Securities Fund, Inc. performed with respect to total return and income during the fiscal year ended March 31, 2001?

For the 12-month reporting period ended March 31, 2001, the fund's Class A Shares produced a strong, double-digit total return of 10.60%, based on net asset value.¹ The Lipper General Municipal Fund Average² produced a total return of 9.91% for the same period.

The fund's current 30-day SEC yield on March 31, 2001 was 3.79% for Class A Shares, based on offering price.³

What factors impacted the fund's performance?

During the reporting period, we concentrated on purchasing bonds with positive convexity characteristics to take advantage of the slowing economic environment. This would include coupons in the 5.00% to 5.50% range with call protection of nine years or longer. We continued to limit new purchases to high-grade credits ("A" rated or better) in anticipation of credit spread widening as real economic growth in the U.S. continued to slow. We made purchases in the following sectors: state and local general obligations, "AAA" rated insured bonds, and high-quality ("A" rated or better) industrial development and pollution control bonds.

The fund's underweighting in bonds subject to the federal alternative minimum tax (AMT) positively benefited performance as spreads widened due to the perceived potential tax impact on investors. The fund's performance was also positively impacted by underweighting issues in California, which experienced spread widening as a result of negative credit news related to the electric power shortfalls and a large amount of new issuance of California-exempt debt.

1 Performance quoted is based on net asset value, represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Total returns for the period, based on net asset value, for Class B and C Shares were 9.62% and 9.63%, respectively. Total returns for the period, based on offering price (i.e., less any applicable sales charge), for Class A, B and C Shares were 5.59%, 4.12%, and 8.63%, respectively.

2 Lipper figures represent the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling into the category indicated. These figures do not take sales charges into account.

3 The 30-day current SEC yield is calculated by dividing the investment income per share for the prior 30 days by the net asset value per share on that date. The SEC yields are compounded and annualized. The 30-day SEC yields on March 31, 2001 for Class B and C Shares were 3.10% and 3.10%, based on offering price (i.e., less any applicable sales charge), respectively.

What were the fund's top five holdings as of March 31, 2001?

The top five holdings were as follows:

Issuer		Percentage of Net Assets
Salt Lake City, UT Hospital Authority Hospital, Revenue Bonds (Series A), 8.125%, due 05/15/2015 (Prerefunded)		3.2%
Springfield, TN Health & Education Facilities Board, Hospital Revenue Bonds, 8.500%, due 04/01/2024 (Prerefunded)		2.9%
Massachusetts Turnpike Authority, Metropolitan Highway System Revenue Bonds (Series A), 4.750%, due 01/15/2017		2.1%
Indianapolis, IN Airport Authority (FedEx Corp.), Special Facilities Revenue Bonds, 7.700%, due 10/01/2022		2.0%
Virginia State Housing Development Authority, Residual Interest Tax-Exempt Securities (Series PA818), 7.4004%, 7/1/2018		1.9%
TOTAL PERCENTAGE OF PORTFOLIO		12.1%

How were the fund's assets allocated in terms of credit quality at the end of the reporting period?

As of March 31, 2001, the quality breakdown of the fund was:

		Percentage of Net Assets
AAA		50.0%
AA		26.7%
A		7.5%
BBB		4.5%
BB		0.7%
Non-rated		8.4%

The weighted average credit quality of the fund as of March 31, 2001 was "AA."

Federal Municipal Securities Fund, Inc. is a high-quality municipal bond fund. What role does credit analysis play in managing the fund?

The fund employs a credit-intensive approach to selecting securities. We have pulled together a team of experienced analysts who perform extensive research on every issue. The analysts who work on this fund have an average of 10 years of analytical experience. Each analyst also has relevant work experience in some of the sectors that they follow.

Each issue is independently reviewed by our analysts regardless of whether or not it has received a rating from one of the rating agencies. This review involves discussions with the issuer, borrower, investment bankers, and other involved parties. When appropriate, the analyst makes an on-site visit. After the research is complete, the analyst's recommendation is reviewed by our credit committee, which consists of senior department personnel, including portfolio managers and other analysts. If the committee agrees that the security meets our standards, we buy it.

After we purchase an issue, we continue to follow it. In addition to following broad sector trends, the credit staff reviews all of our securities on at least an annual basis; many are reviewed more frequently--quarterly or even monthly. When we see signs of changing situations, we alter our holdings accordingly.

What kind of environment do you see ahead for municipal bonds?

The technical market conditions are still in place for the municipal debt market to continue its streak of good performance relative to stocks and other fixed-income alternatives. Demand is expected to remain strong among retail buyers, who have been the most important participants in the municipal bond market over the last two years. Demand has been improving for municipal bonds as a result of investor concerns about the U.S. economy, the stock market, and the potential for state tax rates to increase as tax revenues decline in conjunction with slower economic growth.

There are several events that could have a potential impact on the municipal bond market in the future. A tax bill which would include changes in marginal tax rates has a reasonable probability of being signed into law and would lessen the value of the tax exemption provided for municipal bond income. Also, additional refunding bond issuance could weigh heavy on the market as issuers take advantage of the low interest rate environment to reduce or eliminate outstanding debt. This additional incremental supply of bonds could have an impact on the market's technical position.

Two Ways You May Seek to Invest for Success:

INITIAL INVESTMENT

If you had made an initial investment of $25,000 in the Class A Shares of Federated Municipal Securities Fund, Inc. on 10/4/76, reinvested your dividends and capital gains, and did not redeem any shares, your account would have been worth $104,264 on 3/31/01. You would have earned a 6.00%¹ average annual total return for the investment life span.

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

As of 3/31/01, the Class A Shares' average annual 1-year, 5-year, and 10-year total returns were 5.59%, 3.72%, and 5.37%, respectively. Class B Shares' average annual 1-year, 5-year and since inception (7/26/94) total returns were 4.12%, 3.42% and 3.99%, respectively. Class C Shares' average annual 1-year, 5-year, and since inception (4/21/93) total returns were 8.63%, 3.77%, and 3.56%, respectively.²

1 Total return represents the change in the value of an investment after reinvesting all income and capital gains, and takes into account the 4.50% sales charge applicable to an initial investment in Class A Shares. Data quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost.

2 The total returns stated take into account all applicable sales charges. The maximum sales charges and contingent deferred sales charges for the fund are as follows: Class A Shares, 4.50% sales charge; Class B Shares, 5.50% contingent deferred sales charge; Class C Shares, 1.00% contingent deferred sales charge.

ONE STEP AT A TIME:

$1,000 initial investment and subsequent investments of $1,000 each year for 24 years (reinvesting all dividends and capital gains) would have grown to $61,037.

With this approach, the key is consistency.

If you had started investing $1,000 annually in the Class A Shares of Federated Municipal Securities Fund, Inc. on 10/4/76, reinvested your dividends and capital gains, and did not redeem any shares, you would have invested only $25,000, but your account would have reach a total value of $61,037¹ by 3/31/01. You would have earned an average annual total return of 6.56%.

A practical investment plan helps you pursue a high level of income through tax-free municipal bonds. Through systematic investing, you buy shares on a regular basis and reinvest all earnings. An investment plan can work for you when you invest only $1,000 annually. You can take it one step at a time. Put time, money and compounding to work.

1 This chart assumes that the subsequent annual investments are made on the last day of each anniversary month. No method of investing can guarantee a profit or protect against loss in down markets.

Hypothetical Investors Profile--Investing for Tax-Free Income

Larry and Barbara Bartlett are a fictional couple who, like all other tax-sensitive shareholders, want to keep more of what they earn.

Larry owns a successful architectural firm and Barbara is a marketing executive. Their combined income puts them in the 39.6% federal tax bracket. On March 31, 1990, the Bartletts invested $26,000 in the Class A Shares of Federated Municipal Securities Fund, Inc.

As this chart shows, in 11 years, their original $26,000 investment has grown to $47,101. This represents a 5.55% average annual total return. As far as the Bartletts are concerned, this fund has made all the difference.¹

1 Income may be subject to the federal alternative minimum tax, and state and local taxes.

This hypothetical scenario is provided for illustrative purposes only and does not represent the results obtained by any particular shareholder. Past performance is no guarantee of future results.

Federated Municipal Securities Fund, Inc.--
Class A Shares

GROWTH OF $10,000 INVESTMENT

The graph below illustrates the hypothetical investment of $10,000¹ in Federated Municipal Securities Fund, Inc. (Class A Shares) (the "Fund") from March 31, 1991 to March 31, 2001 compared to the Lehman Brothers Municipal Bond Index (LBMBI),² and the Lipper General Municipal Funds Average (LGMFA).³

Average Annual Total Return⁴ as of 3/31/2001
1 Year		5.59%
5 Years		3.72%
10 Years		5.37%
Start of Performance (10/4/1976)		6.00%

Past performance is no guarantee of future results. Your investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Mutual funds are not obligations of or guaranteed by any bank and are not federally insured.

1 Represents a hypothetical investment of $10,000 in the Fund after deducting the maximum sales charge of 4.50% ($10,000 investment minus $450 sales charge = $9,550). The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI and LGMFA have been adjusted to reflect reinvestment of dividends on securities in the index and average.

2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged.

3 The LGMFA represents the average of the total returns reported by all of the mutual funds designated by Lipper Analytical Services, Inc. as falling in the category indicated, and is not adjusted to reflect any sales charges. However, these total returns are reported net of expenses or other fees that the Securities and Exchange Commission requires to be reflected in a Fund's performance.

4 Total return quoted reflects all applicable sales charges.

Federated Municipal Securities Fund, Inc.--
Class B Shares

GROWTH OF $10,000 INVESTMENT

The graph below illustrates the hypothetical investment of $10,000¹ in Federated Municipal Securities Fund, Inc. (Class B Shares) (the "Fund") from July 26, 1994 (start of performance) to March 31, 2001 compared to the Lehman Brothers Municipal Bond Index (LBMBI),² and the Lipper General Municipal Funds Average (LGMFA).³

Average Annual Total Return⁴ as of 3/31/2001
1 Year		4.12%
5 Years		3.42%
Start of Performance (7/26/1994)		3.99%

1 Represents a hypothetical investment of $10,000 in the Fund. The ending value of the Fund does not reflect a contingent deferred sales charge on any redemption over six years from the purchase date. The maximum contingent deferred sales charge is 5.50% on any redemption less than one year from the purchase date. The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI and LGMFA have been adjusted to reflect reinvestment of dividends on securities in the index and average.

2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged.

4 Total return quoted reflects all applicable sales charges and contingent deferred sales charges.

FEDERATED Municipal Securities Fund, Inc.--
Class C Shares

GROWTH OF $10,000 INVESTMENT

The graph below illustrates the hypothetical investment of $10,000¹ in Federated Municipal Securities Fund, Inc. (Class C Shares) (the "Fund") from April 21, 1993 (start of performance) to March 31, 2001 compared to the Lehman Brothers Municipal Bond Index (LBMBI),² and the Lipper General Municipal Funds Average (LGMFA).³

Average Annual Total Return⁴ as of 3/31/2001
1 Year		8.63%
5 Years		3.77%
Start of Performance (4/21/1993)		3.56%

1 Represents a hypothetical investment of $10,000 in the Fund. A 1.00% contingent deferred sales charge would be applied on any redemption less than one year from the purchases date. The Fund's performance assumes the reinvestment of all dividends and distributions. The LBMBI and LGMFA have been adjusted to reflect reinvestment of dividends on securities in the index and average.

2 The LBMBI is not adjusted to reflect sales charges, expenses, or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The index is unmanaged.

4 Total return quoted reflects all applicable sales charges and contingent deferred sales charges.

Portfolio of Investments

March 31, 2001

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--97.5%

Alabama--0.6%

3,000,000

Mobile County, AL, IDA, IDR Bonds (Series 2000), 6.875% TOBs (Ipsco, Inc.), Mandatory Tender 5/1/2010

3,029,970

California--5.5%

6,870,000

California HFA, Home Mortgage Revenue Bonds (Series 2000), 5.50%, 8/1/2017

AAA

7,196,394

5,000,000

California State Public Works Board, Lease Refunding Revenue Bonds (Series A), 5.25% (Trustees of the California State University), 10/1/2015

A+

5,238,150

1,495,000

California Statewide Communities Development Authority, Certificates of Participation, 6.00% (Sutter Health), 8/15/2013

AAA

1,683,101

1,930,000

California Statewide Communities Development Authority, Certificates of Participation, 6.00% (Sutter Health), 8/15/2015

AAA

2,149,769

4,000,000

Foothill/Eastern Transportation Corridor Agency, CA, Toll Road Refunding Revenue Bonds (Series 1999), 5.375%, 1/15/2015

AAA

4,268,080

4,590,000

Los Angeles, CA, Department of Water & Power, Electric Plant Revenue Bonds, 5.90%, 2/15/2015

A+

4,840,981

4,500,000

Los Angeles, CA, Department of Water & Power, Power System Revenue Bonds (Series 2001A), 5.25%, 7/1/2019

AAA

4,627,215

TOTAL

30,003,690

Colorado--1.7%

2,000,000

Denver (City & County), CO, Excise Tax Refunding Revenue Bonds (Series 1999A), 5.50% (FSA INS), 9/1/2013

AAA

2,139,520

6,650,000

Denver (City & County), CO, Excise Tax Refunding Revenue Bonds (Series 1999A), 5.50% (FSA INS), 9/1/2014

AAA

7,070,812

TOTAL

9,210,332

Connecticut--1.4%

5,000,000

Connecticut State, UT GO Bonds (Series 1999A), 5.25%, 6/15/2012

AAA

5,394,750

2,000,000

University of Connecticut, UT GO Bonds (Series 2000A), 5.25% (Connecticut State), 3/1/2011

AAA

2,185,020

TOTAL

7,579,770

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Delaware--0.5%

2,500,000

Delaware State, UT GO (Series 2000A), 5.25% (Original Issue Yield: 5.40%), 4/1/2016

AAA

2,599,050

Florida--6.7%

4,335,000

Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(Original Issue Yield: 9.173%), 6/1/2014

AA+

6,030,549

665,000

Florida State Board of Education Administration, UT GO Capital Outlay Bonds, 9.125% (Florida State)/(United States Treasury COL)/(Original Issue Yield: 9.173%), 6/1/2014

AAA

924,789

6,070,000

Florida State Board of Education Lottery, Revenue Bonds (Series 2000A), 5.75%, 7/1/2010

AAA

6,807,019

6,635,000

Florida State Department of Transportation, Right of Way Acquisition & Bridge Construction Bonds (Series 1997A), 5.00% (Original Issue Yield: 5.10%), 7/1/2014

AA+

6,794,572

3,000,000

Florida State, UT GO Bonds, Broward County Expressway Authority, 10.00% (Original Issue Yield: 10.105%), 7/1/2014

AA+

4,425,840

1,000,000

Miami-Dade County, FL, Expressway Authority, Toll System Revenue Bonds, 6.00%, 7/1/2013

AAA

1,130,810

3,000,000

Miami-Dade County, FL, School District, Refunding UT GO Bonds, 5.375%, 8/1/2012

AAA

3,274,110

6,135,000

Orange County, FL, Health Facilities Authority, Hospital Revenue Bonds (Series 1999D), 5.75% (Orlando Regional Healthcare System)/(MBIA INS), 10/1/2013

AAA

6,738,991

TOTAL

36,126,680

Georgia--0.4%

2,000,000

Savannah, GA, EDA, Revenue Bonds, 6.80% (Savannah College of Art and Design, Inc.), 10/1/2019

BBB-

2,092,080

Illinois--2.5%

3,250,000

Chicago, IL, Refunding UT GO Bonds (Series 1996A-2), 6.125%, 1/1/2012

AAA

3,706,462

8,295,000

Cook County, IL, Refunding GO Bonds (Series 1997A), 6.25%, 11/15/2013

AAA

9,659,196

TOTAL

13,365,658

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Indiana--2.1%

1,000,000

Indiana Health Facility Financing Authority, Hospital Refunding Revenue Bonds, 5.25% (Floyd Memorial Hospital, IN)/(Original Issue Yield: 5.50%), 2/15/2022

911,870

10,000,000

Indianapolis, IN, Airport Authority, Special Facilities Revenue Bonds, 7.10% (FDX Corp.)/(Original Issue Yield: 7.178%), 1/15/2017

BBB

10,634,100

TOTAL

11,545,970

Kansas--0.8%

4,060,000

Kansas Development Finance Authority, Water Pollution Control Revolving Fund Revenue Bonds (Series II), 6.00%, 11/1/2013

AA+

4,571,885

Louisiana--3.1%

6,000,000

De Soto Parish, LA, Environmental Improvement Authority, Revenue Bonds, 7.70% (International Paper Co.), 11/1/2018

BBB+

6,529,860

10,000,000

St. James Parish, LA, Solid Waste Disposal Revenue Bonds, 7.70% (Freeport McMoRan, Inc.)/(Original Issue Yield: 7.75%), 10/1/2022

10,315,200

TOTAL

16,845,060

Maryland--1.0%

5,000,000

Prince Georges County, MD, Consolidated Public Improvement UT GO Bonds, 5.50%, 10/1/2013

AAA

5,471,450

Massachusetts--7.4%

1,965,000

Boston, MA, UT GO (Series 2000A), 5.75%, 2/1/2012

AA-

2,179,362

5,000,000

Commonwealth of Massachusetts, UT GO Bonds (Series 2000B), 6.00%, 6/1/2016

AA-

5,693,050

2,000,000

Massachusetts Bay Transportation Authority, Assessment Bonds (Series 2000A), 5.75%, 7/1/2016

AAA

2,159,840

3,000,000

Massachusetts Port Authority, Passenger Facility Charges Revenue Bonds (Series 1999A), 5.125% (Original Issue Yield: 5.25%), 7/1/2016

AAA

3,062,040

3,000,000

Massachusetts Port Authority, Passenger Facility Charges Revenue Bonds (Series 1999A), 5.125% (Original Issue Yield: 5.29%), 7/1/2017

AAA

3,046,380

12,360,000

Massachusetts Turnpike Authority, Metropolitan Highway System Revenue Bonds (Series A), 4.75% (Original Issue Yield: 5.23%), 1/1/2034

AAA

11,298,647

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Massachusetts--continued

3,000,000

Massachusetts Water Pollution Abatement Trust Pool, Program Bonds (Series 6), 5.25% (Original Issue Yield: 5.50%), 8/1/2019

AAA

3,063,390

3,000,000

Massachusetts Water Pollution Abatement Trust Pool, Program Bonds (Series 6), 5.25% (Original Issue Yield: 5.53%), 8/1/2020

AAA

3,053,700

3,035,000

Worcester, MA, LT GO Bonds (Series A), 5.75% (FSA INS), 4/1/2013

AAA

3,377,743

3,120,000

Worcester, MA, LT GO Bonds (Series A), 5.75% (FSA INS), 4/1/2014

AAA

3,457,553

TOTAL

40,391,705

Michigan--2.3%

2,390,000

Michigan Municipal Bond Authority, Revenue Bonds (Series 2000), 5.875% (Clean Water Revolving Fund), 10/1/2015

AAA

2,658,469

2,595,000

Michigan Municipal Bond Authority, Revenue Bonds (Series 2000), 5.875% (Drinking Water Revolving Fund), 10/1/2015

AAA

2,886,496

4,215,000

Michigan State, Environmental Protection Program, UT GO Bonds, 5.25% (Original Issue Yield: 5.34%), 11/1/2018

AAA

4,341,239

2,650,000

Rochester, MI, Community School District, UT GO Refunding Bonds (Series I), 5.50% (FGIC and Q-SBLF LOCs)/(Original Issue Yield: 5.56%), 5/1/2013

AAA

2,846,762

TOTAL

12,732,966

Minnesota--2.8%

5,000,000

Northern Municipal Power Agency, MN, Electric System Revenue Bonds, 5.40% (Original Issue Yield: 5.52%), 1/1/2015

AAA

5,266,500

15,000,000

Southern Minnesota Municipal Power Agency, Power Supply System Revenue Bonds (Series A), (MBIA INS)/(Original Issue Yield: 6.65%), 1/1/2019

AAA

5,988,150

3,585,000

St. Paul, MN, Housing & Redevelopment Authority, Hospital Refunding Revenue Bonds (Series A), 6.625% (Healtheast, MN)/(Original Issue Yield: 6.687%), 11/1/2017

BB+

3,220,943

1,000,000

St. Paul, MN, Housing & Redevelopment Authority, Revenue Bonds (Series 1997A), 5.70% (Healtheast, MN)/(Original Issue Yield: 5.756%), 11/1/2015

BB+

816,620

TOTAL

15,292,213

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Mississippi--1.0%

1,500,000

Mississippi State, UT GO Bonds, 5.50%, 9/1/2015

1,638,600

3,335,000

Mississippi State, UT GO Bonds, 5.50%, 9/1/2016

3,623,277

TOTAL

5,261,877

Missouri--1.6%

855,000

Kansas City, MO, IDA, Multifamily Housing Revenue Bonds, 6.70% (Woodbridge Apartments Project), 8/1/2015

834,933

8,010,000

Kansas City, MO, UT GO Bonds (Series B), 5.125% (Original Issue Yield: 5.25%), 2/1/2017

8,150,095

TOTAL

8,985,028

New Jersey--3.3%

6,210,000

New Jersey Health Care Facilities Financing Authority, Revenue Bonds (Series 1999), 5.625% (Meridian Health System Obligated Group)/(FSA INS), 7/1/2012

AAA

6,822,120

4,265,000

New Jersey State Transportation Trust Fund Authority, Transportation System Bonds (Series 2000B), 6.00%, 6/15/2014

AAA

4,781,918

6,000,000

New Jersey State, Refunding UT GO Bonds (Series F), 5.25%, 8/1/2014

AA+

6,298,920

TOTAL

17,902,958

New York--16.7%

8,000,000

Long Island Power Authority, Electric System Revenue Bonds (Series A), 5.50% (FSA INS), 12/1/2012

AAA

8,792,080

3,000,000

New York City, NY, Transit Authority Metropolitan Transportation Authority, Triborough Bridge and Tunnel Authority, Certificates of Participation (Series 1999A), 5.625% (AMBAC INS), 1/1/2012

AAA

3,299,790

3,000,000

New York City, NY, Transit Authority Metropolitan Transportation Authority, Triborough Bridge and Tunnel Authority, Certificates of Participation (Series 1999A), 5.625% (AMBAC INS), 1/1/2013

AAA

3,279,120

4,595,000

New York City, NY, Transitional Finance Authority, Future Tax Secured Revenue Bonds (Series C), 5.25%, 5/1/2013

AA+

4,834,032

6,000,000

New York City, NY, Transitional Finance Authority, Future Tax Secured Revenue Bonds (Series A), 6.00% (FGIC INS), 8/15/2015

AAA

6,665,400

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

New York--continued

2,500,000

New York City, NY, UT GO Bonds (Series 2000A), 6.50%, 5/15/2011

2,919,025

2,500,000

New York City, NY, UT GO Bonds (Series 2000A), 6.50%, 5/15/2012

2,900,550

5,000,000

New York City, NY, UT GO Bonds (Series 2001F), 5.25%, 8/1/2015

5,168,800

2,500,000

New York State Dormitory Authority, Revenue Bonds (Series A), 5.50% (University of Rochester, NY)/(Original Issue Yield: 5.60%), 7/1/2016

A+

2,633,925

5,000,000

New York State Dormitory Authority, Revenue Bonds, 6.00% (New York State University), 5/15/2016

AAA

5,563,400

2,500,000

New York State Environmental Facilities Corp., Refunding Notes (Series F), 5.25%, 6/15/2014

AA-

2,618,925

4,000,000

New York State Environmental Facilities Corp., State Clean Water & Drinking Revolving Fund (Series 1998C), 5.25%, 6/15/2013

AA-

4,207,920

6,025,000

New York State Local Government Assistance Corp., Residual Interest Tax-Exempt Securities (Series PA-207A), 7.8230%, 4/1/2007

7,384,722

5,050,000

New York State Local Government Assistance Corp., Residual Interest Tax-Exempt Securities (Series PA-207B), 7.8230% (AMBAC INS), 4/1/2008

6,276,392

3,315,000

New York State Mortgage Agency, Mortgage Revenue Bonds (Twenty-Ninth Series), 5.40%, 10/1/2022

Aaa

3,325,741

4,000,000

New York State Thruway Authority, Local Highway & Bridge Service Contract Revenue Bonds, 5.625%, 4/1/2013

AAA

4,348,720

4,000,000

New York State Thruway Authority, Service Contract Revenue Bonds (Series 1998A-2), 5.375%, 4/1/2016

AAA

4,167,760

2,595,000

New York State Urban Development Corp., Revenue Bonds (Series 1999C), 6.00% (Correctional Facilities Service Contract), 1/1/2014

AAA

2,884,472

3,000,000

Suffolk County, NY, Water Authority, Waterworks Refunding Revenue Bonds, 6.00% (MBIA INS), 6/1/2014

AAA

3,441,660

5,320,000

Triborough Bridge & Tunnel Authority, NY, General Purpose Revenue Bonds (Series 1999B), 5.75%, 1/1/2015

A+

5,770,285

TOTAL

90,482,719

North Carolina--1.2%

6,000,000

North Carolina State, Public Improvement, UT GO Bonds (Series 1999A), 5.25% (Original Issue Yield: 5.38%), 3/1/2015

AAA

6,325,500

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Ohio--3.8%

3,000,000

Columbus, OH, UT GO Bonds (Series 2), 5.75%, 6/15/2015

AAA

3,305,820

3,000,000

Franklin County, OH, Health Care Facilities, Refunding Revenue Bonds, 5.50% (Ohio Presbyterian Retirement Services)/(Original Issue Yield: 5.64%), 7/1/2017

2,578,380

4,000,000

Ohio State Building Authority, State Facilities Bonds (Series 1999), 5.50%, 10/1/2013

4,314,560

4,135,000

Ohio State, Infrastructure Improvement, UT GO Bonds (Series 1999A), 5.75%, 2/1/2017

AA+

4,484,077

5,500,000

Ohio State, Infrastructure Improvement, UT GO Bonds (Series A), 5.50% (Original Issue Yield: 5.65%), 2/1/2019

AA+

5,774,450

TOTAL

20,457,287

Pennsylvania--3.9%

2,000,000

Allegheny County, PA, HDA, Refunding Revenue Bonds (Series 1998A), 5.125% (South Hills Health System)/(Original Issue Yield: 5.40%), 5/1/2029

1,702,640

2,000,000

Allegheny County, PA, Port Authority, Special Revenue Transportation Bonds (Series 1999), 6.00%, 3/1/2013

AAA

2,267,000

4,350,000

Commonwealth of Pennsylvania, UT GO Bonds (Second Series of 2000), 5.25% (Original Issue Yield: 5.40%), 10/15/2018

4,457,836

5,000,000

Commonwealth of Pennsylvania, UT GO Bonds, 6.00%, 1/15/2014

5,586,550

5,000,000

Pennsylvania Intergovernmental Coop Authority, Special Tax Refunding Revenue Bonds, 5.25% (Philadelphia Funding Program), 6/15/2013

AAA

5,228,450

2,000,000

Sayre, PA, Health Care Facilities Authority, Revenue Bonds (Series A), 7.10% (Guthrie Healthcare System, PA)/(Original Issue Yield: 7.175%), 3/1/2017

AAA

2,045,280

TOTAL

21,287,756

Puerto Rico--0.9%

2,000,000

Puerto Rico Highway and Transportation Authority, Residual Interest Tax-Exempt Securities (Series PA 331A), 6.8575% (AMBAC INS), 7/1/2013

2,463,320

2,000,000

Puerto Rico Highway and Transportation Authority, Residual Interest Tax-Exempt Securities (Series PA 331B), 6.8575% (AMBAC INS), 7/1/2014

2,448,680

TOTAL

4,912,000

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

South Carolina--1.2%

6,000,000

South Carolina Transportation Infrastructure Bank, Revenue Bonds, 5.50% (AMBAC INS), 10/1/2011

AAA

6,556,740

Tennessee--7.0%

5,000,000

Memphis, TN, General Improvement, UT GO Bonds, 5.25% (Original Issue Yield: 5.41%), 4/1/2016

5,150,000

6,000,000

Shelby County, TN, Public Improvement, UT GO School Bonds (Series A), 5.50%, 4/1/2017

AA+

6,297,420

13,000,000

Springfield, TN, Health & Educational Facilities Board, Hospital Revenue Bonds, 8.50% (NorthCrest Medical Center)/(Original Issue Yield: 8.875%), 4/1/2024

AAA

15,978,690

2,280,000

Tennessee Housing Development Agency, Home Ownership Program Revenue Bonds (Series 1999-2A), 5.35%, 7/1/2012

2,379,910

2,405,000

Tennessee Housing Development Agency, Home Ownership Program Revenue Bonds (Series 1999-2A), 5.40%, 7/1/2013

2,503,220

5,500,000

Tennessee State, UT GO Bonds (Series A), 5.00% (Original Issue Yield: 5.18%), 3/1/2015

AA+

5,612,860

TOTAL

37,922,100

Texas--5.0%

2,200,000

Harris County, TX, HFDC, Hospital Revenue Bonds (Series 1997A), 6.00% (Memorial Hospital System), 6/1/2011

AAA

2,471,546

4,000,000

Harris County, TX, HFDC, Hospital Revenue Bonds (Series 1997A), 6.00% (Memorial Hospital System), 6/1/2012

AAA

4,508,800

2,000,000

Lufkin, TX, HFDC, Health System Revenue Bonds (Series 1998), 5.70% (Memorial Health System of East Texas)/(Original Issue Yield: 5.75%), 2/15/2028

BBB-

1,530,220

3,395,000

Richardson, TX, Hospital Authority, Refunding Revenue Bonds, 6.50% (Baylor/Richardson Medical Center, TX)/(Original Issue Yield: 6.72%), 12/1/2012

BBB+

3,417,645

11,915,000

San Antonio, TX, Electric & Gas, Revenue Bonds, 5.00% (Original Issue Yield: 6.10%), 2/1/2017

12,110,281

7,070,000

Texas Municipal Power Agency, Refunding Revenue Bonds (MBIA INS)/(Original Issue Yield: 6.15%), 9/1/2017

AAA

3,048,230

TOTAL

27,086,722

Principal
Amount

Credit
Rating

Value

LONG-TERM MUNICIPALS--continued

Utah--3.2%

13,500,000

Salt Lake City, UT, Hospital Authority, Hospital Refunding Revenue Bonds (Series A), 8.125% (IHC Hospitals Inc., UT)/(United States Treasury COL)/(Original Issue Yield: 8.17%), 5/15/2015

AAA

17,422,965

Virginia--4.2%

3,360,000

Greater Richmond Convention Center Authority, VA, Hotel Tax Revenue Bonds, 6.00% (Convention Center Expansion Project), 6/15/2012

A-

3,768,038

3,185,000

Greater Richmond Convention Center Authority, VA, Hotel Tax Revenue Bonds, 6.00% (Convention Center Expansion Project), 6/15/2013

A-

3,548,791

5,000,000

Richmond, VA, UT GO Bonds, 5.50% (Original Issue Yield: 5.58%), 1/15/2018

AAA

5,302,550

9,300,000

Virginia State Housing Development Authority, Residual Interest Tax-Exempt Securities (Series PA 818), 7.4004%, 7/1/2018

10,386,240

TOTAL

23,005,619

Washington--3.2%

5,905,000

Seattle, WA, Library Facilities, UT GO Bonds (Series 1999A), 5.375%, 12/1/2012

AA+

6,318,055

5,000,000

Washington State Public Power Supply System, (Nuclear Project No. 2) Refunding Revenue Bonds (Series 1998A), 5.00% (Original Issue Yield: 5.18%), 7/1/2012

AA-

5,120,550

5,595,000

Washington State, Convention and Trade Center, Certificates of Participation, 5.125% (Original Issue Yield: 5.30%), 7/1/2013

AAA

5,761,507

TOTAL

17,200,112

West Virginia--1.2%

6,000,000

West Virginia State, GO State Road Bonds (Series 1999), 5.75%, 6/1/2014

AA-

6,555,720

Wisconsin--1.3%

6,460,000

Wisconsin State, UT GO Bonds (Series A), 5.50%, 5/1/2009

7,032,808

TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $494,604,161)

529,256,390

Principal
Amount

Credit
Rating

Value

SHORT-TERM MUNICIPALS--0.3%

Indiana--0.1%

300,000

Indiana Health Facility Financing Authority (Series 2000B) Daily VRDNs (Clarian Health Partners, Inc.)/(Chase Manhattan Bank, New York LIQ)

A-1+

300,000

Puerto Rico--0.1%

400,000

Puerto Rico Government Development Bank (GDB) Weekly VRDNs (MBIA INS)/(Credit Suisse First Boston LIQ)

A-1+

400,000

Texas--0.1%

700,000

Harris County, TX, HFDC, (Series 1997A) Daily VRDNs (St. Luke's Episcopal Hospital)/(Bank of America, N.A., Morgan Guaranty Trust Co., New York and Toronto Dominion Bank LIQs)

A-1+

700,000

TOTAL SHORT-TERM MUNICIPALS (AT AMORTIZED COST)

1,400,000

TOTAL INVESTMENTS (IDENTIFIED COST $496,004,161)³

530,656,390

Securities that are subject to alternative minimum tax represent 7.5% of the portfolio as calculated based on total portfolio market value.

1 Please refer to the Appendix of the Statement of Additional Information for an explanation of the credit ratings. Current credit ratings are unaudited.

2 Denotes a restricted security which is subject to restrictions on resale under federal securities laws. These securities have been deemed liquid based upon criteria approved by the Fund's Board of Directors. At March 31, 2001, these securities amounted to $10,942,549, which represents 2.02% of net assets.

3 The cost of investments for federal tax purposes amounts to $496,004,161. The net unrealized appreciation of investments on a federal tax basis amounts to $34,652,229 which is comprised of $36,650,453 appreciation and $1,998,224 depreciation at March 31, 2001.

Note: The categories of investments are shown as a percentage of net assets ($542,586,902) at March 31, 2001.

The following acronyms are used throughout this portfolio:

AMBAC	--American Municipal Bond Assurance Corporation
COL	--Collateralized
EDA	--Economic Development Authority
FGIC	--Financial Guaranty Insurance Corporation
FSA	--Financial Security Assurance
GO	--General Obligation
HDA	--Hospital Development Authority
HFA	--Housing Finance Authority
HFDC	--Health Facility Development Corporation
IDA	--Industrial Development Authority
IDR	--Industrial Development Revenue
INS	--Insured
LIQ	--Liquidity Agreement
LOCs	--Letter(s) of Credit
LT	--Limited Tax
MBIA	--Municipal Bond Insurance Association
Q-SBLF	--Qualified State Bond Loan Fund
TOBs	--Tender Option Bonds
UT	--Unlimited Tax
VRDNs	--Variable Rate Demand Notes

See Notes which are an integral part of the Financial Statements

Statement of Assets and Liabilities

March 31, 2001

Assets:

Total investments in securities, at value (identified cost $496,004,161)

530,656,390

Cash

49,047

Income receivable

8,859,740

Receivable for investments sold

4,080,000

Receivable for shares sold

1,155,874

TOTAL ASSETS

544,801,051

Liabilities:

Payable for shares redeemed

1,247,096

Income distribution payable

714,217

Accrued expenses

252,836

TOTAL LIABILITIES

2,214,149

Net assets for 51,913,571 shares outstanding

542,586,902

Net Assets Consist of:

Paid in capital

550,996,479

Net unrealized appreciation of investments

34,652,229

Accumulated net realized loss on investments

(44,630,944

)

Accumulated undistributed net investment income

1,569,138

TOTAL NET ASSETS

542,586,902

Net Asset Value, Offering Price and Redemption Proceeds Per Share

Class A Shares:

Net asset value per share ($461,456,206 ÷ 44,151,115 shares outstanding)

$10.45

Offering price per share (100/95.50 of $10.45)¹

$10.94

Redemption proceeds per share

$10.45

Class B Shares:

Net asset value per share ($71,510,893 ÷ 6,842,047 shares outstanding)

$10.45

Offering price per share

$10.45

Redemption proceeds per share (94.50/100 of $10.45)¹

$9.88

Class C Shares:

Net asset value per share ($9,619,803 ÷ 920,409 shares outstanding)

$10.45

Offering price per share

$10.45

Redemption proceeds per share (99.00/100 of $10.45)¹

$10.35

1 See "What Do Shares Cost?" in the Prospectus.

See Notes which are an integral part of the Financial Statements

Statement of Operations

Year Ended March 31, 2001

Investment Income:

Interest

29,984,704

Expenses:

Investment adviser fee

2,966,085

Administrative personnel and services fee

405,789

Custodian fees

57,518

Transfer and dividend disbursing agent fees and expenses

396,589

Directors'/Trustees' fees

15,037

Auditing fees

12,315

Legal fees

13,689

Portfolio accounting fees

132,352

Distribution services fee--Class B Shares

525,323

Distribution services fee--Class C Shares

73,952

Shareholder services fee--Class A Shares

1,147,607

Shareholder services fee--Class B Shares

175,108

Shareholder services fee--Class C Shares

24,650

Share registration costs

45,867

Printing and postage

52,768

Insurance premiums

1,887

Taxes

40,567

Miscellaneous

5,939

TOTAL EXPENSES

6,093,042

Waivers:

Waiver of shareholder services fee--Class A Shares

(642,660

)

Waiver of shareholder services fee--Class C Shares

(666

)

TOTAL WAIVERS

(643,326

)

Net expenses

5,449,716

Net investment income

24,534,988

Realized and Unrealized Gain on Investments:

Net realized gain on investments

6,318,453

Net change in unrealized appreciation of investments

22,888,932

Net realized and unrealized gain on investments

29,207,385

Change in net assets resulting from operations

53,742,373

See Notes which are an integral part of the Financial Statements

Statement of Changes in Net Assets

Year Ended March 31

2001

2000

Increase (Decrease) in Net Assets

Operations:

Net investment income

24,534,988

28,578,781

Net realized gain (loss) on investments

6,318,453

(30,801,658

)

Net change in unrealized appreciation of investments

22,888,932

(26,542,320

)

CHANGE IN NET ASSETS RESULTING FROM OPERATIONS

53,742,373

(28,765,197

)

Distributions to Shareholders:

Distributions from net investment income

Class A Shares

(21,503,298

)

(24,804,613

)

Class B Shares

(2,657,372

)

(3,215,677

)

Class C Shares

(374,318

)

(558,491

)

Distributions from net realized gain on investments

Class A Shares

(1,587,020

)

Class B Shares

(249,229

)

Class C Shares

(45,144

)

CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS

(24,534,988

)

(30,460,174

)

Share Transactions:

Proceeds from sale of shares

136,563,530

128,643,376

Net asset value of shares issued to shareholders in payment of distributions declared

16,236,724

19,111,909

Cost of shares redeemed

(193,592,665

)

(202,867,424

)

CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS

(40,792,411

)

(55,112,139

)

Change in net assets

(11,585,026

)

(114,337,510

)

Net Assets:

Beginning of period

554,171,928

668,509,438

End of period (including undistributed net investment income of $1,569,138 and $1,573,343, respectively)

542,586,902

554,171,928

See Notes which are an integral part of the Financial Statements

Financial Highlights -- Class A Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31

2001

2000

1999

1998

1997

Net Asset Value, Beginning of Period

$ 9.90

$10.87

$10.91

$10.31

$10.82

Income From Investment Operations:

Net investment income

0.47

0.58

0.53

0.46

0.55

Net realized and unrealized gain (loss) on investments

0.55

(1.02

)

(0.05

)

0.64

(0.36

)

TOTAL FROM INVESTMENT OPERATIONS

1.02

(0.44

)

0.48

1.10

0.19

Less Distributions:

Distributions from net investment income

(0.47

)

(0.50

)

(0.52

)

(0.46

)

(0.55

)

Distributions in excess of net investment income³

(0.01

)

(0.05

)

Total distributions from net investment income

(0.47

)

(0.50

)

(0.52

)

(0.47

)

(0.60

)

Distributions from net realized gain on investments

(0.03

)

(0.03

)

(0.10

)

TOTAL DISTRIBUTIONS

(0.47

)

(0.53

)

(0.52

)

(0.50

)

(0.70

)

Net Asset Value, End of Period

$10.45

$ 9.90

$10.87

$10.91

$10.31

Total Return⁴

10.60

(4.01

4.46

11.28

1.84

Ratios to Average Net Assets:

Expenses

0.88

0.92

0.87

0.86

0.93

Net investment income

4.68

5.72

4.86

4.70

5.37

Expense waiver/reimbursement⁵

0.14

Supplemental Data:

Net assets, end of period (000 omitted)

$461,456

$471,475

$562,883

$591,310

$595,515

Portfolio turnover

1 Beginning with the year ended March 31, 2000, the Fund was audited by Ernst & Young LLP. Each of the previous years was audited by other auditors.

2 Per share information is based on average shares outstanding.

3 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.

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

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

See Notes which are an integral part of the Financial Statements

Financial Highlights -- Class B Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31

2001

2000

1999

1998

1997

Net Asset Value, Beginning of Period

$ 9.90

$10.87

$10.91

$10.31

$10.82

Income From Investment Operations:

Net investment income

0.38

0.48

0.43

0.38

0.47

Net realized and unrealized gain (loss) on investments

0.55

(1.01

)

(0.05

)

0.64

(0.37

)

TOTAL FROM INVESTMENT OPERATIONS

0.93

(0.53

)

0.38

1.02

0.10

Less Distributions:

Distributions from net investment income

(0.38

)

(0.41

)

(0.42

)

(0.38

)

(0.47

)

Distributions in excess of net investment income³

(0.01

)

(0.04

)

Total distributions from net investment income

(0.38

)

(0.41

)

(0.42

)

(0.39

)

(0.51

)

Distributions from net realized gain on investments

(0.03

)

(0.03

)

(0.10

)

TOTAL DISTRIBUTIONS

(0.38

)

(0.44

)

(0.42

)

(0.42

)

(0.61

)

Net Asset Value, End of Period

$10.45

$ 9.90

$10.87

$10.91

$10.31

Total Return⁴

9.62

(4.85

3.53

10.30

0.94

Ratios to Average Net Assets:

Expenses

1.77

1.81

1.76

1.75

1.82

Net investment income

3.79

4.68

3.97

3.81

4.50

Supplemental Data:

Net assets, end of period (000 omitted)

$71,511

$72,095

$88,756

$87,304

$77,536

Portfolio turnover

1 Beginning with the year ended March 31, 2000, the Fund was audited by Ernst & Young LLP. Each of the previous years was audited by other auditors.

2 Per share information is based on average shares outstanding.

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

See Notes which are an integral part of the Financial Statements

Financial Highlights -- Class C Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31

2001

2000

1999

1998

1997

Net Asset Value, Beginning of Period

$9.90

$10.87

$10.91

$10.31

$10.82

Income From Investment Operations:

Net investment income

0.38

0.48

0.43

0.37

0.46

Net realized and unrealized gain (loss) on investments

0.55

(1.01

)

(0.05

)

0.65

(0.36

)

TOTAL FROM INVESTMENT OPERATIONS

0.93

(0.53

)

0.38

1.02

0.10

Less Distributions:

Distributions from net investment income

(0.38

)

(0.41

)

(0.42

)

(0.37

)

(0.46

)

Distributions in excess of net investment income³

(0.02

)

(0.05

)

Total distributions from net investment income

(0.38

)

(0.41

)

(0.42

)

(0.39

)

(0.51

)

Distributions from net realized gain on investments

(0.03

)

(0.03

)

(0.10

)

TOTAL DISTRIBUTIONS

(0.38

)

(0.44

)

(0.42

)

(0.42

)

(0.61

)

Net Asset Value, End of Period

$10.45

$ 9.90

$10.87

$10.91

$10.31

Total Return⁴

9.63

(4.85

3.54

10.31

0.95

Ratios to Average Net Assets:

Expenses

1.76

1.80

1.75

1.74

1.81

Net investment income

3.80

4.68

3.98

3.83

4.51

Expense waiver/reimbursement⁵

0.01

Supplemental Data:

Net assets, end of period (000 omitted)

$9,620

$10,601

$16,870

$17,616

$20,544

Portfolio turnover

1 Beginning with the year ended March 31, 2000, the Fund was audited by Ernst & Young LLP. Each of the previous years was audited by other auditors.

2 Per share information is based on average shares outstanding.

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

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

See Notes which are an integral part of the Financial Statements

Notes to Financial Statements

March 31, 2001

ORGANIZATION

Federated Municipal Securities Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund offers three classes of shares: Class A Shares, Class B Shares and Class C Shares. The investment objective of the Fund is to provide for its shareholders a high level of current income which is exempt from federal regular income tax.

SIGNIFICANT ACCOUNTING POLICIES

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

Investment Valuation

Municipal bonds are valued by an independent pricing service, taking into consideration yield, liquidity, risk, credit quality, coupon, maturity, type of issue, and any other factors or market data the pricing service deems relevant. Short-term securities are valued at the prices provided by an independent pricing service. However, short-term securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, which approximates fair market value. Securities for which no quotations are readily available are valued at fair value as determined in good faith using methods approved by the Board of Directors (the "Directors").

The Fund will adopt the provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, as revised, effective for fiscal years beginning after December 15, 2000. As required, the Fund will begin amortizing premiums and discounts on debt securities effective April 1, 2001. Prior to this date, the Fund did not amortize premiums or discounts on debt securities. The cumulative effect, although not yet fully determined, will have no impact on the total net assets of the Fund.

Investment Income, Expenses and Distributions

Interest income and expenses are accrued daily. Bond premium and discount, if applicable, are amortized as required by the Internal Revenue Code, as amended (the "Code"). Distributions to shareholders are recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at fair value. The Fund offers multiple classes of shares, which differ in their respective distribution and service fees. All shareholders bear the common expenses of the Fund based on average daily net assets of each class, without distinction between share classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.

Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles.

The following reclassifications have been made to the financial statements.

Increase (Decrease)

Paid-In Capital

Accumulated Undistributed
Net Investment Income

Accumulated Net Realized
Loss on Investments

$3,917,589

$(4,205)

$(3,913,384)

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

Federal Taxes

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

At March 31, 2001, the Fund, for federal tax purposes, had a capital loss carryforward of $44,630,944, which will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. Pursuant to the Code, such capital loss carryforward will expire as follows:

Expiration Year

Expiration Amount

2008

$43,980,229

2009

$ 650,715

When-Issued and Delayed Delivery Transactions

The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked-to-market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.

Restricted Securities

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

Use of Estimates

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

Other

Investment transactions are accounted for on a trade date basis.

CAPITAL STOCK

At March 31, 2001, par values shares ($0.01 per share) authorized were as follows:

Share Class Name		Number of Par Value Capital Stock Authorized
Class A Shares		375,000,000
Class B Shares		250,000,000
Class C Shares		375,000,000
TOTAL		1,000,000,000

Transactions in capital stock were as follows:

Year Ended March 31

2001

2000

Class A Shares:

Shares

Amount

Shares

Amount

Shares sold

9,866,052

98,911,478

9,897,073

99,768,199

Shares issued to shareholders in payment of distributions declared

1,472,902

14,842,203

1,698,867

17,136,432

Shares redeemed

(14,807,063

)

(148,715,250

)

(15,749,468

)

(158,525,358

)

NET CHANGE RESULTING FROM CLASS A SHARE TRANSACTIONS

(3,468,109

)

(34,961,569

)

(4,153,528

)

(41,620,727

)

Year Ended March 31

2001

2000

Class B Shares:

Shares

Amount

Shares

Amount

Shares sold

1,021,860

10,382,729

1,034,706

10,573,834

Shares issued to shareholders in payment of distributions declared

117,174

1,182,883

158,380

1,597,023

Shares redeemed

(1,578,592

)

(15,921,566

)

(2,075,020

)

(20,875,144

)

NET CHANGE RESULTING FROM CLASS B SHARE TRANSACTIONS

(439,558

)

(4,355,954

)

(881,934

)

(8,704,287

)

Year Ended March 31

2001

2000

Class C Shares:

Shares

Amount

Shares

Amount

Shares sold

2,734,470

27,269,323

1,858,031

18,301,343

Shares issued to shareholders in payment of distributions declared

20,984

211,638

37,330

378,454

Shares redeemed

(2,905,717

)

(28,955,849

)

(2,376,325

)

(23,466,922

)

NET CHANGE RESULTING FROM CLASS C SHARE TRANSACTIONS

(150,263

)

(1,474,888

)

(480,964

)

(4,787,125

)

NET CHANGE RESULTING FROM SHARE TRANSACTIONS

(4,057,930

)

(40,792,411

)

(5,516,426

)

(55,112,139

)

INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES

Investment Adviser Fee

Federated Investment Management Company, the Fund's investment adviser (the "Adviser"), receives for its services an annual investment adviser fee equal to (a) a maximum of 0.30% of the average daily net assets of the Fund, and (b) 4.50% of the gross income of the Fund, excluding capital gains or losses.

Administrative Fee

Federated Services Company ("FServ"), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FServ is based on a scale that ranges from 0.150% to 0.075% of the average aggregate daily net assets of all funds advised by subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum per portfolio and $30,000 per each additional class.

Distribution Services Fee

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

Share Class Name

Percentage of Average
Daily Net Assets

Class B Shares

0.75%

Class C Shares

0.75%

Shareholder Services Fee

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

Transfer and Dividend Disbursing Agent Fees and Expenses

FServ, through its subsidiary FSSC, serves as transfer and dividend disbursing agent for the Fund. The fee paid to FSSC is based on the size, type and number of accounts and transactions made by shareholders.

Portfolio Accounting Fees

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

Interfund Transactions

During the year ended March 31, 2001, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $235,400,000 and $272,116,467, respectively.

General

Certain of the Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.

INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities (and in-kind contributions), for the year ended March 31, 2001, were as follows:

Purchases	$	144,327,555

Sales	$	185,002,255

CONCENTRATION OF CREDIT RISK

At March 31, 2001, 16.0% of the securities in the portfolio of investments are backed by letters of credit or bond insurance of various financial institutions and financial guaranty assurance agencies. The percentage of investments insured by or supported (backed) by a letter of credit from any one institution or agency did not exceed 6.0% of total investments.

FEDERAL INCOME TAX INFORMATION (UNAUDITED)

For the year ended March 31, 2001, the Fund did not designate any long-term capital gain dividends.

Report of Ernst & Young LLP, Independent Auditors

TO THE DIRECTORS AND SHAREHOLDERS OF FEDERATED MUNICIPAL SECURITIES FUND, INC.:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Federated Municipal Securities Fund, Inc. (the "Fund"), as of March 31, 2001, and the related statement of operations for the year then ended, the statements of changes in net assets and the financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the three years in the period ended March 31, 1999 were audited by other auditors whose report, dated May 14, 1999, expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 2001 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Municipals Securities Fund, Inc. at March 31, 2001, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States.

Ernst & Young LLP

Boston, Massachusetts
May 15, 2001

Directors

JOHN F. DONAHUE

THOMAS G. BIGLEY

JOHN T. CONROY, JR.

NICHOLAS P. CONSTANTAKIS

JOHN F. CUNNINGHAM

J. CHRISTOPHER DONAHUE

LAWRENCE D. ELLIS, M.D.

PETER E. MADDEN

CHARLES F. MANSFIELD, JR.

JOHN E. MURRAY, JR., J.D., S.J.D.

MARJORIE P. SMUTS

JOHN S. WALSH

Officers

JOHN F. DONAHUE

Chairman

J. CHRISTOPHER DONAHUE

President

EDWARD C. GONZALES

Executive Vice President

JOHN W. MCGONIGLE

Executive Vice President and Secretary

RICHARD B. FISHER

Vice President

RICHARD J. THOMAS

Treasurer

LESLIE K. ROSS

Assistant Secretary

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

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

Federated
World-Class Investment Manager
Federated Municipal Securities Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com
Federated Securities Corp., Distributor

Cusip 313913105
Cusip 313913204
Cusip 313913303

8042830 (5/01)