FEDERATED MUNICIPAL SECURITIES FUND, INC.

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P0MRH0wJ3LwrULew+vmbzhWURSpvyfFoCeffZ6XBwibOfCYnQadW3OXzUee1N8rz uDMbCeAeQB05g2zOgJWKow== 0001056288-04-000350.txt : 20040601 0001056288-04-000350.hdr.sgml : 20040601 20040601102555 ACCESSION NUMBER: 0001056288-04-000350 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20040601 EFFECTIVENESS DATE: 20040601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-57181 FILM NUMBER: 04839959 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERATED MUNICIPAL SECURITIES FUND INC CENTRAL INDEX KEY: 0000201801 IRS NUMBER: 251304971 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02677 FILM NUMBER: 04839960 BUSINESS ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 BUSINESS PHONE: 8003417400 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TWR CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY MUNICIPAL SECURITIES FUND INC DATE OF NAME CHANGE: 19930517 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 485BPOS 1 fmsfform.htm FEDERATED MUNICIPAL SECURITIES FUND, INC.



                                                       1933 Act File No. 2-57181
                                                      1940 Act File No. 811-2677

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933             X

    Pre-Effective Amendment No.

    Post-Effective Amendment No.   59  .....................        X

                                  and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940     X

    Amendment No.   43   ...................................        X

                    FEDERATED MUNICIPAL SECURITIES FUND, INC.

               (Exact Name of Registrant as Specified in Charter)

                            Federated Investors Funds
                              5800 Corporate Drive
                       Pittsburgh, Pennsylvania 15237-7000
                    (Address of Principal Executive Offices)

                                 (412) 288-1900
                         (Registrant's Telephone Number)

                           John W. McGonigle, Esquire
                            Federated Investors Tower
                               1001 Liberty Avenue
                       Pittsburgh, Pennsylvania 15222-3779
                     (Name and Address of Agent for Service)
                (Notices should be sent to the Agent for Service)

It is proposed that this filing will become effective:

 x  immediately upon filing pursuant to paragraph (b)
    on __________________ pursuant to paragraph (b)
    60 days after filing pursuant to paragraph (a)(i)
    on __________________ pursuant to paragraph (a)(i)
    75 days after filing pursuant to paragraph (a)(ii)
    on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

     This  post-effective  amendment  designates  a  new  effective  date  for a
previously filed post-effective amendment.


                                Copies to:

Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, NW
Washington, DC  20037

Federated Investors
World-Class Investment Manager

Federated Municipal Securities Fund, Inc.

PROSPECTUS

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May 31, 2004

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CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

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A mutual fund seeking to provide for its shareholders a high level of current income which is exempt from federal regular income tax by investing primarily in a portfolio of long-term, investment-grade, tax-exempt securities.

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As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.

NOT FDIC INSURED * MAY LOSE VALUE * NO BANK GUARANTEE

Risk/Return Summary 1

What are the Fund's Fees and Expenses? 5

What are the Fund's Investment Strategies? 6

What are the Principal Securities in Which the Fund Invests? 9

What are the Specific Risks of Investing in the Fund? 14

What Do Shares Cost? 16

How is the Fund Sold? 21

How to Purchase Shares 21

How to Redeem and Exchange Shares 24

Account and Share Information 27

Who Manages the Fund? 28

Legal Proceedings 29

Financial Information 30

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide for its shareholders a high level of current income which is exempt from federal regular income tax. While there is no assurance that the Fund will achieve its investment objective, it endeavors to do so by following the strategies and policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

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The Fund pursues its objective by investing its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to the federal alternative minimum tax (AMT) for individuals and corporations. The Fund invests primarily in long-term, investment-grade, tax-exempt securities. The Fund may invest in derivative contracts to implement its investment strategies as more fully described herein.

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WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money by investing in the Fund. The primary factors that may reduce the Fund's returns include:

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Interest Rate Risks. Prices of fixed-income securities generally fall when interest rates rise.
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Credit Risks. There is a possibility that issuers of securities in which the Fund may invest may default in the payment of interest or principal on the securities when due, which would cause the Fund to lose money.
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Liquidity Risks. Certain securities in which the Fund invests may be less readily marketable and may be subject to greater fluctuation in price than other securities. Liquidity risk also refers to the possibility that the Fund may not be able to close out a derivative contract when it wants to. Over-the-counter derivative contracts generally carry greater liquidity risk than exchange-traded contracts.
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Tax Risks. The federal income tax treatment of payments in respect of certain derivative contracts is unclear. Consequently, the Fund may receive payments that are treated as ordinary income for federal income tax purposes.
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Leverage Risks. Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such and investment magnify the Fund's risk of loss and potential for gain.
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Call Risks. The Fund's performance may be adversely affected by the possibility that an issuer of a security held by the Fund may redeem the security prior to maturity at a price below its current market value.
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Sector Risks. A substantial part of the Fund's portfolio may be comprised of securities issued or credit enhanced by companies in similar businesses, or with other similar characteristics. As a result, the Fund will be more susceptible to any economic, business, political, or other developments which generally affect these issuers.
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Risks of Investing in Derivative Contracts. Changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Also, derivative contracts may involve other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks.
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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 or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

Risk/Return Bar Chart and Table

The performance information shown below will help you analyze the Fund's investment risks in light of its historical returns. The bar chart shows the variability of the Fund's Class A Shares total returns on a calendar year-by-year basis. The Average Annual Total Return table shows returns averaged over the stated periods, and includes comparative performance information. The Fund's performance will fluctuate, and past performance (before and after taxes) is no guarantee of future results.

The total returns shown in the bar chart do not reflect the payment of any sales charges or recurring shareholders account fees. If these charges or fees had been included, the returns shown would have been lower.

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The Fund's Class A Shares total return for the three-month period from January 1, 2004 to March 31, 2004 was 1.28%.

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Within the period shown in the bar chart, the Fund's Class A Shares highest quarterly return was 5.53% (quarter ended March 31, 1995). Its lowest quarterly return was (4.13)% (quarter ended March 31, 1994).

Average Annual Total Return Table

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The Average Annual Total Returns for the Fund's Class A Shares are reduced to reflect applicable sales charges. Return Before Taxes is shown for all classes. In addition, Return After Taxes is shown for the Fund's Class A Shares to illustrate the effect of federal taxes on Fund returns. Actual after-tax returns depend on each investor's personal tax situation, and are likely to differ from those shown. The table also shows returns for Lehman Brothers Municipal Bond Index (LBMB), a broad-based market index and the Lipper General Municipal Debt Funds Average (LGMFA), an average of funds with similar investments objectives. The LBMB is the Fund's total return performance benchmark for the long-term, investment grade market. The LGMFA represents the average of the total returns reported by all the mutual funds designated by Lipper, Inc. as falling in the category indicated. Index returns do not reflect taxes, sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. Indexes are unmanaged, and it is not possible to invest directly in an index or average.

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(For the periods ended December 31, 2003)

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	1 Year	5 Years	10 Years	Start of Performance¹
<R>Share Class A:</R>
Return Before Taxes	<R>(0.15)%</R>	<R>3.39%</R>	<R>4.10%</R>	- --
Return After Taxes on Distributions²	<R>(0.15)%</R>	<R>3.37%</R>	<R>3.99%</R>	- --
Return After Taxes on Distributions and Sale of Fund Shares²	<R> 1.30%</R>	<R>3.51%</R>	<R>4.12%</R>	- --
<R>Share Class B:</R>
Return Before Taxes	<R>(1.84)%</R>	<R>3.08%</R>	<R>--</R>	4.35%
<R>Share Class C:</R>
Return Before Taxes	<R> 1.62%</R>	<R>3.22%</R>	<R>3.56%</R>	- --
LBMB	<R> 5.31%</R>	<R>5.83%</R>	<R>6.03%</R>	N/A
LGMFA	<R> 4.75%</R>	<R>4.52%</R>	<R>4.98%</R>	N/A

1 The Fund's Class B and Class C Shares start of performance dates were July 26, 1994 and April 21, 1993, respectively.

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2 After-tax returns are calculated using a standard set of assumptions. The stated returns assume the highest historical federal income and capital gains tax rates. Return After Taxes on Distributions assumes a continued investment in the Fund and shows the effect of taxes on Fund distributions. Return After Taxes on Distributions and Sale of Fund Shares assumes all Shares were redeemed at the end of each measurement period, and shows the effect of any taxable gain (or offsetting loss) on redemption, as well as the effects of taxes on Fund distributions. These after-tax returns do not reflect the effect of any applicable state and local taxes. After-tax returns for Class B Shares and Class C Shares will differ from those shown above for Class A Shares. After-tax returns are not relevant to investors holding Shares through tax-deferred programs, such as IRA or 401(k) plans.

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What are the Fund's Fees and Expenses?

FEDERATED MUNICIPAL SECURITIES FUND, INC.

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy and hold the Fund's Class A, B, and C Shares.

Shareholder Fees	Class A	Class B	Class C
Fees Paid Directly From Your Investment
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)	4.50%	None	1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, as applicable)	0.00%	5.50%	1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a percentage of offering price)	None	None	None
Redemption Fee (as a percentage of amount redeemed, if applicable)	None	None	None
Exchange Fee	None	None	None

Annual Fund Operating Expenses (Before Waivers)¹
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee²	0.52%	0.52%	0.52%
Distribution (12b-1) Fee	None	0.75%	0.75%
Shareholder Services Fee³	0.25%	0.25%	0.25%
Other Expenses	0.22%	0.22%	0.22%
Total Annual Fund Operating Expenses	0.99%	1.74%⁴	1.74%

1 The percentages shown are based on expenses for the entire fiscal year ended March 31, 2004. However, the rate at which expenses are accrued during the fiscal year may not be constant and, at any particular point, may be greater or less than the stated average percentage. Although not contractually obligated to do so, the shareholder services provider waived certain amounts. These are shown below along with the net expenses the Fund actually paid for the fiscal year ended March 31, 2004.
Total Waivers of Fund Expenses	0.14%	0.00%	0.00%
Total Actual Annual Fund Operating Expenses (after waivers)	0.85%	1.74%	1.74%
2 The management fee equals the sum of 0.30% of the Fund's average daily net assets plus 4.50% of the Fund's gross income.
3 A portion of the shareholder services fee has been voluntarily waived. This voluntary waiver can be terminated at any time. The shareholder services fee paid by the Fund's Class A Shares (after the voluntary waiver) was 0.11% for the fiscal year ended March 31, 2004.
4 After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. Class A Shares pay lower operating expenses than Class B Shares.

EXAMPLE

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This Example is intended to help you compare the cost of investing in the Fund's Class A, Class B and Class C Shares with the cost of investing in other mutual funds.

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The Example assumes that you invest $10,000 in the Fund's Class A, Class B and Class C Shares for the time periods indicated and then redeem all of your Shares at the end of those periods. Expenses assuming no redemption are also shown. The Example also assumes that your investment has a 5% return each year and that the Fund's Class A, Class B and Class C Shares operating expenses are before waivers as shown in the table and remain the same. Although your actual costs and returns may be higher or lower, based on these assumptions your costs would be:

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Share Class	1 Year	3 Years	5 Years	10 Years
Class A:
Expenses assuming redemption	$546	$751	$ 972	$1,608

Expenses assuming no redemption	$546	$751	$ 972	$1,608

Class B:
Expenses assuming redemption	$727	$948	$1,144	$1,853

Expenses assuming no redemption	$177	$548	$ 944	$1,853

Class C:
Expenses assuming redemption	$375	$643	$1,034	$2,131

Expenses assuming no redemption	$275	$643	$1,034	$2,131

What are the Fund's Investment Strategies?

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The Fund pursues its objectives by investing its assets so that, normally, distributions of annual interest income are exempt from federal regular income tax. Interest from the Fund's investments may be subject to AMT. The Fund invests primarily in long-term, investment-grade, tax-exempt securities. The Fund's investment adviser (Adviser) actively manages the Fund's portfolio, seeking to manage the interest rate risk and credit risk assumed by the Fund and provide superior levels of after-tax total return.

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The Adviser manages the Fund's interest rate risk by adjusting the duration of its portfolio. "Duration" measures the sensitivity of a security's price to changes in interest rates. The greater a portfolio's duration, the greater the change in the portfolio's value in response to a change in market interest rates. The Adviser will increase or reduce the Fund's portfolio duration based on its interest rate outlook. When the Adviser expects interest rates to fall, it will maintain a longer portfolio duration. When the Adviser expects interest rates to increase, it will shorten the portfolio duration. The Adviser considers a variety of factors in formulating its interest rate outlook, including the following:

current and expected U.S. economic growth;
current and expected interest rates and inflation;
the Federal Reserve's monetary policy; and
supply and demand factors related to the municipal market and the affect they may have on the returns offered for various bond maturities.

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The Adviser manages credit risk by performing a fundamental credit analysis on tax-exempt securities before the Fund purchases such securities. The Adviser considers various factors, including the following:

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the economic feasibility of revenue bond financings and general purpose financings;
the financial condition of the issuer or guarantor; and
political developments that may affect credit quality.

The Adviser monitors the credit risks of all portfolio securities on an ongoing basis by reviewing periodic financial data and ratings of nationally recognized statistical rating organizations (NRSROs).

The Adviser attempts to provide superior levels of after-tax total return. After-tax total return consists of two components: (1) changes in the market value of the Fund's portfolio securities and attendant increase or decrease in the net asset value (NAV) of Fund shares; and (2) income received from the Fund's portfolio securities. The Adviser seeks total return on an after-tax basis, so that it will try to maximize tax exempt income distributions; make no ordinary income distributions; and minimize or eliminate capital gains distributions.

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The Adviser's ability to formulate an accurate interest rate outlook, coupled with effective management of the Fund's duration as described above, is critical to the Adviser's achievement of this component of its strategy. The Adviser will seek to further enhance after-tax total return by engaging in a relative value analysis; that is, the Adviser will assess the cost of a tax-exempt security compared with other tax-exempt securities and taxable securities such as U.S. Treasury obligations. The Adviser may also allocate investments in sectors of the tax-exempt market that offer the highest return. Finally, the Adviser will invest a portion of the portfolio in tax-exempt securities subject to AMT, which may offer higher returns.

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The Fund may enter into derivatives contracts as hedging transactions, as more fully described herein. The Fund also may use derivative contracts to implement its overall investment strategies in a more cost effective or efficient manner. For example, the Fund may purchase derivatives contracts rather than individual securities in order to gain exposure to the municipal bond sector.

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Because the Fund refers to municipal investments in its name, it has an investment policy that it will normally invest its assets so that at least 80% of the income that it distributes will be exempt from federal regular income tax. This policy may not be changed without shareholder approval.

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HEDGING

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Hedging transactions are intended to reduce specific risks. For example, to protect the Fund against circumstances that would normally cause the Fund's portfolio securities to decline in value, the Fund may buy or sell a derivative contract that would normally increase in value under the same circumstances. The Fund may also attempt to hedge by using combinations of different derivatives contracts, or derivatives contracts and securities. The Fund's ability to hedge may be limited by the costs of the derivatives contracts. The Fund may attempt to lower the cost of hedging by entering into transactions that provide only limited protection, including transactions that: (1) hedge only a portion of its portfolio; (2) use derivatives contracts that cover a narrow range of circumstances; or (3) involve the sale of derivatives contracts with different terms. Consequently, hedging transactions will not eliminate risk even if they work as intended. In addition, hedging strategies are not always successful, and could result in increased expenses and losses to the Fund.

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Temporary Defensive Investments

The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term securities subject to federal income tax. It may do this to minimize potential losses and maintain liquidity to meet shareholder redemptions during adverse market conditions. This may cause the Fund to receive and distribute taxable income to investors. It may also cause the Fund to give up greater investment returns to maintain the safety of principal, that is, the original amount invested by shareholders.

What are the Principal Securities in Which the Fund Invests?

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TAX-EXEMPT SECURITIES

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Tax-exempt securities are fixed-income securities that pay interest that is not subject to federal regular income taxes. Fixed-income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically.

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Typically, states, counties, cities and other political subdivisions and authorities issue tax-exempt securities. The market categorizes tax exempt securities by their source of repayment.

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Municipal Leases

Municipalities may enter into leases for equipment or facilities. In order to comply with state public financing laws, these leases are typically subject to annual appropriation. In other words, a municipality may end a lease, without penalty, by not providing for the lease payments in its annual budget. After the lease ends, the lessor can resell the equipment or facility but may lose money on the sale.

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The Fund may invest in securities supported by pools of municipal leases. The most common type of lease-backed securities is certificates of participation (COPs). However, the Fund may also invest directly in individual leases.

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Inverse Floaters

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An inverse floater has a floating or variable interest rate that moves in the opposite direction of market interest rates. When market interest rates go up, the interest rate paid on the inverse floater goes down; when market interest rates go down, the interest rate paid on the inverse floater goes up. Inverse floaters generally respond more rapidly to market interest rates changes than fixed-rate, tax-exempt securities. Inverse floaters are subject to interest rate risks and leverage risks.

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Zero Coupon Securities

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Zero coupon securities do not pay interest or principal until final maturity unlike debt securities that provide periodic payments of interest (referred to as a "coupon payment"). Investors buy zero coupon securities at a price below the amount payable at maturity. The difference between the purchase price and the amount paid at maturity represents interest on the zero coupon security. Investors must wait until maturity to receive interest and principal, which increases the interest rate and credit risks of a zero coupon security.

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General Obligation Bonds

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Derivative contracts are financial instruments that require payments based upon changes in the values of designated (or underlying) securities, commodities, financial indices or other assets or instruments. Some derivative contracts (such as futures, forwards and options) require payments relating to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income or returns from the underlying asset or instrument. The other party to a derivative contract is referred to as a counterparty.

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Many derivative contracts are traded on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Investors make payments due under their contracts through the exchange. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. Parties to the contract make (or collect) daily payments to the margin accounts to reflect losses (or gains) in the value of their contracts. This protects investors against potential defaults by the counterparty. Trading contracts on an exchange also allows investors to close out their contracts by entering into offsetting contracts.

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The Fund may also trade derivative contracts over-the-counter (OTC) in transactions negotiated directly between the Fund and the counterparty. OTC contracts do not necessarily have standard terms, so they cannot be directly offset with other OTC contracts. In addition, OTC contracts with more specialized terms may be more difficult to price than exchange-traded contracts.

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Depending upon how the Fund uses derivative contracts and the relationships between the market value of a derivative contract and the underlying asset or instrument derivative contracts may increase or decrease the Fund's exposure to interest rate risks, and may also expose the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to credit risks in the event that a counterparty defaults on the contract.

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The Fund may trade in the following types of derivative contracts, as well as combinations of these contracts:

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Futures Contracts

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Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of an underlying asset at a specified price, date and time. Entering into a contract to buy an underlying asset is commonly referred to as buying a contract or holding a long position in the asset. Entering into a contract to sell an underlying asset is commonly referred to as selling a contract or holding a short position in the asset. Futures contracts are considered to be commodity contracts.The Fund has claimed an exclusion from the definition of the term "commodity pool operator" under the Commodity Exchange Act and, therefore, is not subject to registration or regulation as commodity pool operator under that Act. Futures contracts traded OTC are frequently referred to as forward contracts.

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The Fund may buy or sell the following types of futures contracts: interest rate and index financial futures contracts.

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Options

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Options are rights to buy or sell an underlying asset for a specified price (the exercise price) during, or at the end of, a specified period. The seller (or writer) of the option receives payment, or premium, from the buyer, which the writer keeps regardless of whether the buyer uses (or exercises) the option. A call option gives the holder (buyer) the right to buy the underlying asset from the seller (writer) of the option. A put option gives the holder the right to sell the underlying asset to the writer of the option. Options can trade on exchanges or in the OTC market and may be bought or sold on a wide variety of underlying assets or instruments, including financial indices, individual securities, and other derivative instruments, such as futures contracts, forward contracts and swaps.

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Swaps

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Swaps are contracts in which two parties agree to pay each other (swap) the returns derived from underlying assets with differing characteristics. Most swaps do not involve the delivery of the underlying assets by either party, and the parties might not own the assets underlying the swap. The payments are usually made on a net basis so that, on any given day, the Fund would receive (or pay) only the amount by which its payment under the contract is less than (or exceeds) the amount of the other party's payment. Swap agreements are sophisticated instruments that can take many different forms. Common types of swaps in which the Fund may invest include: interest rate swaps, cap and floors and total return swaps.

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SPECIAL TRANSACTIONS

Delayed Delivery Transactions

Delayed delivery transactions, including when-issued transactions, are arrangements in which the Fund buys securities for a set price, with payment and delivery of the securities scheduled for a future time. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. The Fund records the transaction when it agrees to buy the securities and reflects their value in determining the price of its shares. Settlement dates may be a month or more after entering into these transactions so that the market values of the securities bought may vary from the purchase prices. Therefore, delayed delivery transactions create interest rate risks for the Fund. Delayed delivery transactions also involve credit risks in the event of a counterparty default. These transactions create leverage risks.

Asset Coverage

In order to secure its obligations in connection with derivative contracts or special transactions, the Fund will either own the underlying assets, enter into an offsetting transaction or set aside readily marketable securities with a value that equals or exceeds the Fund's obligations. Unless the Fund has other readily marketable assets to set aside, it cannot trade assets used to secure such obligations without entering into an offsetting derivative contract or terminating a special transaction. This may cause the Fund to miss favorable trading opportunities or to realize losses on derivative contracts or special transactions.

Investment Ratings for Investment Grade Securities

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Liquidity risk also refers to the possibility that the Fund may not be able to sell a security or close out a derivative contract when it wants to. If this happens, the Fund will be required to continue to hold the security or keep the position open, and the Fund could incur losses.

CALL RISKS

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Call risk is the possibility that an issuer may redeem a fixed-income security before maturity (a call) at a price below its current market price. An increase in the likelihood of a call may reduce the security's price.

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The Fund's use of derivative contracts involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. First, changes in the value of the derivative contracts in which the Fund invests may not be correlated with changes in the value of the underlying asset or, if they are correlated, may move in the opposite direction than originally anticipated. Second, while some strategies involving derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting favorable price movements in portfolio holdings. Third, there is a risk that derivatives contracts may be mispriced or improperly valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Finally, derivative contracts may cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal income tax purposes) and, as a result, may increase taxable distributions to shareholders. Derivative contracts may also involve other risks described in this prospectus, such as interest rate, credit, liquidity and leverage risks.

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What Do Shares Cost?

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You can purchase, redeem or exchange Shares any day the New York Stock Exchange (NYSE) is open. When the Fund receives your transaction request in proper form (as described in this prospectus), it is processed at the next calculated net asset value (NAV) plus any applicable front-end sales charge (public offering price). NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern time) each day the NYSE is open.

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The Fund generally values fixed income securities according to the mean between bid and asked prices as furnished by an independent pricing service, except that fixed income securities with remaining maturities of less than 60 days at the time of purchase may be valued at amortized cost. Futures contracts and options are generally valued at market values established by the exchanges on which they are traded at the close of trading on such exchanges. Options traded in the over-the-counter market are generally valued according to the mean between the last bid and the last asked price for the option as provided by an investment dealer or other financial institute that deals in the option.

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The Fund's current NAV and public offering price may be found in the mutual funds section of certain local newspapers under "Federated."

The following table summarizes the minimum required investment amount and the maximum sales charge, if any, that you will pay on an investment in the Fund. Keep in mind that investment professionals may charge you fees for their services in connection with your Share transactions.

	Minimum Initial/Subsequent Investment Amounts¹	Maximum Sales Charge
Shares Offered	Minimum Initial/Subsequent Investment Amounts¹	Front-End Sales Charge²	Contingent Deferred Sales Charge³
Class A	$1,500/$100	4.50%	0.00%
Class B	$1,500/$100	None	5.50%
Class C	$1,500/$100	1.00%	1.00%

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1 The minimum subsequent investment amounts for Systematic Investment Programs (SIP) is $50. Investment professionals may impose higher or lower minimum investment requirements on their customers than those imposed by the Fund. Orders for $100,000 or more of Class B Shares (effective April 5, 2004) or $1million or more of Class C Shares (effective June 14, 2004) will be invested in Class A Shares instead of Class B Shares or Class C Shares to maximize your return and minimize the sales charges and marketing fees. Accounts held in the name of an investment professional may be treated differently. After Class B Shares have been held for eight years from the date of purchase, they will automatically convert to Class A Shares on or about the last day of the following month. This conversion is a non-taxable event.

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2 Front-End Sales Charge is expressed as a percentage of public offering price. See "Sales Charge When You Purchase."

3 See "Sales Charge When You Redeem."

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As shown in the table above, each Class of Shares has a different sales charge structure. In addition, the ongoing annual operating expenses ("expense ratios"), as well as the compensation payable to investment professionals, also vary among the Classes. Before you decide which Class to purchase, you should review the different charges and expenses of each Class carefully, in light of your personal circumstances, and consult with your investment professional.

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Among the important factors to consider are the amount you plan to invest, and the length of time you expect to hold your investment. You should consider, for example, that it may be possible to reduce the front-end sales charges imposed on purchases of Class A Shares. Among other ways, Class A Shares have a series of "breakpoints," which means that the front-end sales charges decrease (and can be eliminated entirely) as the amount invested increases. (The breakpoint schedule is set out below under "Sales Charge When You Purchase.") On the other hand, Class B Shares do not have front-end sales charges, but the deferred sales charges imposed on redemptions of Class B Shares do not vary at all in relation to the amounts invested. Rather, these charges decrease with the passage of time (ultimately going to zero after seven years). Finally, Class C Shares bear a relatively low front-end sales load and a contingent deferred sales charge only if redeemed within one year after purchase; however, the asset-based 12b-1 fees charged to Class C Shares are greater than those charged to Class A Shares and comparable to those charged to Class B Shares.

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You should also consider that the expense ratio for Class A Shares will be lower than that for Class B (or Class C) Shares. Thus, the fact that no front-end charges are ever imposed on purchases of Class B Shares (or that a relatively low front-end charge is imposed on purchases of Class C Shares) does not always make them preferable to Class A Shares.

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SALES CHARGE WHEN YOU PURCHASE

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Class A Shares
Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV
Less than $100,000	4.50%	4.71%
$100,000 but less than $250,000	3.75%	3.90%
$250,000 but less than $500,000	2.50%	2.56%
$500,000 but less than $1 million	2.00%	2.04%
$1 million or greater¹	0.00%	0.00%

1 A contingent deferred sales charge of 0.75% may apply. See "Sales Charge When You Redeem."

Class C Shares
Purchase Amount	Sales Charge as a Percentage of Public Offering Price	Sales Charge as a Percentage of NAV
All Purchases	1.00%	1.01%

If your investment qualifies for a reduction or elimination of the sales charge as described below, you or your investment professional should notify the Fund's Distributor at the time of purchase. If the Distributor is not notified, you will receive the reduced sales charge only on additional purchases, and not retroactively on previous purchases.

The sales charge at purchase of Class A Shares only, may be reduced or eliminated by:

purchasing Shares in greater quantities to reduce the applicable sales charge;
combining concurrent purchases of Shares:
- by you, your spouse, and your children under age 21; or
- of the same share class of two or more Federated funds (other than money market funds);
accumulating purchases (in calculating the sales charge on an additional purchase, include the current value of previous Share purchases still invested in the Fund); or
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signing a letter of intent to purchase a specific dollar amount of Shares within 13 months. (Call your investment professional or the Fund for more information.)
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The sales charge will be eliminated when you purchase Shares:

within 120 days of redeeming Shares of an equal or greater amount;
by exchanging shares from the same share class of another Federated fund (other than a money market fund);
through wrap accounts or other investment programs where you pay the investment professional directly for services;
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as a shareholder that originally became a shareholder of the Fund pursuant to the terms of an agreement and plan of reorganization which permits shareholders to acquire Shares at NAV;
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through investment professionals that receive no portion of the sales charge;
as a Federated Life Member (Class A Shares only) and their immediate family members; or
as a Director or employee of the Fund, the Adviser, the Distributor and their affiliates, and the immediate family members of these individuals.

SALES CHARGE WHEN YOU REDEEM

Your redemption proceeds may be reduced by a sales charge, commonly referred to as a contingent deferred sales charge (CDSC).

Class A Shares (Purchase amount of $1 million or greater):
A CDSC of 0.75% of the redemption amount applies to Class A Shares redeemed up to 24 months after purchase under certain investment programs where an investment professional received an advance payment on the transaction.
Class B Shares:
Shares Held Up To:		CDSC
1 Year		5.50%
2 Years		4.75%
3 Years		4.00%
4 Years		3.00%
5 Years		2.00%
6 Years		1.00%
7 Years or More		0.00%
Class C Shares:
You will pay a 1% CDSC if you redeem Shares within one year of the purchase date.

If your investment qualifies for a reduction or elimination of the CDSC as described below, you or your investment professional should notify the Distributor at the time of redemption. If the Distributor is not notified, the CDSC will apply.

You will not be charged a CDSC when redeeming Shares:

purchased with reinvested dividends or capital gains;
purchased within 120 days of redeeming Shares of an equal or lesser amount;
that you exchanged into the same share class of another Federated fund if the shares were held for the applicable CDSC holding period (other than a money market fund);
purchased through investment professionals who did not receive advanced sales payments;
if, after you purchase Shares, you become disabled as defined by the IRS;
if the Fund redeems your Shares and closes your account for not meeting the minimum balance requirement;
if your redemption is a required retirement plan distribution; or
upon the death of the last surviving shareholder of the account. The beneficiary on an account with a Transfer on Death registration is deemed the last surviving shareholder of the account.

To keep the sales charge as low as possible, the Fund redeems your Shares in this order:

Shares that are not subject to a CDSC; and
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Shares held the longest. (To determine the number of years your Shares have been held, include the time you held shares of other Federated funds that have been exchanged for Shares of this Fund.)
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The CDSC is then calculated using the Share price at the time of purchase or redemption, whichever is lower.

How is the Fund Sold?

The Fund offers three Share classes: Class A Shares, Class B Shares and Class C Shares, each representing interests in a single portfolio of securities.

The Fund's Distributor, Federated Securities Corp., markets the Shares described in this prospectus to institutions or to individuals, directly or through investment professionals. The Fund may not be a suitable investment for retirement plans.

When the Distributor receives marketing fees and sales charges, it may pay some or all of them to investment professionals. The Distributor and its affiliates may pay out of their assets other amounts (including items of material value) to investment professionals for marketing and servicing Shares. The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to the Distributor and investment professionals for the sale, distribution and customer servicing of the Fund's Class B Shares and Class C Shares. Because these Shares pay marketing fees on an ongoing basis, your investment cost may be higher over time than other shares with different sales charges and marketing fees.

How to Purchase Shares

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You may purchase Shares through an investment professional, directly from the Fund, or through an exchange from another Federated fund. The Fund reserves the right to reject any request to purchase or exchange Shares. Where the Fund offers more than one Share class and you do not specify the class choice on your New Account Form or form of payment (e.g., Federal Reserve wire or check) you automatically will receive Class A Shares.

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THROUGH AN INVESTMENT PROFESSIONAL

Establish an account with the investment professional; and
Submit your purchase order to the investment professional before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will receive the next calculated NAV if the investment professional forwards the order to the Fund on the same day and the Fund receives payment within three business days. You will become the owner of Shares and receive dividends when the Fund receives your payment.

Investment professionals should send payments according to the instructions in the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

Establish your account with the Fund by submitting a completed New Account Form; and
Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next calculated NAV after the Fund receives your wire or your check. If your check does not clear, your purchase will be canceled and you could be liable for any losses or fees incurred by the Fund or Federated Shareholder Services Company, the Fund's transfer agent.

An institution may establish an account and place an order by calling the Fund and the Shares will be priced at the next calculated NAV after the Fund receives the order.

By Wire

Send your wire to:

State Street Bank and Trust Company

Boston, MA

Dollar Amount of Wire

ABA Number 011000028

Attention: EDGEWIRE

Wire Order Number, Dealer Number or Group Number

Nominee/Institution Name

Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are restricted.

By Check

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Make your check payable to The Federated Funds, note your account number on the check, and send it to:

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Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

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If you send your check by a private courier or overnight delivery service that requires a street address, send it to:

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Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund reserves the right to reject any purchase request. For example, to protect against check fraud the Fund may reject any purchase request involving a check that is not made payable to The Federated Funds (including, but not limited to, requests to purchase Shares using third-party checks), or involving temporary checks or credit card checks.

THROUGH AN EXCHANGE

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You may purchase Shares through an exchange from the same share class of another Federated fund. You must meet the minimum initial investment requirement for purchasing Shares and both accounts must have identical registrations.

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BY SYSTEMATIC INVESTMENT PROGRAM

Once you have opened an account, you may automatically purchase additional Shares on a regular basis by completing the SIP section of the New Account Form or by contacting the Fund or your investment professional.

BY AUTOMATED CLEARING HOUSE (ACH)

Once you have opened an account, you may purchase additional Shares through a depository institution that is an ACH member. This purchase option can be established by completing the appropriate sections of the New Account Form.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

through an investment professional if you purchased Shares through an investment professional; or
directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

Submit your redemption or exchange request to your investment professional by the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The redemption amount you will receive is based upon the next calculated NAV after the Fund receives the order from your investment professional.

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by simply calling the Fund at 1-800-341-7400.

If you call before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time), you will receive a redemption amount based on that day's NAV.

By Mail

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You may redeem or exchange Shares by sending a written request to the Fund.

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You will receive a redemption amount based on the next calculated NAV after the Fund receives your written request in proper form.

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

All requests must include:

Fund Name and Share Class, account number and account registration;
amount to be redeemed or exchanged;
signatures of all shareholders exactly as registered; and
if exchanging, the Fund Name and Share Class, account number and account registration into which you are exchanging.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees

Signatures must be guaranteed if:

your redemption will be sent to an address other than the address of record;
your redemption will be sent to an address of record that was changed within the last 30 days;
a redemption is payable to someone other than the shareholder(s) of record; or
if exchanging (transferring) into another fund with a different shareholder registration.

A signature guarantee is designed to protect your account from fraud. Obtain a signature guarantee from a bank or trust company, savings association, credit union or broker, dealer or securities exchange member. A notary public cannot provide a signature guarantee.

PAYMENT METHODS FOR REDEMPTIONS

Your redemption proceeds will be mailed by check to your address of record. The following payment options are available if you complete the appropriate section of the New Account Form or an Account Service Options Form. These payment options require a signature guarantee if they were not established when the account was opened:

an electronic transfer to your account at a financial institution that is an ACH member; or
wire payment to your account at a domestic commercial bank that is a Federal Reserve System member.

Redemption in Kind

Although the Fund intends to pay Share redemptions in cash, it reserves the right to pay the redemption price in whole or in part by a distribution of the Fund's portfolio securities.

LIMITATIONS ON REDEMPTION PROCEEDS

Redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form. Payment may be delayed up to seven days:

to allow your purchase to clear;
during periods of market volatility; or
when a shareholder's trade activity or amount adversely impacts the Fund's ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if those checks are undeliverable and returned to the Fund.

EXCHANGE PRIVILEGE

You may exchange Shares of the Fund into shares of the same class of another Federated fund. To do this, you must:

ensure that the account registrations are identical;
meet any minimum initial investment requirements; and
receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a taxable transaction.

The Fund may modify or terminate the exchange privilege at any time. The Fund's management or Adviser may determine from the amount, frequency and pattern of exchanges that a shareholder is engaged in excessive trading that is detrimental to the Fund and other shareholders. If this occurs, the Fund may terminate the availability of exchanges to that shareholder and may bar that shareholder from purchasing other Federated funds.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100 on a regular basis. Complete the appropriate section of the New Account Form or an Account Service Options Form or contact your investment professional or the Fund. Your account value must meet the minimum initial investment amount at the time the program is established. This program may reduce, and eventually deplete, your account. Payments should not be considered yield or income. Generally, it is not advisable to continue to purchase Class A Shares subject to a sales charge while redeeming Shares using this program.

Systematic Withdrawal Program (SWP) on Class B Shares

You will not be charged a CDSC on SWP redemptions if:

you redeem 12% or less of your account value in a single year;
you reinvest all dividends and capital gains distributions; and
your account has at least a $10,000 balance when you establish the SWP. (You cannot aggregate multiple Class B Share accounts to meet this minimum balance.)

You will be subject to a CDSC on redemption amounts that exceed the 12% annual limit. In measuring the redemption percentage, your account is valued when you establish the SWP and then annually at calendar year-end. You can redeem monthly, quarterly or semi-annually.

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ADDITIONAL CONDITIONS

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Telephone Transactions

The Fund will record your telephone instructions. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions.

Share Certificates

The Fund no longer issues share certificates. If you are redeeming or exchanging Shares represented by certificates previously issued by the Fund, you must return the certificates with your written redemption or exchange request. For your protection, send your certificates by registered or certified mail, but do not endorse them.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases, redemptions and exchanges (except for systematic transactions). In addition, you will receive periodic statements reporting all account activity, including systematic transactions, dividends and capital gains paid.

DIVIDENDS AND CAPITAL GAINS

The Fund declares any dividends daily and pays them monthly to shareholders. If you purchase Shares by wire, you begin earning dividends on the day your wire is received. If you purchase Shares by check, you begin earning dividends on the business day after the Fund receives your check. In either case, you earn dividends through the day your redemption request is received.

In addition, the Fund pays any capital gains at least annually. Your dividends and capital gains distributions will be automatically reinvested in additional Shares without a sales charge, unless you elect cash payments.

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If you purchase Shares just before the record date for a capital gain distribution, you will pay the full price for the Shares and then receive a portion of the price back in the form of a taxable distribution, whether or not you reinvest the distribution in Shares. Therefore, you should consider the tax implications of purchasing Shares shortly before the record date for a capital gain. Contact your investment professional or the Fund for information concerning when dividends and capital gains will be paid.

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ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, accounts may be closed if redemptions or exchanges cause the account balance to fall below the minimum initial investment amount. Before an account is closed, you will be notified and allowed 30 days to purchase additional Shares to meet the minimum.

TAX INFORMATION

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The Fund sends an annual statement of your account activity to assist you in completing your federal, state and local tax returns. It is anticipated that Fund distributions will be primarily dividends that are exempt from federal regular income tax, although a portion of the Fund's dividends may not be exempt. Dividends may be subject to state and local taxes. Capital gains and non-exempt dividends are taxable whether paid in cash or reinvested in the Fund. Redemptions and exchanges are taxable sales. Please consult your tax adviser regarding your federal, state and local tax liability.

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Who Manages the Fund?

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The Board of Directors (the "Board") governs the Fund. The Board selects and oversees the Adviser, Federated Investment Management Company. The Adviser manages the Fund's assets, including buying and selling portfolio securities. Federated Advisory Services Company (FASC), an affiliate of the Adviser, provides certain support services to the Adviser. The fee for these services is paid by the Adviser and not by the Fund. The address of the Adviser and FASC is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

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The Adviser and other subsidiaries of Federated advise approximately 136 mutual funds and a variety of separate accounts, which totaled approximately $198 billion in assets as of December 31, 2003. Federated was established in 1955 and is one of the largest mutual fund investment managers in the United States with approximately 1,650 employees. More than 5,000 investment professionals make Federated funds available to their customers.

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THE FUND'S PORTFOLIO MANAGERS ARE:

J. Scott Albrecht

J. Scott Albrecht has been the Fund's Portfolio Manager since May 1996. Mr. Albrecht joined Federated in 1989. He has been a Senior Portfolio Manager since 1997 and a Vice President of the Fund's Adviser since 1994. He was a Portfolio Manager from 1994 to 1996. Mr. Albrecht is a Chartered Financial Analyst and received his M.S. in Public Management from Carnegie Mellon University.

Mary Jo Ochson

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Mary Jo Ochson has been the Fund's Portfolio Manager since May 1996. Ms. Ochson was named Chief Investment Officer of tax-exempt, fixed-income products in 2004 and is Vice President of the Fund. She joined Federated in 1982 and has been a Senior Portfolio Manager and a Senior Vice President of the Fund's Adviser since 1996. Ms. Ochson is a Chartered Financial Analyst and received her M.B.A. in Finance from the University of Pittsburgh.

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ADVISORY FEES

The Adviser receives an annual investment advisory fee of 0.30% of the Fund's average daily net assets plus 4.50% of the Fund's gross income. The Adviser may voluntarily waive a portion of its fee or reimburse the Fund for certain operating expenses.

Gross income includes, in general, discounts earned on U.S. Treasury bills and agency discount notes, interest earned on all interest-bearing obligations, and dividend income recorded on the ex-dividend date but does not include capital gains or losses or reduction for expenses.

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Legal Proceedings

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Like many other mutual fund companies, in September 2003, Federated Investors, Inc., the parent company of the Federated funds' advisers and distributor (collectively, "Federated"), received detailed requests for information on shareholder trading activities in the Federated funds ("Funds") from the SEC, the New York State Attorney General, and the National Association of Securities Dealers. Since that time, Federated has received additional inquiries from regulatory authorities on these and related matters, and more such inquiries may be received in the future.

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As a result of these inquiries, Federated and the Funds have conducted an internal investigation of the matters raised, which revealed instances in which a few investors were granted exceptions to Federated's internal procedures for limiting frequent transactions and that one of these investors made an additional investment in another Federated fund. The investigation has also identified inadequate procedures which permitted a limited number of investors (including several employees) to engage in undetected frequent trading activities and/or the placement and acceptance of orders to purchase shares of fluctuating net asset value funds after the funds' closing times. Federated has issued a series of press releases describing these matters in greater detail and emphasizing that it is committed to compensating the Funds for any detrimental impact these transactions may have had on them. In that regard, on February 3, 2004, Federated and the independent directors of the Funds announced the establishment by Federated of a restoration fund that is intended to cover any such detrimental impact. The press releases and related communications are available in the "About Us" section of Federated's website www.federatedinvestors.com, and any future press releases on this subject will also be posted there.

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Shortly after Federated's first public announcement concerning the foregoing matters, and notwithstanding Federated's commitment to taking remedial actions, Federated and various Funds were named as defendants in several class action lawsuits now pending in the United States District Court for the District of Maryland seeking damages of unspecified amounts. The lawsuits were purportedly filed on behalf of people who purchased, owned and/or redeemed shares of Federated-sponsored mutual funds during specified periods beginning November 1, 1998. The suits are generally similar in alleging that Federated engaged in illegal and improper trading practices including market timing and late trading in concert with certain institutional traders, which allegedly caused financial injury to the mutual fund shareholders. The board of the Funds has retained the law firm of Dickstein, Shapiro Morin & Oshinsky LLP to represent the Funds in these lawsuits. Federated and the Funds, and their respective counsel, are reviewing the allegations and will respond appropriately. Additional lawsuits based upon similar allegations have been filed, and others may be filed in the future. Although we do not believe that these lawsuits will have a material adverse effect on the Funds, there can be no assurance that these suits, the ongoing adverse publicity and/or other developments resulting from the regulatory investigations will not result in increased Fund redemptions, reduced sales of Fund shares, or other adverse consequences for the Funds.

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Financial Information

FINANCIAL HIGHLIGHTS

The Financial Highlights will help you understand the Fund's financial performance for its past five fiscal years. Some of the information is presented on a per share basis. Total returns represent the rate an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of any dividends and capital gains.

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This information has been audited by Ernst & Young LLP, whose report, along with the Fund's audited financial statements, is included in the Annual Report.

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Financial Highlights -- Class A Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31	2004		2003		2002		2001		2000
Net Asset Value, Beginning of Period	$10.75		$10.22		$10.45		$ 9.90		$10.87
Income From Investment Operations:
Net investment income	0.43	¹	0.47	¹	0.47	²	0.47	¹	0.58
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts	0.08		0.53		(0.23	)²	0.55		(1.02	)

TOTAL FROM INVESTMENT OPERATIONS	0.51		1.00		0.24		1.02		(0.44	)

Less Distributions:
Distributions from net investment income	(0.43	)	(0.47	)	(0.47	)	(0.47	)	(0.50	)
Distributions from net realized gain on investments	--		--		--		--		(0.03	)

TOTAL DISTRIBUTIONS	(0.43	)	(0.47	)	(0.47	)	(0.47	)	(0.53	)

Net Asset Value, End of Period	$10.83		$10.75		$10.22		$10.45		$ 9.90

Total Return³	4.88	%	9.91	%	2.31	%	10.60	%	(4.01	)%


Ratios to Average Net Assets:

Expenses	0.85	%	0.85	%	0.86	%	0.88	%	0.92	%

Net investment income	4.03	%	4.41	%	4.52	%²	4.68	%	5.72	%

Expense waiver/reimbursement⁴	0.14	%	0.14	%	0.14	%	0.14	%	0.14	%

Supplemental Data:

Net assets, end of period (000 omitted)	$467,681		$466,097		$450,049		$461,456		$471,475

Portfolio turnover	46	%	54	%	35	%	28	%	68	%

1 Per share information is based on average shares outstanding

2 Effective April 1, 2001, the Fund adopted provisions of the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on debt securities. For the year ended March 31, 2002, this change had no effect on the net investment income per share, net realized and unrealized gain (loss) on investments per share, or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for periods prior to April 1, 2001 have not been restated to reflect this change in presentation.

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

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

Further information about the Fund's performance is contained in the Fund's Annual Report, dated March 31, 2004, which can be obtained free of charge.

Financial Highlights -- Class B Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31	2004		2003		2002		2001		2000
Net Asset Value, Beginning of Period	$10.75		$10.22		$10.45		$9.90		$10.87
Income From Investment Operations:
Net investment income	0.34	¹	0.37	¹	0.38	²	0.38	¹	0.48
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts	0.08		0.53		(0.23	)²	0.55		(1.01	)

TOTAL FROM INVESTMENT OPERATIONS	0.42		0.90		0.15		0.93		(0.53	)

Less Distributions:
Distributions from net investment income	(0.34	)	(0.37	)	(0.38	)	(0.38	)	(0.41	)
Distributions from net realized gain on investments	--		--		--		--		(0.03	)

TOTAL DISTRIBUTIONS	(0.34	)	(0.37	)	(0.38	)	(0.38	)	(0.44	)

Net Asset Value, End of Period	$10.83		$10.75		$10.22		$10.45		$ 9.90

Total Return³	3.95	%	8.94	%	1.41	%	9.62	%	(4.85	)%


Ratios to Average Net Assets:

Expenses	1.74	%	1.74	%	1.75	%	1.77	%	1.81	%

Net investment income	3.14	%	3.52	%	3.63	%²	3.79	%	4.68	%

Expense waiver/reimbursement⁴	0.00	%⁵	--		--		--		--

Supplemental Data:

Net assets, end of period (000 omitted)	$60,714		$77,381		$71,429		$71,511		$72,095

Portfolio turnover	46	%	54	%	35	%	28	%	68	%

1 Per share information is based on average shares outstanding.

2 Effective April 1, 2001, the Fund adopted provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount/amortizing premium on debt securities. For the year ended March 31, 2002, this change had no effect on the net investment income per share, net realized and unrealized gain (loss) on investments per share, or the ratio of net investment income to average net assets. Per share, ratios and supplemental data for periods prior to April 1, 2001 have not been restated to reflect this change in presentation.

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

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

5 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Fund's Annual Report, dated March 31, 2004, which can be obtained free of charge.

Financial Highlights -- Class C Shares

(For a Share Outstanding Throughout Each Period)

Year Ended March 31	2004		2003		2002		2001		2000
Net Asset Value, Beginning of Period	$10.75		$10.22		$10.45		$ 9.90		$10.87
Income From Investment Operations:
Net investment income	0.34	¹	0.37	¹	0.38	²	0.38	¹	0.48
Net realized and unrealized gain (loss) on investments, futures contracts and swap contracts	0.08		0.53		(0.23	)²	0.55		(1.01	)

TOTAL FROM INVESTMENT OPERATIONS	0.42		0.90		0.15		0.93		(0.53	)

Less Distributions:
Distributions from net investment income	(0.34	)	(0.37	)	(0.38	)	(0.38	)	(0.41	)
Distributions from net realized gain on investments	--		--		--		--		(0.03	)

TOTAL DISTRIBUTIONS	(0.34	)	(0.37	)	(0.38	)	(0.38	)	(0.44	)

Net Asset Value, End of Period	$10.83		$10.75		$10.22		$10.45		$ 9.90

Total Return³	3.95	%	8.94	%	1.41	%	9.63	%	(4.85	)%


Ratios to Average Net Assets:

Expenses	1.74	%	1.74	%	1.75	%	1.76	%	1.80	%

Net investment income	3.14	%	3.52	%	3.63	%²	3.80	%	4.68	%

Expense waiver/reimbursement⁴	0.00	%⁵	--		--		0.01	%	0.01	%

Supplemental Data:

Net assets, end of period (000 omitted)	$14,486		$13,324		$9,188		$9,620		$10,601

Portfolio turnover	46	%	54	%	35	%	28	%	68	%

1 Per share information is based on average shares outstanding.

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

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

5 Represents less than 0.01%.

Further information about the Fund's performance is contained in the Fund's Annual Report, dated March 31, 2004, which can be obtained free of charge.

<R>

A Statement of Additional Information (SAI) dated May 31, 2004, is incorporated by reference into this prospectus. Additional information about the Fund and its investments is contained in the Fund's SAI and Annual and Semi-Annual Reports to shareholders as they become available. The Annual Report's Management's Discussion of Fund Performance discusses market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. To obtain the SAI, Annual Report, Semi-Annual Report and other information without charge, and to make inquiries, call your investment professional or the Fund at 1-800-341-7400.

</R>

<R>

These documents, as well as additional information about the Fund (including portfolio holdings, performance and distributions), are also available on Federated's Internet site at www.federatedinvestors.com.

</R>

You can obtain information about the Fund (including the SAI) by writing to or visiting the SEC's Public Reference Room in Washington, DC. You may also access Fund information from the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can purchase copies of this information by contacting the SEC by email at publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, DC 20549-0102. Call 1-202-942-8090 for information on the Public Reference Room's operations and copying fees.

Federated Investors
World-Class Investment Manager

Federated Municipal Securities Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
www.federatedinvestors.com

Contact us at 1-800-341-7400 or
www.federatedinvestors.com/contact

Federated Securities Corp., Distributor

Investment Company Act File No. 811-2677

Cusip 313913105
Cusip 313913204
Cusip 313913303

<R>

G00322-01 (5/04)

</R>






FEDERATED MUNICIPAL SECURITIES FUND, INC.


Statement of Additional Information



May 31, 2004

Class A Shares
Class B Shares
Class C Shares


This Statement of Additional  Information  (SAI) is not a prospectus.  Read this
SAI in conjunction with the prospectus for Federated Municipal  Securities Fund,
Inc.  (Fund),  dated May 31, 2004. This SAI incorporates by reference the Fund's
Annual  Report.  Obtain the  prospectus or the Annual Report  without  charge by
calling 1-800-341-7400.

        Contents

        How is the Fund Organized?                               1
        Securities in Which the Fund Invests                     1
        What do Shares Cost?                                     8
        How is the Fund Sold?                                   10
        Exchanging Securities for Shares                        10
        Subaccounting Services                                  11
        Redemption in Kind                                      11
        Account and Share Information                           11
        Tax Information                                         12
        Who Manages and Provides Services to the Fund?          12
        How Does the Fund Measure Performance?                  21
        Who is Federated Investors, Inc.?                       25
        Financial Information                                   27
        Investment Ratings                                      27
        Addresses                                               29


HOW IS THE FUND ORGANIZED?

The Fund is a  diversified  open-end,  management  investment  company  that was
established under the laws of the State of Maryland on September 10, 1976.

The Board of Directors  (the Board) has  established  three classes of shares of
the Fund,  known as Class A Shares,  Class B Shares and Class C Shares (Shares).
This SAI  relates to all  classes of Shares.  The Fund's  investment  adviser is
Federated Investment Management Company (Adviser).


SECURITIES IN WHICH THE FUND INVESTS

In  pursuing  its  investment  strategy,  the Fund may  invest in the  following
securities for any purpose that is consistent with its investment objective.


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SECURITIES DESCRIPTIONS AND TECHNIQUES

Fixed Income Securities

Fixed income securities pay interest,  dividends or distributions at a specified
rate.  The  rate  may  be a  fixed  percentage  of  the  principal  or  adjusted
periodically.  In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities  provide more regular  income than equity  securities.  However,  the
returns on fixed income securities are limited and normally do not increase with
the issuer's  earnings.  This limits the potential  appreciation of fixed income
securities as compared to equity securities.

A  security's  yield  measures  the  annual  income  earned on a  security  as a
percentage of its price. A security's yield will increase or decrease  depending
upon whether it costs less (a discount) or more (a premium)  than the  principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount  or  premium  security  may change  based upon the
probability of an early redemption.  Securities with higher risks generally have
higher yields.

The  following  describes the types of fixed income  securities,  in addition to
those described in the prospectus, in which the Fund invests.

Tax Exempt Securities

Tax exempt  securities are fixed income securities that pay interest that is not
subject to federal regular income taxes. Typically, states, counties, cities and
other political  subdivisions and authorities issue tax exempt  securities.  The
market categorizes tax exempt securities by their source of repayment.

Investing in Securities of Other Investment Companies

The Fund may invest  its assets in  securities  of other  investment  companies,
including the securities of affiliated money market funds, as an efficient means
of carrying out its investment policies and managing its uninvested cash.

Derivative Contracts

Derivative contracts are financial  instruments that require payments based upon
changes in the values of  designated  (or  underlying)  securities,  currencies,
commodities,  financial indices or other assets. Some derivative contracts (such
as futures,  forwards and options) require  payments  relating to a future trade
involving the  underlying  asset.  Other  derivative  contracts  (such as swaps)
require  payments  relating to the income or returns from the underlying  asset.
The other party to a derivative contract is referred to as a counterparty.

Many derivative contracts are traded on securities or commodities exchanges.  In
this case, the exchange sets all the terms of the contract except for the price.
Investors  make payments due under their  contracts  through the exchange.  Most
exchanges require investors to maintain margin accounts through their brokers to
cover their potential obligations to the exchange.  Parties to the contract make
(or collect) daily payments to the margin  accounts to reflect losses (or gains)
in the value of their  contracts.  This  protects  investors  against  potential
defaults by the  counterparty.  Trading  contracts  on an  exchange  also allows
investors to close out their contracts by entering into offsetting contracts.

For  example,  the Fund could  close out an open  contract  to buy an asset at a
future date by entering  into an  offsetting  contract to sell the same asset on
the same date. If the offsetting  sale price is more than the original  purchase
price,  the Fund  realizes  a gain;  if it is less,  the Fund  realizes  a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position.  If this  happens,  the
Fund will be required to keep the  contract  open (even if it is losing money on
the contract),  and to make any payments required under the contract (even if it
has to sell portfolio  securities at unfavorable  prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading  any assets it has been  using to secure  its  obligations  under the
contract.

The  Fund  may  also  trade  derivative  contracts   over-the-counter  (OTC)  in
transactions  negotiated  directly  between the Fund and the  counterparty.  OTC
contracts do not  necessarily  have standard  terms,  so they cannot be directly
offset  with  other  OTC  contracts.   In  addition,  OTC  contracts  with  more
specialized terms may be more difficult to price than exchange traded contracts.

Depending  upon how the Fund uses  derivative  contracts  and the  relationships
between the market value of a  derivative  contract  and the  underlying  asset,
derivative  contracts  may increase or decrease the Fund's  exposure to interest
rate risks,  and may also expose the Fund to liquidity and leverage  risks.  OTC
contracts  also expose the Fund to credit risks in the event that a counterparty
defaults on the contract.

The Fund may trade in the following  types of derivative  contracts,  as well as
combinations  of these  contracts,  including,  but not limited  to,  options on
futures contracts, options on forward contracts and options on swaps.

FUTURES CONTRACTS

Futures  contracts  provide  for the future  sale by one party and  purchase  by
another party of a specified amount of an underlying asset at a specified price,
date, and time.  Entering into a contract to buy an underlying asset is commonly
referred  to as buying a  contract  or  holding a long  position  in the  asset.
Entering into a contract to sell an underlying asset is commonly  referred to as
selling a contract or holding a short position in the asset.  Futures  contracts
are considered to be commodity contracts. The Fund has claimed an exclusion from
the  definition  of the term  "commodity  pool  operator"  under  the  Commodity
Exchange Act and,  therefore,  is not subject to registration or regulation as a
commodity  pool  operator  under  that Act.  Futures  contracts  traded  OTC are
frequently referred to as forward contracts.

The Fund may buy or sell the  following  types of  contracts:  interest rate and
index financial futures contracts.

OPTIONS

Options  are  rights  to buy or sell an  underlying  asset or  instrument  for a
specified  price (the  exercise  price)  during,  or at the end of, a  specified
period.  The seller (or  writer) of the option  receives a payment,  or premium,
from the buyer,  which the writer keeps regardless of whether the buyer uses (or
exercises)  the option.  Options can trade on exchanges or in the OTC market and
may be bought or sold on a wide  variety of  underlying  assets or  instruments,
including  financial  indices,   individual  securities,  and  other  derivative
instruments,  such as futures  contracts.  Options  that are  written on futures
contracts  will be subject to margin  requirements  similar to those  applied to
futures contracts.

CALL OPTIONS

A call option  gives the holder  (buyer) the right to buy the  underlying  asset
from the seller  (writer)  of the option.  The Fund may use call  options in the
following ways:

|X|  Buy call  options on  indices,  individual  securities,  index  futures and
     financial  futures  in  anticipation  of an  increase  in the  value of the
     underlying asset or instrument; and

|X|  Write call  options on indices,  portfolio  securities,  index  futures and
     financial futures to generate income from premiums,  and in anticipation of
     a decrease or only limited  increase in the value of the underlying  asset.
     If a call written by the Fund is exercised,  the Fund foregoes any possible
     profit from an increase in the market  price of the  underlying  asset over
     the exercise price plus the premium received.

PUT OPTIONS

A put  option  gives the holder  the right to sell the  underlying  asset to the
writer of the option. The Fund may use put options in the following ways:

|X|  Buy put  options on  indices,  individual  securities,  index  futures  and
     financial  futures  in  anticipation  of a  decrease  in the  value  of the
     underlying asset; and

|X|  Write put  options on  indices,  portfolio  securities,  index  futures and
     financial futures to generate income from premiums,  and in anticipation of
     an increase or only limited decrease in the value of the underlying  asset.
     In  writing  puts,  there is a risk that the Fund may be  required  to take
     delivery of the  underlying  asset when its current  market  price is lower
     than the exercise price.

The Fund may also buy or write options,  as needed, to close out existing option
positions.

SWAPS

Swaps are  contracts  in which two  parties  agree to pay each other  (swap) the
returns  derived from  underlying  assets with differing  characteristics.  Most
swaps do not involve the delivery of the underlying  assets by either party, and
the parties  might not own the assets  underlying  the swap.  The  payments  are
usually made on a net basis so that,  on any given day,  the Fund would  receive
(or pay) only the amount by which its  payment  under the  contract is less than
(or  exceeds)  the amount of the other  party's  payment.  Swap  agreements  are
sophisticated instruments that can take many different forms, and are known by a
variety of names including  caps,  floors,  and collars.  Common swap agreements
that the Fund may use include:

Interest Rate Swaps

Interest  rate swaps are  contracts  in which one party  agrees to make  regular
payments  equal to a fixed or floating  interest rate times a stated,  principal
amount of fixed income  securities,  in return for payments equal to a different
fixed or floating rate times the same principal  amount,  for a specific period.
For  example,  a $10 million  London  Interbank  Offer Rate  (LIBOR)  swap would
require one party to pay the  equivalent  of the LIBOR rate of  interest  (which
fluctuates) on $10 million principal amount in exchange for the right to receive
the  equivalent  of a stated  fixed rate of interest  on $10  million  principal
amount.

Total Rate of Return Swaps

Total  rate of return  swaps  are  contracts  in which one party  agrees to make
payments of the total  return from the  underlying  asset  during the  specified
period,  in return for payments equal to a fixed or floating rate of interest or
the total return from another underlying asset.

Caps and Floors

Caps and floors are contracts in which one party agrees to make payments only if
an interest  rate or index goes above (cap) or below  (floor) a certain level in
return for a fee from the other party.

</R>

Temporary Defensive Investments

The Fund may make  temporary  defensive  investments  in the  following  taxable
securities:

Corporate Debt Securities

Corporate  debt  securities  are fixed income  securities  issued by businesses.
Notes,  bonds,  debentures and commercial  paper are the most prevalent types of
corporate debt securities. The Fund may also purchase interests in bank loans to
companies.  The credit  risks of  corporate  debt  securities  vary widely among
issuers.

Commercial Paper

Commercial  paper is an  issuer's  obligation  with a maturity of less than nine
months.   Companies   typically  issue  commercial  paper  to  pay  for  current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing  paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity  of  commercial  paper  reduces  both the market  and  credit  risks as
compared to other debt securities of the same issuer.

Treasury Securities

Treasury  securities  are direct  obligations  of the federal  government of the
United States.  Treasury  securities are generally regarded as having the lowest
credit risks.

<R>

Agency Securities

Agency  securities  are  issued  or  guaranteed  by a  federal  agency  or other
government  sponsored  entity  (GSE) acting under  federal  authority.  Some GSE
securities  are  supported  by the full faith and  credit of the United  States.
These include the  Government  National  Mortgage  Association,  Small  Business
Administration,  Farm Credit System Financial Assistance  Corporation,  Farmer's
Home  Administration,  Federal Financing Bank, General Services  Administration,
Department  of  Housing  and Urban  Development,  Export-Import  Bank,  Overseas
Private  Investment  Corporation,   and  Washington  Metropolitan  Area  Transit
Authority Bonds.

Other GSE securities receive support through federal  subsidies,  loans or other
benefits.  For example,  the U.S.  Treasury is authorized to purchase  specified
amounts of  securities  issued by (or  otherwise  make funds  available  to) the
Federal Home Loan Bank System,  Federal Home Loan Mortgage Corporation,  Federal
National Mortgage Association, Student Loan Marketing Association, and Tennessee
Valley Authority in support of such obligations.

A few GSE securities  have no explicit  financial  support,  but are regarded as
having implied support because the federal government sponsors their activities.
These include the Farm Credit  System,  Financing  Corporation,  and  Resolution
Funding Corporation.

Investors regard agency securities as having low credit risks, but not as low as
Treasury securities.

</R>

Bank Instruments

Bank  instruments  are unsecured  interest  bearing  deposits  with banks.  Bank
instruments  include bank accounts,  time deposits,  certificates of deposit and
banker's  acceptances.  Yankee  instruments are denominated in U.S.  dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.

SPECIAL TRANSACTIONS

Inter-Fund Borrowing and Lending Arrangements

The  Securities  and Exchange  Commission  (SEC) has granted an  exemption  that
permits  the Fund and all other  funds  advised  by  subsidiaries  of  Federated
Investors, Inc. (Federated funds) to lend and borrow money for certain temporary
purposes  directly  to and from other  Federated  funds.  Participation  in this
inter-fund lending program is voluntary for both borrowing and lending Federated
funds,  and an inter-fund  loan is only made if it benefits  each  participating
Federated fund.  Federated Investors,  Inc. (Federated)  administers the program
according to procedures approved by the Fund's Board, and the Board monitors the
operation  of  the  program.  Any  inter-fund  loan  must  comply  with  certain
conditions set out in the exemption,  which are designed to assure  fairness and
protect all participating Federated funds.

For  example,  inter-fund  lending  is  permitted  only (a) to meet  shareholder
redemption  requests,  and (b) to meet commitments arising from "failed" trades.
All  inter-fund  loans  must be  repaid  in  seven  days  or  less.  The  Fund's
participation  in this program must be consistent  with its investment  policies
and limitations, and must meet certain percentage tests. Inter-fund loans may be
made only when the rate of  interest  to be  charged is more  attractive  to the
lending  Federated fund than  market-competitive  rates on overnight  repurchase
agreements (Repo Rate) and more attractive to the borrowing  Federated fund than
the  rate of  interest  that  would  be  charged  by an  unaffiliated  bank  for
short-term borrowings (Bank Loan Rate), as determined by the Board. The interest
rate  imposed on  inter-fund  loans is the average of the Repo Rate and the Bank
Loan Rate.

Repurchase Agreements

Repurchase  agreements are transactions in which the Fund buys a security from a
dealer or bank and agrees to sell the  security  back at a mutually  agreed-upon
time and price.  The  repurchase  price exceeds the sale price,  reflecting  the
Fund's return on the transaction.  This return is unrelated to the interest rate
on the underlying security.  The Fund will enter into repurchase agreements only
with  banks and other  recognized  financial  institutions,  such as  securities
dealers, deemed creditworthy by the Adviser.

The Fund's  custodian or  subcustodian  will take  possession of the  securities
subject to repurchase agreements.  The Adviser or sub-custodian will monitor the
value of the  underlying  security  each  day to  ensure  that the  value of the
security always equals or exceeds the repurchase price.

Repurchase agreements are subject to credit risks.

<R>

INVESTMENT RISKS

There are many factors which may affect an  investment  in the Fund.  The Fund's
principal  risks are described in its  prospectus.  Additional  risk factors are
outlined below.

Credit Risks

The Fund may invest up to 100% of its assets in fixed  income  securities  rated
BBB or in unrated but comparable  securities.  Fixed income securities generally
compensate  for greater  credit risk by paying  interest at a higher  rate.  The
difference  between  the  yield of a  security  and the  yield of a "AAA"  rated
general  obligation  security or index with a comparable  maturity  (the spread)
measures the additional  interest paid for risk.  Spreads may increase generally
in response to adverse economic or market  conditions.  A security's  spread may
also increase if the security's rating is lowered,  or the security is perceived
to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.

Credit risk includes the possibility that a party to a transaction involving the
Fund  will  fail to meet its  obligations.  This  could  cause  the Fund to lose
benefit of the  transaction  or prevent  the Fund from  selling or buying  other
securities to implement its investment strategy.

Tax Risks

In order  to be  tax-exempt,  tax-exempt  securities  must  meet  certain  legal
requirements.  Failure to meet such requirements may cause the interest received
and distributed by the Fund to  shareholders to be taxable.  Changes or proposed
changes in federal  tax laws may cause the prices of  tax-exempt  securities  to
fall.

The federal  income tax  treatment of payments in respect of certain  derivative
contracts  is  unclear.  Additionally,  the Fund  may not be able to  close  out
certain  derivative  contracts  when it  wants  to.  Consequently,  the Fund may
receive  payments  that are  treated as ordinary  income for federal  income tax
purposes.

Liquidity Risks

Liquidity risk also refers to the  possibility  that the Fund may not be able to
sell a security or close out a  derivatives  contract  when it wants to. If this
happens,  the Fund will be required to continue to hold the security or keep the
position  open,  and the Fund  could  incur  losses.  OTC  derivative  contracts
generally carry greater liquidity risk than exchange-traded contracts.

Leverage Risks

Leverage risk is created when an investment  exposes the Fund to a level of risk
that  exceeds the amount  invested.  Changes in the value of such an  investment
magnify the Fund's risk of loss and  potential  for gain.  Investments  can have
these same  results if their  returns  are based on a  multiple  of a  specified
index, security, or other benchmark.

Risks Associated with Noninvestment Grade Securities

Securities rated below  investment  grade,  also known as junk bonds,  generally
entail  greater  market,  credit  and  liquidity  risks  than  investment  grade
securities. For example, their prices are more volatile,  economic downturns and
financial  setbacks may affect their prices more  negatively,  and their trading
market may be more limited.

Ordinarily,  the Fund will invest  primarily in a portfolio of investment  grade
securities and unrated securities  determined to be of equivalent  quality.  The
remainder of the portfolio may be invested in securities  rated below investment
grade.

Risks of Investing in Derivative Contracts

The Fund's  use of  derivative  contracts  involves  risks  different  from,  or
possibly  greater  than,  the  risks  associated  with  investing   directly  in
securities and other traditional investments. First, changes in the value of the
derivative  contracts  in which  the Fund  invests  may not be  correlated  with
changes in the value of the underlying asset or if they are correlated, may move
in the  opposite  direction  than  originally  anticipated.  Second,  while some
strategies  involving  derivatives  may reduce  the risk of loss,  they may also
reduce  potential  gains or,  in some  cases,  result  in  losses by  offsetting
favorable price  movements in portfolio  holdings.  Third,  there is a risk that
derivatives  contracts may be mispriced or  improperly  valued and, as a result,
the Fund may need to make increased cash payments to the counterparty.  Finally,
derivative  contracts may cause the Fund to realize increased ordinary income or
short-term  capital  gains  (which are  treated as  ordinary  income for Federal
income tax purposes) and, as a result,  may increase  taxable  distributions  to
shareholders.  Derivative  contracts may also involve  other risks  described in
this SAI, such as interest rate, credit, liquidity and leverage risks.

</R>

Fundamental Investment Objective and Policy

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. The
Fund  will  invest  its  assets  so  that at  least  80% of the  income  that it
distributes  will be exempt from  federal  regular  income tax.  The  investment
objective  and  policy  may not be  changed  by the  Board  without  shareholder
approval.

INVESTMENT LIMITATIONS

Diversification

With respect to securities  comprising 75% of the value of its total assets, the
Fund will not  purchase  securities  of any one issuer  (other  than cash,  cash
items, securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities  and repurchase  agreements  collateralized by
such U.S. government  securities,  and securities of other investment companies)
if, as a result, more than 5% of the value of its total assets would be invested
in the  securities  of that  issuer,  or the Fund would own more than 10% of the
outstanding voting securities of that issuer.

Borrowing Money and Issuing Senior Securities

The Fund may borrow money,  directly or indirectly,  and issue senior securities
to the maximum extent  permitted under the Investment  Company Act of 1940 (1940
Act).

Investing in Real Estate

The Fund may not purchase or sell real estate,  provided  that this  restriction
does not prevent the Fund from  investing  in issuers  which  invest,  deal,  or
otherwise  engage in  transactions  in real  estate  or  interests  therein,  or
investing in  securities  that are secured by real estate or interests  therein.
The Fund may exercise its rights under  agreements  relating to such securities,
including  the right to  enforce  security  interests  and to hold  real  estate
acquired by reason of such enforcement  until that real estate can be liquidated
in an orderly manner.

Investing in Commodities

The Fund may not purchase or sell physical  commodities,  provided that the Fund
may purchase  securities of companies that deal in commodities.  For purposes of
this  restriction,  investments in transactions  involving futures contracts and
options,  forward  currency  contracts,  swap  transactions  and other financial
contracts  that  settle by payment of cash are not deemed to be  investments  in
commodities.

Underwriting

The Fund may not underwrite  the  securities of other  issuers,  except that the
Fund may engage in transactions involving the acquisition, disposition or resale
of its portfolio  securities,  under circumstances where it may be considered to
be an underwriter under the Securities Act of 1933.

Lending

The Fund may not make loans, provided that this restriction does not prevent the
Fund from purchasing  debt  obligations,  entering into  repurchase  agreements,
lending its assets to broker/dealers or institutional investors and investing in
loans, including assignments and participation interests.

Concentration

The Fund will not make investments that will result in the  concentration of its
investments in the securities of issuers primarily engaged in the same industry,
provided  that the Fund may  invest  more that 25% of the value of its assets in
industrial development bonds.  Government  securities,  municipal securities and
bank instruments will not be deemed to constitute an industry.  As to industrial
development  bonds,  the Fund may purchase  securities of an issuer resulting in
the  ownership of more than 25% of the Fund's  assets in one  industry,  and the
Fund  reserves  the right to invest  more than 25% of its  assets in  industrial
development bonds in the same state.

The above  limitations  cannot be changed unless  authorized by the Board and by
the "vote of a majority of its outstanding voting securities," as defined by the
1940 Act.  The  following  limitations,  however,  may be  changed  by the Board
without shareholder approval.  Shareholders will be notified before any material
change in these limitations becomes effective.


Pledging Assets

The Fund will not mortgage,  pledge or hypothecate  any of its assets,  provided
that this shall not apply to the transfer of securities  in connection  with any
permissible   borrowing  or  to  collateral   arrangements  in  connection  with
permissible activities.

Purchases on Margin

The Fund will not  purchase  securities  on margin,  provided  that the Fund may
obtain short-term  credits necessary for the clearance of purchases and sales of
securities,  and  further  provided  that the Fund may make  margin  deposits in
connection  with its use of  financial  options  and  futures,  forward and spot
currency   contracts,   swap  transactions  and  other  financial  contracts  or
derivative instruments.

Restricted Securities

The Fund may invest in  restricted  securities.  Restricted  securities  are any
securities in which the Fund may invest pursuant to its investment objective and
policies  but  which  are  subject  to  restrictions  on  resale  under  federal
securities  law. Under criteria  established  by the board,  certain  restricted
securities are determined to be liquid. To the extent that restricted securities
are not determined to be liquid,  the Fund will limit their  purchase,  together
with other illiquid securities, to 15% of its net assets.

To  conform  to the  current  view of the SEC  staff  that  only  domestic  bank
instruments may be excluded from industry concentration limitations, as a matter
of  non-fundamental  policy,  the Fund will not exclude foreign bank instruments
from  industry  concentration  tests as long as the policy of the SEC remains in
effect.

The Fund applies its concentration of investments restrictions as follows:

o    utility companies will be divided according to their services, for example,
     gas, gas  transmissions,  electric and telephone  will each be considered a
     separate industry;

o    financial service  companies will be classified  according to the end users
     of their  services,  for  example,  automobile  finance,  bank  finance and
     diversified finance will each be considered a separate industry; and

o    asset backed  securities  will be  classified  according to the  underlying
     assets securing such securities.


DETERMINING MARKET VALUE OF SECURITIES

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

o    futures  contracts  and  options  are  generally  valued at  market  values
     established  by the  exchanges  on which  they are  traded  at the close of
     trading on such exchanges.  Options traded in the  over-the-counter  market
     are  generally  valued  according  to the mean between the last bid and the
     last asked  price for the option as  provided  by an  investment  dealer or
     other  financial  institution  that  deals in the  option.  The  Board  may
     determine in good faith that another method of valuing such  investments is
     necessary to appraise their fair market value;

o    for fixed  income  securities,  according to the mean between bid and asked
     prices as furnished by an independent  pricing  service,  except that fixed
     income  securities  with  remaining  maturities of less than 60 days at the
     time of purchase may be valued at amortized cost; and

o    for all other  securities  at fair value as determined in good faith by the
     Board.

Prices  provided by  independent  pricing  services  may be  determined  without
relying exclusively on quoted prices and may consider  institutional  trading in
similar groups of securities,  yield,  quality,  stability,  risk,  coupon rate,
maturity,  type of issue,  trading  characteristics,  and other  market  data or
factors.  From time to time,  when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.

WHAT DO SHARES COST?

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.

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

You can reduce or eliminate the applicable front-end sales charge, as follows:

Quantity Discounts (Class A Shares Only)

Larger  purchases of the same Share class  reduce or eliminate  the sales charge
you pay. You can combine  purchases of Shares made on the same day by you,  your
spouse and your children  under age 21. In addition,  purchases made at one time
by a trustee  or  fiduciary  for a single  trust  estate  or a single  fiduciary
account can be combined.

Accumulated Purchases  (Class A Shares Only)

If you make an  additional  purchase  of Shares,  you can count  previous  Share
purchases still invested in the Fund in calculating the applicable  sales charge
on the additional purchase.

Concurrent Purchases (Class A Shares Only)

You can  combine  concurrent  purchases  of the same share  class of two or more
Federated funds in calculating the applicable sales charge.

Letter of Intent (Class A Shares Only)

You can sign a Letter of Intent  committing to purchase a certain  amount of the
same class of Shares  within a  13-month  period to combine  such  purchases  in
calculating  the sales charge.  The Fund's  custodian will hold Shares in escrow
equal to the maximum  applicable  sales  charge.  If you  complete the Letter of
Intent, the Custodian will release the Shares in escrow to your account.  If you
do not fulfill the Letter of Intent,  the Custodian will redeem the  appropriate
amount  from the Shares  held in escrow to pay the sales  charges  that were not
applied to your purchases.

Reinvestment Privilege

You may reinvest,  within 120 days, your Share  redemption  proceeds at the next
determined NAV without any sales charge.

Purchases by Affiliates of the Fund

The following  individuals and their immediate  family members may buy Shares at
NAV without any sales charge because there are nominal sales efforts  associated
with their purchases:

o    the  Directors,  employees  and  sales  representatives  of the  Fund,  the
     Adviser, the Distributor and their affiliates;

o    any  associated  person of an investment  dealer who has a sales  agreement
     with the Distributor; and

o    trusts, pension or profit-sharing plans for these individuals.

Purchases Through Omnibus Accounts (Class C Shares Only)

Class C Shares may be purchased  without an initial sales charge by any investor
who  buys  Class  C  Shares   through  an  omnibus   account  with  a  financial
intermediary,  such as a broker or a bank,  that does not  accept or charge  the
initial sales charge.

<R>

Reorganizations (Class A Shares Only)

Class  A  Shares  may be  purchased  without  an  initial  sales  charge  by any
shareholder  that  originally  became a shareholder  of the Fund pursuant to the
terms of an agreement and plan of reorganization  which permits  shareholders to
acquire shares at NAV.

</R>

Federated Life Members

Shareholders  of the Fund known as  "Federated  Life  Members"  are exempt  from
paying  any  front-end  sales  charge.   These  shareholders   joined  the  Fund
originally:

o    through the  "Liberty  Account,"  an account  for  Liberty  Family of Funds
     shareholders  on February 28, 1987 (the Liberty  Account and Liberty Family
     of Funds are no longer marketed); or

o    as Liberty  Account  shareholders  by investing  through an affinity  group
     prior to August 1, 1987.

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

These reductions or eliminations are offered because:  no sales commissions have
been advanced to the investment professional selling Shares; the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC); or nominal sales efforts
are associated with the original purchase of Shares.

Upon  notification to the Distributor or the Fund's transfer agent, no CDSC will
be imposed on redemptions:

o    following  the death or  post-purchase  disability,  as  defined in Section
     72(m)(7)  of the  Internal  Revenue  Code of 1986,  of the  last  surviving
     shareholder;

o    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;

o    of Shares  that  represent  a  reinvestment  within  120 days of a previous
     redemption;

o    of Shares held by the Directors,  employees,  and sales  representatives of
     the Fund, the Adviser,  the Distributor and their affiliates;  employees of
     any  investment  professional  that  sells  Shares  according  to  a  sales
     agreement  with the  Distributor;  and the immediate  family members of the
     above persons;

o    of  Shares  originally  purchased  through  a  bank  trust  department,   a
     registered  investment  adviser or  retirement  plans where the third party
     administrator has entered into certain arrangements with the Distributor or
     its affiliates, or any other investment professional, to the extent that no
     payments were advanced for purchases made through these entities;

o    which  are  involuntary  redemptions  processed  by the  Fund  because  the
     accounts do not meet the minimum balance requirements and

<R>

Class B Shares Only

o    which  are  qualifying  redemptions  of Class B Shares  under a  Systematic
     Withdrawal Program.

To keep the sales  charge as low as  possible,  the Fund  redeems your Shares in
this order:

o    Shares that are not subject to a CDSC; and

o    Shares held the longest (to  determine the number of years your Shares have
     been held,  include the time you held shares of other  Federated funds that
     have been exchanged for Shares of this Fund).

The CDSC is then  calculated  using the share  price at the time of  purchase or
redemption, whichever is lower.

HOW IS THE FUND SOLD?

Under the  Distributor's  Contract  with the Fund,  the  Distributor  (Federated
Securities Corp.) offers Shares on a continuous, best-efforts basis.

FRONT-END SALES CHARGE REALLOWANCES

The Distributor  receives a front-end  sales charge on certain Share sales.  The
Distributor pays a portion of this charge to investment  professionals  that are
eligible to receive it (the  "Dealer  Reallowance")  and  retains any  remaining
portion of the front-end sales charge.

When an investment  professional's  customer  purchases  Shares,  the investment
professional may receive a Dealer Reallowance as follows:

                                             Dealer Reallowance
                                             as a Percentage of
                                            Public Offering Price
   Purchase Amount Class A Shares
         Less than $100,000                         4.00%
   $100,000 but less than $250,000                  3.25%
   $250,000 but less than $500,000                  2.25%
  $500,000 but less than $1 million                 1.80%
        $1 million or greater                       0.00%

- ---------------------------------------------------------------------------
                                             Dealer Reallowance
                                             as a Percentage of
                                            Public Offering Price
           Class C Shares
        All Purchase Amounts                        1.00%

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

ADVANCE COMMISSIONS

When an investment  professional's  customer  purchases  Shares,  the investment
professional may receive an advance commission as follows:


Class A Shares (for purchases over $1 million)
                                          Advance Commission
                                          as a Percentage of
                                        Public Offering Price
        Purchase Amount
 First $1 million - $5 million                  0.75%
 Next $5 million - $20 million                  0.50%
       Over $20 million                         0.25%

Advance  commissions  are  calculated  on a year by year basis  based on amounts
invested  during that year.  Accordingly,  with respect to  additional  purchase
amounts,  the  advance  commission  breakpoint  resets  annually  to  the  first
breakpoint on the anniversary of the first purchase.
- --------------------------------------------------------------------------------

Class A Share purchases under this program may be made by Letter of Intent or by
combining concurrent  purchases.  The above advance commission will be paid only
on those purchases that were not previously  subject to a front-end sales charge
or dealer advance  commission.  Certain retirement  accounts may not be eligible
for this program.

                                              Advance Commission
                                              as a Percentage of
                                             Public Offering Price
       Class B Shares
    All Purchase Amounts                          Up to 5.50%
                                               Advance Commission
                                               as a Percentage of
                                             Public Offering Price
       Class C Shares
    All Purchase Amounts                             1.00%

RULE 12B-1 PLAN (Class B Shares and Class C Shares)

As a  compensation-type  plan,  the  Rule  12b-1  Plan  is  designed  to pay the
Distributor for activities  principally intended to result in the sale of Shares
such as advertising and marketing of Shares (including printing and distributing
prospectuses  and sales  literature to  prospective  shareholders  and financial
institutions)  and  providing  incentives to  investment  professionals  to sell
Shares.  The Rule 12b-1 Plan allows the  Distributor to contract with investment
professionals to perform  activities covered by the Plan. The Rule 12b-1 Plan is
expected to benefit the Fund in a number of ways. For example, it is anticipated
that the Plan will help the Fund attract and retain assets,  thus providing cash
for orderly  portfolio  management and Share redemptions and possibly helping to
stabilize or reduce other operating expenses.

In addition,  the Plan is integral to the multiple class  structure of the Fund,
which  promotes the sale of Shares by providing a range of options to investors.
The Fund's  service  providers that receive  asset-based  fees also benefit from
stable or increasing Fund assets.

The Fund may compensate the Distributor  more or less than its actual  marketing
expenses. In no event will the Fund pay for any expenses of the Distributor that
exceed the maximum Rule 12b-1 Plan fee.

For some classes of Shares,  the maximum Rule 12b-1 Plan fee that can be paid in
any one year may not be sufficient to cover the  marketing-related  expenses the
Distributor  has incurred.  Therefore,  it may take the  Distributor a number of
years to recoup these expenses.

Federated  and its  subsidiaries  may benefit from  arrangements  where the Rule
12b-1 Plan fees related to Class B Shares may be paid to third  parties who have
provided  the  funds  to  make  advance   commission   payments  to   investment
professionals.

SERVICE FEES

The Fund may pay fees not to exceed 0.25% of average  daily net assets  (Service
Fees) to investment  professionals or to Federated  Shareholder Services Company
(FSSC),  a subsidiary of Federated,  for providing  services to shareholders and
maintaining shareholder accounts.  Under certain agreements,  rather than paying
investment  professionals  directly,  the Fund may pay Service  Fees to FSSC and
FSSC will use the fees to compensate investment professionals.

SUPPLEMENTAL PAYMENTS

Investment  professionals may be paid fees, in significant  amounts,  out of the
assets  of the  Distributor.  These  fees do not  come out of Fund  assets.  The
Distributor may be reimbursed by the Adviser or its affiliates.

These  supplemental  payments  may be based  upon such  factors as the number or
value of Shares  the  investment  professional  sells or may sell;  the value of
client assets invested; and/or the type and nature of services, sales support or
marketing support furnished by the investment professional. In addition to these
supplemental  payments,  an investment  professional  may also receive  payments
under the Rule 12b-1 Plan and/or Service Fees.

</R>

EXCHANGING SECURITIES FOR SHARES

You may contact the  Distributor to request a purchase of Shares in exchange for
securities  you own. The Fund reserves the right to determine  whether to accept
your securities and the minimum market value to accept. The Fund will value your
securities in the same manner as it values its assets.  This exchange is treated
as a sale of your securities for federal tax purposes.

SUBACCOUNTING SERVICES

Certain   investment   professionals  may  wish  to  use  the  transfer  agent's
subaccounting system to minimize their internal recordkeeping requirements.  The
transfer  agent may  charge a fee based on the level of  subaccounting  services
rendered.  Investment  professionals  holding  Shares  in a  fiduciary,  agency,
custodial or similar capacity may charge or pass through  subaccounting  fees as
part of or in addition to normal  trust or agency  account  fees.  They may also
charge fees for other  services  that may be related to the ownership of Shares.
This information should,  therefore, be read together with any agreement between
the customer and the investment  professional about the services  provided,  the
fees charged for those services, and any restrictions and limitations imposed.

REDEMPTION IN KIND

Although  the Fund  intends to pay Share  redemptions  in cash,  it reserves the
right, as described  below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.

Because  the Fund has  elected to be  governed by Rule 18f-1 under the 1940 Act,
the Fund is obligated to pay Share  redemptions  to any one  shareholder in cash
only up to the lesser of  $250,000 or 1% of the net assets  represented  by such
Share class during any 90-day period.

Any Share  redemption  payment  greater  than this  amount  will also be in cash
unless the Fund's Board  determines  that payment  should be in kind.  In such a
case,  the Fund will pay all or a portion of the remainder of the  redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio  securities  will be selected in a manner that the Fund's  Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.

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

ACCOUNT AND SHARE INFORMATION

<R>

VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Director  elections and
other matters submitted to shareholders for vote.

All  Shares  of the Fund  have  equal  voting  rights,  except  that in  matters
affecting  only a  particular  class,  only Shares of that class are entitled to
vote.

Directors may be removed by the Board or by shareholders at a special meeting. A
special  meeting of  shareholders  will be called by the Board upon the  written
request of shareholders who own at least 10% of the Fund's outstanding Shares.

As of May 11, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class A Shares: Edward Jones & Co., Maryland
Heights, MO, owned approximately 3,704,258 Shares (8.66%).

As of May 11, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class B Shares: Edward Jones & Co., Maryland
Heights,  MO, owned approximately  449,920 Shares (8.43%),  and Citigroup Global
Markets Inc., New York, NY, owned approximately 414,441 Shares (7.77%).

As of May 11, 2004, the following shareholders owned of record, beneficially, or
both, 5% or more of outstanding Class C Shares:  MLPF&S,  Jacksonville,  FL,
owned  approximately  205,021 Shares (15.77%);  Edward Jones & Co., Maryland
Heights,  MO owned  approximately  163,376  Shares  (12.57%);  Citigroup  Global
Markets  Inc.,  New York, NY owned  approximately  71,433  Shares  (5.50%),  and
Trucojo,  Gold Trust Company,  St. Joseph, MO, owned approximately 66,359 Shares
(5.11%).

</R>

TAX INFORMATION

FEDERAL INCOME TAX

The Fund intends to meet  requirements  of Subchapter M of the Internal  Revenue
Code applicable to regulated investment companies. If these requirements are not
met, it will not receive  special tax  treatment  and will be subject to federal
corporate income tax.

The Fund is  entitled  to a loss  carry-forward,  which may reduce  the  taxable
income or gain that the Fund would realize,  and to which the shareholder  would
be subject, in the future.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

<R>

BOARD OF DIRECTORS

The Board is  responsible  for  managing  the Fund's  business  affairs  and for
exercising all the Fund's powers except those reserved for the shareholders. The
following  tables  give  information  about  each  Board  member  and the senior
officers of the Fund. Where required,  the tables  separately list Board members
who are "interested persons" of the Fund (i.e.,  "Interested" Board members) and
those who are not (i.e.,  "Independent" Board members).  Unless otherwise noted,
the address of each person  listed is Federated  Investors  Tower,  1001 Liberty
Avenue,  Pittsburgh,  PA.  The  Corporation  comprises  one  portfolio  and  the
Federated  Fund Complex  consists of 44  investment  companies  (comprising  136
portfolios).  Unless otherwise noted, each Officer is elected  annually.  Unless
otherwise noted, each Board member oversees all portfolios in the Federated Fund
Complex; serves for an indefinite term; and also serves as a Board member of the
following investment company complexes:  Banknorth Funds-four portfolios; Golden
Oak(R) Family of Funds-seven portfolios and WesMark Funds-five portfolios.

As of May 11, 2004,  the Fund's Board and Officers as a group owned less than 1%
of the Fund's outstanding Class A, Class B, and Class C Shares.



INTERESTED DIRECTORS BACKGROUND AND COMPENSATION

        Name                                                                Total
     Birth Date                                                         Compensation
      Address                                             Aggregate     From Fund and
Positions Held with                                      Compensation  Federated Fund
        Fund          Principal Occupation(s) for Past    From Fund        Complex
 Date Service Began    Five Years, Other Directorships      (past      (past calendar
                        Held and Previous Position(s)    fiscal year)       year)


                      Principal Occupations: Chairman         $0             $0
John F. Donahue*      and Director or Trustee of the
Birth Date: July      Federated Fund Complex; Chairman
28, 1924              and Director, Federated
CHAIRMAN AND          Investors, Inc.
DIRECTOR
Began serving:
September 1976        Previous Positions: Trustee,
                      Federated Investment Management
                      Company and Chairman and
                      Director, Federated Investment
                      Counseling.

                      Principal Occupations: Principal        $0             $0
J. Christopher        Executive Officer and President
Donahue*              of the Federated Fund Complex;
Birth Date: April     Director or Trustee of some of
11, 1949              the Funds in the Federated Fund
PRESIDENT AND         Complex; President, Chief
DIRECTOR              Executive Officer and Director,
Began serving:        Federated Investors, Inc.;
December 1986         Chairman and Trustee, Federated
                      Investment Management Company;
                      Trustee, Federated Investment
                      Counseling; Chairman and
                      Director, Federated Global
                      Investment Management Corp.;
                      Chairman, Federated Equity
                      Management Company of
                      Pennsylvania, Passport Research,
                      Ltd. and Passport Research II,
                      Ltd.; Trustee, Federated
                      Shareholder Services Company;
                      Director, Federated Services
                      Company.

                      Previous Positions: President,
                      Federated Investment Counseling;
                      President and Chief Executive
                      Officer, Federated Investment
                      Management Company, Federated
                      Global Investment Management
                      Corp. and Passport Research, Ltd.

                      Principal Occupations: Director     $1,327.71       $148,500
Lawrence D. Ellis,    or Trustee of the Federated Fund
M.D.*                 Complex; Professor of Medicine,
Birth Date: October   University of Pittsburgh;
11, 1932              Medical Director, University of
3471 Fifth Avenue     Pittsburgh Medical Center
Suite 1111            Downtown; Hematologist,
Pittsburgh, PA        Oncologist and Internist,
DIRECTOR              University of Pittsburgh Medical
Began serving:        Center.
August 1987
                      Other Directorships Held:
                      Member, National Board of
                      Trustees, Leukemia Society of
                      America.

                      Previous Positions: Trustee,
                      University of Pittsburgh;
                      Director, University of
                      Pittsburgh Medical Center.

* Family  relationships and reasons for "interested"  status: John F. Donahue is
the father of J. Christopher Donahue; both are "interested" due to the positions
they hold with  Federated  and its  subsidiaries.  Lawrence  D.  Ellis,  M.D. is
"interested"  because  his  son-in-law  is  employed  by  the  Fund's  principal
underwriter, Federated Securities Corp.

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


INDEPENDENT DIRECTORS BACKGROUND AND COMPENSATION

        Name                                                                Total
     Birth Date                                                         Compensation
      Address                                             Aggregate     From Fund and
Positions Held with                                      Compensation  Federated Fund
        Fund          Principal Occupation(s) for Past    From Fund        Complex
 Date Service Began    Five Years, Other Directorships      (past      (past calendar
                        Held and Previous Position(s)    fiscal year)       year)



                      Principal Occupation: Director      $1,460.49       $163,350
Thomas G. Bigley      or Trustee of the Federated Fund
Birth Date:           Complex.
February 3, 1934
15 Old Timber Trail   Other Directorships Held:
Pittsburgh, PA        Director, Member of Executive
DIRECTOR              Committee, Children's Hospital
Began serving:        of Pittsburgh; Director,
November 1994         University of Pittsburgh.

                      Previous Position: Senior
                      Partner, Ernst & Young LLP.

                      Principal Occupations: Director     $1,460.49       $163,350
John T. Conroy, Jr.   or Trustee of the Federated Fund
Birth Date: June      Complex; Chairman of the Board,
23, 1937              Investment Properties
Grubb &           Corporation; Partner or Trustee
Ellis/Investment      in private real estate ventures
Properties            in Southwest Florida.
Corporation
3838 North Tamiami    Previous Positions: President,
Trail                 Investment Properties
Suite 402             Corporation; Senior Vice
Naples, FL            President, John R. Wood and
DIRECTOR              Associates, Inc., Realtors;
Began serving:        President, Naples Property
August 1991           Management, Inc. and Northgate
                      Village Development Corporation.

                      Principal Occupation: Director      $1,460.49       $163,350
Nicholas P.           or Trustee of the Federated Fund
Constantakis          Complex.
Birth Date:
September 3, 1939     Other Directorships Held:
175 Woodshire Drive   Director and Member of the Audit
Pittsburgh, PA        Committee, Michael Baker
DIRECTOR              Corporation (engineering and
Began serving:        energy services worldwide).
February 1998
                      Previous Position: Partner,
                      Anderson Worldwide SC.

                      Principal Occupation: Director      $1,327.71       $148,500
John F. Cunningham    or Trustee of the Federated Fund
Birth Date: March     Complex.
5, 1943
353 El Brillo Way     Other Directorships Held:
Palm Beach, FL        Chairman, President and Chief
DIRECTOR              Executive Officer, Cunningham
Began serving: July   & Co., Inc. (strategic
1999                  business consulting); Trustee
                      Associate, Boston College.

                      Previous Positions: Director,
                      Redgate Communications and EMC
                      Corporation (computer storage
                      systems); Chairman of the Board
                      and Chief Executive Officer,
                      Computer Consoles, Inc.;
                      President and Chief Operating
                      Officer, Wang Laboratories;
                      Director, First National Bank of
                      Boston; Director, Apollo
                      Computer, Inc.

                      Principal Occupation: Director      $1,327.71       $148,500
Peter E. Madden       or Trustee of the Federated Fund
Birth Date: March     Complex; Management Consultant.
16, 1942
One Royal Palm Way    Other Directorships Held: Board
100 Royal Palm Way    of Overseers, Babson College.
Palm Beach, FL
DIRECTOR              Previous Positions:
Began serving:        Representative, Commonwealth of
AUGUST 1991           Massachusetts General Court;
                      President, State Street Bank and
                      Trust Company and State Street
                      Corporation (retired); Director,
                      VISA USA and VISA International;
                      Chairman and Director,
                      Massachusetts Bankers
                      Association; Director,
                      Depository Trust Corporation;
                      Director, The Boston Stock
                      Exchange.

                      Principal Occupations: Director     $1,460.49       $163,350
Charles F.            or Trustee of the Federated Fund
Mansfield, Jr.        Complex; Management Consultant;
Birth Date: April     Executive Vice President, DVC
10, 1945              Group, Inc. (marketing,
80 South Road         communications and technology)
Westhampton Beach,    (prior to 9/1/00).
NY
DIRECTOR              Previous Positions: Chief
Began serving: July   Executive Officer, PBTC
1999                  International Bank; Partner,
                      Arthur Young & Company (now
                      Ernst & Young LLP); Chief
                      Financial Officer of Retail
                      Banking Sector, Chase Manhattan
                      Bank; Senior Vice President,
                      HSBC Bank USA (formerly, Marine
                      Midland Bank); Vice President,
                      Citibank; Assistant Professor of
                      Banking and Finance, Frank G.
                      Zarb School of Business, Hofstra
                      University.

John E. Murray,       Principal Occupations: Director     $1,593.24       $178,200
Jr., J.D., S.J.D.     or Trustee of the Federated Fund
Birth Date:           Complex; Chancellor and Law
December 20, 1932     Professor, Duquesne University;
Chancellor,           Partner, Murray, Hogue &
Duquesne University   Lannis.
Pittsburgh, PA
DIRECTOR              Other Directorships Held:
Began serving:        Director, Michael Baker Corp.
February 1995         (engineering, construction,
                      operations and technical
                      services).

                      Previous Positions: President,
                      Duquesne University; Dean and
                      Professor of Law, University of
                      Pittsburgh School of Law; Dean
                      and Professor of Law, Villanova
                      University School of Law.

                      Principal Occupations:  Director    $1,327.71       $148,500
Marjorie P. Smuts     or Trustee of the Federated Fund
Birth Date: June      Complex; Public
21, 1935              Relations/Marketing
4905 Bayard Street    Consultant/Conference
Pittsburgh, PA        Coordinator.
DIRECTOR
Began serving:        Previous Positions: National
February 1984         Spokesperson, Aluminum Company
                      of America; television producer;
                      President, Marj Palmer Assoc.;
                      Owner, Scandia Bord.

                      Principal Occupations:  Director    $1,327.71       $148,500
John S. Walsh         or Trustee of the Federated Fund
Birth Date:           Complex; President and Director,
November 28, 1957     Heat Wagon, Inc. (manufacturer
2604 William Drive    of construction temporary
Valparaiso, IN        heaters); President and
DIRECTOR              Director, Manufacturers
Began serving:        Products, Inc. (distributor of
January 1999          portable construction heaters);
                      President, Portable Heater
                      Parts, a division of
                      Manufacturers Products, Inc.

                      Previous Position: Vice
                      President, Walsh & Kelly,
                      Inc.


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



OFFICERS**

            Name
         Birth Date
           Address
  Positions Held with Fund
- -----------------------------
     Date Service Began           Principal Occupation(s) and Previous Position(s)

                              Principal Occupations: Executive Vice President and
John W. McGonigle             Secretary of the Federated Fund Complex; Executive Vice
Birth Date: October 26, 1938  President, Secretary and Director, Federated Investors,
EXECUTIVE VICE PRESIDENT AND  Inc.
SECRETARY
Began serving: September 1976 Previous Positions: Trustee, Federated Investment
                              Management Company and Federated Investment Counseling;
                              Director, Federated Global Investment Management Corp.,
                              Federated Services Company and Federated Securities
                              Corp.

                              Principal Occupations: Principal Financial Officer and
Richard J. Thomas             Treasurer of the Federated Fund Complex; Senior Vice
Birth Date: June 17, 1954     President, Federated Administrative Services.
TREASURER
Began serving: November 1998  Previous Positions: Vice President, Federated
                              Administrative Services; held various management
                              positions within Funds Financial Services Division of
                              Federated Investors, Inc.

                              Principal Occupations: Vice Chairman or Vice President
Richard B. Fisher             of some of the Funds in the Federated Fund Complex;
Birth Date: May 17, 1923      Vice Chairman, Federated Investors, Inc.; Chairman,
VICE PRESIDENT                Federated Securities Corp.
Began serving: January 1985
                              Previous Positions: President and Director or Trustee
                              of some of the Funds in the Federated Fund Complex;
                              Executive Vice President, Federated Investors, Inc. and
                              Director and Chief Executive Officer, Federated
                              Securities Corp.

                              Mary Jo Ochson has been the Fund's Portfolio Manager
Mary Jo Ochson                since May 1996. Ms. Ochson was named Chief Investment
Birth Date: September 12,     Officer of tax-exempt fixed income products in 2004 and
1953                          is a Vice President of the Fund.  She joined Federated
VICE PRESIDENT                in 1982 and has been a Senior Portfolio Manager and a
Began serving: November 1998  Senior Vice President of the Fund's Adviser since
                              1996.  Ms. Ochson is a Chartered Financial Analyst and
                              received her M.B.A. in Finance from the University of
                              Pittsburgh.

**    Officers do not receive any compensation from the Fund.
- ---------------------------------------------------------------------------
Thomas R.  Donahue,  Chief  Financial  Officer,  Vice  President,  Treasurer and
Assistant  Secretary  of  Federated  and an officer of its various  advisory and
underwriting subsidiaries, has served as a Term Member on the Board of Directors
of Duquesne University,  Pittsburgh,  Pennsylvania, since May 12, 2000. Mr. John
E.  Murray,  Jr., an  Independent  Director of the Fund,  served as President of
Duquesne from 1988 until his  retirement  from that position in 2001, and became
Chancellor of Duquesne on August 15, 2001.  It should be noted that Mr.  Donahue
abstains  on any matter  that comes  before  Duquesne's  Board that  affects Mr.
Murray personally.


COMMITTEES OF THE BOARD
                                                                           Meetings
                                                                              Held
Board         Committee                                                    During
Committee      Members                   Committee Functions                  Last
                                                                           Fiscal
                                                                              Year
Executive                     In between meetings of the full Board,          One
          John F. Donahue     the Executive Committee generally may
          John E. Murray,     exercise all the powers of the full Board
          Jr., J.D., S.J.D.   in the management and direction of the
                              business and conduct of the affairs of
                              the Corporation in such manner as the
                              Executive Committee shall deem to be in
                              the best interests of the Corporation.
                              However, the Executive Committee cannot
                              elect or remove Board members, increase
                              or decrease the number of Directors,
                              elect or remove any Officer, declare
                              dividends, issue shares or recommend to
                              shareholders any action requiring
                              shareholder approval.

Audit                         The Audit Committee reviews and                 Four
          Thomas G. Bigley    recommends to the full Board the
          John T. Conroy,     independent auditors to be selected to
          Jr.                 audit the Fund`s financial statements;
          Nicholas P.         meets with the independent auditors
          Constantakis        periodically to review the results of the
          Charles F.          audits and reports the results to the
          Mansfield, Jr.      full Board; evaluates the independence of
                              the auditors, reviews legal and
                              regulatory matters that may have a
                              material effect on the financial
                              statements, related compliance policies
                              and programs, and the related reports
                              received from regulators; reviews the
                              Fund`s internal audit function; reviews
                              compliance with the Fund`s code of
                              conduct/ethics; reviews valuation issues;
                              monitors inter-fund lending transactions;
                              reviews custody services and issues and
                              investigates any matters brought to the
                              Committee's attention that are within the
                              scope of its duties.


Board ownership of shares in the fund and in the Federated  family of Investment
companies AS OF DECEMBER 31, 2003

                                                               Aggregate
                                                               Dollar Range of
                                                               Shares Owned in
                                            Dollar Range of    Federated Family of
Interested                                  Shares Owned       Investment Companies
Board Member Name                           in Fund


John F. Donahue                              None                Over $100,000
J. Christopher Donahue                       None                Over $100,000
Lawrence D. Ellis, M.D.                      $1 - $10,000        Over $100,000

Independent
Board Member Name

Thomas G. Bigley                             None                Over $100,000
John T. Conroy, Jr.                          None                Over $100,000
Nicholas P. Constantakis                     None                Over $100,000
John F. Cunningham                           None                Over $100,000
Peter E. Madden                              None                Over $100,000
Charles F. Mansfield, Jr.                    None                $50,001 - $100,000
John E. Murray, Jr., J.D., S.J.D.            None                Over $100,000
Marjorie P. Smuts                            None                Over $100,000
John S. Walsh                                None                Over $100,000

</R>
- ------------------------------------------------------------------------------------

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment  decisions for the
Fund.

The Adviser is a wholly owned subsidiary of Federated.

The  Adviser  shall not be liable  to the Fund or any Fund  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.

As required by the 1940 Act, the Fund's Board has reviewed the Fund's investment
advisory  contract.  The Board's  decision to approve the contract  reflects the
exercise  of  its  business   judgment  on  whether  to  continue  the  existing
arrangements.  During  its  review of the  contract,  the Board  considers  many
factors,  among the most material of which are: the Fund's investment objectives
and long term performance;  the Adviser's management  philosophy,  personnel and
processes;  the preferences  and  expectations  of Fund  shareholders  and their
relative sophistication;  the continuing state of competition in the mutual fund
industry;  comparable fees in the mutual fund industry; the range and quality of
services provided to the Fund and its shareholders by the Federated organization
in addition to investment advisory services;  and the Fund's relationship to the
Federated funds.

In  assessing  the  Adviser's  performance  of its  obligations,  the Board also
considers  whether  there  has  occurred  a  circumstance  or event  that  would
constitute  a reason for it to not renew an advisory  contract.  In this regard,
the Board is mindful of the potential  disruptions of the Fund's  operations and
various risks, uncertainties and other effects that could occur as a result of a
decision to  terminate or not renew an advisory  contract.  In  particular,  the
Board  recognizes  that  most  shareholders  have  invested  in the  Fund on the
strength  of  the  Adviser's   industry  standing  and  reputation  and  in  the
expectation  that the Adviser will have a continuing role in providing  advisory
services to the Fund.

The Board also considers the compensation and benefits  received by the Adviser.
This includes fees received for services  provided to the Fund by other entities
in the Federated organization and research services received by the Adviser from
brokers that execute fund trades, as well as advisory fees. In this regard,  the
Board is aware that various courts have  interpreted  provisions of the 1940 Act
and have indicated in their decisions that the following factors may be relevant
to an Adviser's compensation: the nature and quality of the services provided by
the Adviser,  including  the  performance  of the Fund;  the  Adviser's  cost of
providing the services;  the extent to which the Adviser may realize  "economies
of scale" as the Fund grows larger; any indirect benefits that may accrue to the
Adviser and its  affiliates as a result of the Adviser's  relationship  with the
Fund;  performance and expenses of comparable funds; and the extent to which the
independent  Board  members are fully  informed  about all facts  bearing on the
Adviser's  service and fee. The Fund's Board is aware of these factors and takes
them into account in its review of the Fund's advisory contract.

The Board considers and weighs these  circumstances  in light of its substantial
accumulated  experience  in  governing  the Fund and working  with  Federated on
matters relating to the Federated funds, and is assisted in its deliberations by
the advice of independent legal counsel.  In this regard, the Board requests and
receives a significant  amount of  information  about the Fund and the Federated
organization.  Federated  provides  much of  this  information  at each  regular
meeting of the Board,  and furnishes  additional  reports in connection with the
particular  meeting at which the Board's formal review of the advisory contracts
occurs.  In  between  regularly  scheduled  meetings,   the  Board  may  receive
information  on  particular  matters  as the  need  arises.  Thus,  the  Board's
evaluation of an advisory  contract is informed by reports covering such matters
as: the Adviser's  investment  philosophy,  personnel and processes;  the Fund's
short- and long-term  performance  (in absolute terms as well as in relationship
to its  particular  investment  program and certain  competitor  or "peer group"
funds),  and  comments  on the  reasons  for  performance;  the Fund's  expenses
(including  the  advisory  fee itself and the overall  expense  structure of the
Fund,  both in absolute  terms and relative to similar and/or  competing  funds,
with due regard for contractual or voluntary expense  limitations);  the use and
allocation of brokerage  commissions  derived from trading the Fund's  portfolio
securities; the nature and extent of the advisory and other services provided to
the  Fund by the  Adviser  and its  affiliates;  compliance  and  audit  reports
concerning  the Federated  funds and the Federated  companies that service them;
and relevant  developments  in the mutual fund  industry  and how the  Federated
funds and/or Federated are responding to them.

The Board also receives financial information about Federated, including reports
on the compensation and benefits  Federated derives from its relationships  with
the  Federated  funds.  These reports cover not only the fees under the advisory
contracts,  but also fees  received by  Federated's  subsidiaries  for providing
other  services to the  Federated  funds under  separate  contracts  (e.g.,  for
serving as the Federated funds'  administrator and transfer agent).  The reports
also  discuss  any  indirect  benefit  Federated  may derive from its receipt of
research services from brokers who execute Federated fund trades.

The Board bases its decision to approve an advisory  contract on the totality of
the  circumstances  and  relevant  factors,  and with a view to past and  future
long-term  considerations.  Not all of the factors and considerations identified
above are relevant to every  Federated fund, nor does the Board consider any one
of them to be  determinative.  Because the  totality of  circumstances  includes
considering the relationship of each Federated fund, the Board does not approach
consideration  of every Federated  fund's advisory  contract as if that were the
only Federated fund.


<R>

Services Agreement

Federated  Advisory  Services  Company,  an affiliate  of the Adviser,  provides
certain support  services to the Adviser.  The fee for these services is paid by
the Adviser and not by the Fund.

</R>


Other Related Services

Affiliates of the Adviser may,  from time to time,  provide  certain  electronic
equipment and software to  institutional  customers in order to  facilitate  the
purchase of Fund Shares offered by the Distributor.

Code of Ethics Restrictions on Personal Trading

As  required by SEC rules,  the Fund,  its  Adviser,  and its  Distributor  have
adopted codes of ethics.  These codes govern  securities  trading  activities of
investment personnel, Fund Directors, and certain other employees. Although they
do permit these  people to trade in  securities,  including  those that the Fund
could buy, they also contain significant safeguards designed to protect the Fund
and its  shareholders  from abuses in this area,  such as requirements to obtain
prior approval for, and to report, particular transactions.

<R>

Voting Proxies on Fund Portfolio Securities

The  Board  has  delegated  to the  Adviser  authority  to vote  proxies  on the
securities  held in the  Fund's  portfolio.  The  Board  has also  approved  the
Adviser's  policies and procedures  for voting the proxies,  which are described
below.

Proxy Voting Policies

The Adviser's  general  policy is to cast proxy votes in favor of proposals that
the Adviser anticipates will enhance the long-term value of the securities being
voted. Generally,  this will mean voting for proposals that the Adviser believes
will: improve the management of a company; increase the rights or preferences of
the voted  securities;  and/or increase the chance that a premium offer would be
made for the company or for the voted securities.

The  following  examples  illustrate  how these  general  policies  may apply to
proposals  submitted by a company's  board of  directors.  However,  whether the
Adviser  supports  or  opposes a proposal  will  always  depend on the  specific
circumstances described in the proxy statement and other available information.

On  matters  of  corporate  governance,  generally  the  Adviser  will  vote for
proposals to:  require  independent  tabulation of proxies  and/or  confidential
voting by  shareholders;  reorganize  in another  jurisdiction  (unless it would
reduce the rights or preferences of the  securities  being voted);  and repeal a
shareholder  rights  plan (also  known as a "poison  pill").  The  Adviser  will
generally  vote against the adoption of such a plan (unless the plan is designed
to facilitate, rather than prevent, unsolicited offers for the company).

On  matters of capital  structure,  generally  the  Adviser  will vote:  against
proposals  to  authorize  or issue  shares that are senior in priority or voting
rights to the securities being voted;  for proposals to grant preemptive  rights
to  the  securities  being  voted;  and  against  proposals  to  eliminate  such
preemptive rights.

On matters relating to management compensation, generally the Adviser will vote:
for  stock  incentive  plans  that  align  the  recipients'  interests  with the
interests of shareholders without creating undue dilution; and against proposals
that would permit the amendment or replacement of outstanding  stock  incentives
with new stock incentives having more favorable terms.

On matters  relating to  corporate  transactions,  the Adviser will vote proxies
relating to proposed mergers, capital reorganizations,  and similar transactions
in accordance with the general  policy,  based upon its analysis of the proposed
transaction.  The Adviser will vote proxies in contested  elections of directors
in accordance with the general  policy,  based upon its analysis of the opposing
slates and their respective proposed business strategies.  Some transactions may
also involve proposed  changes to the company's  corporate  governance,  capital
structure  or  management  compensation.  The Adviser  will vote on such changes
based on its evaluation of the proposed  transaction or contested  election.  In
these  circumstances,  the Adviser may vote in a manner  contrary to the general
practice  for  similar  proposals  made  outside  the context of such a proposed
transaction or change in the board. For example,  if the Adviser decides to vote
against  a  proposed  transaction,   it  may  vote  for  anti-takeover  measures
reasonably  designed  to  prevent  the  transaction,  even  though  the  Adviser
typically votes against such measures in other contexts.

The Adviser generally votes against proposals submitted by shareholders  without
the favorable  recommendation  of a company's board. The Adviser believes that a
company's board should manage its business and policies,  and that  shareholders
who seek specific changes should strive to convince the board of their merits or
seek direct representation on the board.

In addition, the Adviser will not vote if it determines that the consequences or
costs outweigh the potential benefit of voting. For example, if a foreign market
requires  shareholders  casting  proxies  to retain the voted  shares  until the
meeting date (thereby  rendering the shares "illiquid" for some period of time),
the Adviser will not vote proxies for such shares.

Proxy Voting Procedures

The Adviser has  established  a Proxy Voting  Committee  (Proxy  Committee),  to
exercise all voting discretion granted to the Adviser by the Board in accordance
with the proxy voting  policies.  The Adviser has hired Investor  Responsibility
Research  Center (IRRC) to obtain,  vote, and record proxies in accordance  with
the Proxy Committee's  directions.  The Proxy Committee directs IRRC by means of
Proxy  Voting  Guidelines,  and IRRC may vote any proxy as directed in the Proxy
Voting  Guidelines  without further  direction from the Proxy Committee (and may
make any  determinations  required to implement  the Proxy  Voting  Guidelines).
However,  if the Proxy Voting Guidelines  require  case-by-case  direction for a
proposal, IRRC will provide the Proxy Committee with all information that it has
obtained  regarding the proposal and the Proxy  Committee will provide  specific
direction to IRRC. The Adviser's proxy voting  procedures  generally  permit the
Proxy Committee to amend the Proxy Voting Guidelines, or override the directions
provided in such Guidelines,  whenever necessary to comply with the proxy voting
policies.

Conflicts of Interest

The Adviser has adopted procedures to address situations where a matter on which
a proxy is sought may present a potential  conflict between the interests of the
Fund (and its  shareholders)  and those of the Adviser or Distributor.  This may
occur where a significant  business  relationship exists between the Adviser (or
its  affiliates)  and a company  involved with a proxy vote. A company that is a
proponent,  opponent, or the subject of a proxy vote, and which to the knowledge
of the Proxy Committee has this type of significant  business  relationship,  is
referred to as an "Interested Company."

The Adviser has implemented the following  procedures in order to avoid concerns
that the conflicting  interests of the Adviser have influenced  proxy votes. Any
employee of the Adviser who is  contacted  by an  Interested  Company  regarding
proxies to be voted by the Adviser must refer the Interested Company to a member
of the Proxy  Committee,  and must inform the Interested  Company that the Proxy
Committee  has exclusive  authority to determine how the Adviser will vote.  Any
Proxy Committee member contacted by an Interested  Company must report it to the
full Proxy Committee and provide a written summary of the  communication.  Under
no  circumstances  will the Proxy Committee or any member of the Proxy Committee
make a commitment  to an Interested  Company  regarding the voting of proxies or
disclose to an  Interested  Company how the Proxy  Committee  has directed  such
proxies to be voted. If the Proxy Voting  Guidelines  already  provide  specific
direction on the proposal in question,  the Proxy  Committee  shall not alter or
amend  such  directions.  If the  Proxy  Voting  Guidelines  require  the  Proxy
Committee  to provide  further  direction,  the Proxy  Committee  shall do so in
accordance with the proxy voting  policies,  without regard for the interests of
the Adviser  with  respect to the  Interested  Company.  If the Proxy  Committee
provides  any  direction  as to the  voting of  proxies  relating  to a proposal
affecting  an  Interested   Company,  it  must  disclose  to  the  Fund's  Board
information  regarding:  the  significant  business  relationship;  any material
communication with the Interested Company;  the matter(s) voted on; and how, and
why, the Adviser voted as it did.

If the Fund holds shares of another investment company for which the Adviser (or
an affiliate) acts as an investment  adviser,  the Proxy Committee will vote the
Fund's proxies in the same proportion as the votes cast by shareholders  who are
not  clients  of the  Adviser  at  any  shareholders'  meeting  called  by  such
investment company, unless otherwise directed by the Board.

</R>

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.  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 the  Distributor
and its affiliates.  The Adviser makes decisions on portfolio  transactions  and
selects brokers and dealers subject to review by the Fund's Board.

Investment  decisions  for the Fund are made  independently  from those of other
accounts managed by the Adviser. When the Fund and one or more of those accounts
invests  in,  or  disposes  of,  the same  security,  available  investments  or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner  believed  by the Adviser to be  equitable.  While the  coordination  and
ability to  participate  in volume  transactions  may  benefit  the Fund,  it is
possible that this procedure could  adversely  impact the price paid or received
and/or the position obtained or disposed of by the Fund.

<R>

ADMINISTRATOR

Federated  Administrative  Services  (FAS), a subsidiary of Federated,  provides
administrative  personnel  and services  (including  certain legal and financial
reporting  services)  necessary to operate the Fund.  FAS provides  these at the
following annual rate of the average aggregate daily net assets of all Federated
funds as specified below:

                                       Average Aggregate Daily
                                  Net Assets of the Federated Funds
Maximum Administrative Fee
        0.150 of 1%                    on the first $5 billion
        0.125 of 1%                     on the next $5 billion
        0.100 of 1%                    on the next $10 billion
        0.075 of 1%                   on assets over $20 billion

The  administrative  fee  received  during  any  fiscal  year  shall be at least
$150,000 per portfolio and $40,000 per each additional class of Shares.  FAS may
voluntarily waive a portion of its fee and may reimburse the Fund for expenses.

FAS also provides certain accounting and recordkeeping  services with respect to
the  Fund's  portfolio   investments  for  a  fee  based  on  Fund  assets  plus
out-of-pocket expenses.

</R>

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated  Services Company,  through its registered  transfer agent subsidiary,
FSSC,  maintains all necessary  shareholder  records. The Fund pays the transfer
agent a fee based on the size, type and number of accounts and transactions made
by shareholders.

INDEPENDENT AUDITORS

The independent auditor for the Fund, Ernst & Young LLP, conducts its audits
in accordance with auditing standards generally accepted in the United States of
America,  which require it to plan and perform its audits to provide  reasonable
assurance about whether the Fund's financial statements and financial highlights
are free of material misstatement.

<R>

FEES PAID BY THE FUND FOR SERVICES
For the Year Ended March            2004                2003            2002
31
Advisory Fee Earned              $2,934,173          $2,991,220      $2,939,907
Advisory Fee Reduction               $0                  $0              $0
Advisory Fee Reimbursement           $0                  $0              $0
Administrative Fee                $427,119            $418,946        $408,152
12b-1 Fee:
 Class B Shares                   $530,134               --              --
 Class C Shares                   $112,718               --              --
Shareholder Services Fee:
  Class A Shares                  $527,141               --              --
  Class B Shares                  $176,711               --              --
  Class C Shares                  $37,573                --              --

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

Fees are  allocated  among classes based on their pro rata share of Fund assets,
except for marketing (Rule 12b-1) fees and shareholder  services fees, which are
borne only by the applicable class of Shares.

</R>

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the SEC's standard methods for
calculating  performance  applicable to all mutual  funds.  The SEC also permits
this  standard  performance   information  to  be  accompanied  by  non-standard
performance information.

Share performance reflects the effect of non-recurring  charges, such as maximum
sales charges,  which,  if excluded,  would increase the total return and yield.
The  performance of Shares depends upon such  variables as:  portfolio  quality;
average portfolio maturity;  type and value of portfolio securities;  changes in
interest  rates;  changes or  differences  in the Fund's or any class of Shares'
expenses; and various other factors.

Share  performance  fluctuates  on a daily basis  largely  because net  earnings
and/or the value of portfolio  holdings  fluctuate daily.  Both net earnings and
offering  price per  Share are  factors  in the  computation  of yield and total
return.

<R>

Average Annual Total Returns and Yield

Total  returns are given for the  one-year,  five-year  and ten-year or Start of
Performance periods ended March 31, 2004.

Yield and  Tax-Equivalent  Yield are given for the 30-day period ended March 31,
2004.

                         30-Day Period       1 Year       5 Years     10 Years
Class A Shares:
Total Return
  Before Taxes                N/A             0.13%        3.65%        4.67%
  After Taxes on              N/A             0.13%        3.63%        4.56%
  Distributions
  After Taxes on              N/A             1.46%        3.73%        4.62%
  Distributions
  and Sale of Shares
Yield                        2.77%             N/A          N/A          N/A
Tax-Equivalent Yield         4.26%             N/A          N/A          N/A
- -----------------------------------------------------------------------------------
                                                                         Start of
                         30-Day Period        1 Year       5 Years      Performance
                                                                       on 7/26/1994
Class B Shares:
Total Return
  Before Taxes                N/A            (1.55)%        3.33%          4.38%
  After Taxes on              N/A            (1.55)%        3.31%          4.30%
  Distributions
  After Taxes on              N/A             0.11%         3.35%          4.31%
  Distributions
  and Sale of Shares
Yield                        2.00%             N/A           N/A            N/A
Tax-Equivalent Yield         3.08%             N/A           N/A            N/A
- -------------------------------------------------------------------------------------
                         30-Day Period        1 Year        5 Years      10 Years
Class C Shares:
Total Return
  Before Taxes                N/A             1.91%          3.47%        4.13%
  After Taxes on              N/A             1.91%          3.45%        4.02%
  Distributions
  After Taxes on              N/A             2.34%          3.47%        4.06%
  Distributions
  and Sale of Shares
Yield                        1.98%             N/A            N/A          N/A
Tax-Equivalent Yield         3.05%             N/A            N/A          N/A
- ------------------------------------------------------------------------------------

</R>

TOTAL RETURN

Total return  represents the change  (expressed as a percentage) in the value of
Shares over a specific period of time, and includes the investment of income and
capital gains distributions.

The average  annual  total return for Shares is the average  compounded  rate of
return for a given period that would equate a $10,000 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 NAV 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 $10,000,  less any  applicable  sales charge,  adjusted over the
period  by any  additional  Shares,  assuming  the  annual  reinvestment  of all
dividends  and  distributions.  Total  returns  after taxes are  calculated in a
similar manner, but reflect additional standard assumptions required by the SEC.

YIELD AND TAX-EQUIVALENT YIELD

The yield of Shares is calculated by dividing: (i) the net investment income per
Share earned by the Shares over a 30-day  period;  by (ii) the maximum  offering
price per Share on the last day of the period.  This  number is then  annualized
using  semi-annual  compounding.  This means that the amount of income generated
during the 30-day  period is assumed to be generated  each month over a 12-month
period and is reinvested every six months. The tax-equivalent yield of Shares is
calculated  similarly to the yield, but is adjusted to reflect the taxable yield
that  Shares  would have had to earn to equal the  actual  yield,  assuming  the
maximum combined federal and state tax rate. The yield and tax-equivalent  yield
do not  necessarily  reflect income actually earned by Shares because of certain
adjustments  required  by the  SEC  and,  therefore,  may not  correlate  to the
dividends or other distributions paid to shareholders.

To the  extent  investment  professionals  and  broker/dealers  charge  fees  in
connection with services  provided in conjunction  with an investment in Shares,
the Share performance is lower for shareholders paying those fees.

TAX EQUIVALENCY TABLE

Set  forth  below is a sample  of a  tax-equivalency  table  that may be used in
advertising and sales literature.  This table is for illustrative  purposes only
and is not  representative  of past  or  future  performance  of the  Fund.  The
interest earned by the tax exempt securities owned by the Fund generally remains
free from  federal  regular  income  tax and is often  free from state and local
taxes as well. However,  some of the Fund's income may be subject to the federal
alternative minimum tax and state and/or local taxes.

<R>

TAX EQUIVALENCY TABLE

Taxable Yield Equivalent for 2004 Multistate Municipal Fund
Tax Bracket:
Federal           10.00%      15.00%      25.00%      28.00%      33.00%      35.00%
Joint Return:       $0    -  $14,001  -  $56,801  -  $114,651 -  $174,701 -    Over
                 $14,000     $56,800     $114,650    $174,700    $311,950    $311,950
Single Return:      $0    -   $7,001  -  $28,401  -  $68,801  -  $143,501 -    Over
                  $7,000     $28,400     $68,800     $143,500    $311,950    $311,950

Tax-Exempt                             Taxable Yield Equivalent
Yield
    0.50%         0.56%       0.59%       0.67%       0.69%       0.75%       0.77%
    1.00%         1.11%       1.18%       1.33%       1.39%       1.49%       1.54%
    1.50%         1.67%       1.76%       2.00%       2.08%       2.24%       2.31%
    2.00%         2.22%       2.35%       2.67%       2.78%       2.99%       3.08%
    2.50%         2.78%       2.94%       3.33%       3.47%       3.73%       3.85%
    3.00%         3.33%       3.53%       4.00%       4.17%       4.48%       4.62%
    3.50%         3.89%       4.12%       4.67%       4.86%       5.22%       5.38%
    4.00%         4.44%       4.71%       5.33%       5.56%       5.97%       6.15%
    4.50%         5.00%       5.29%       6.00%       6.25%       6.72%       6.92%
    5.00%         5.56%       5.88%       6.67%       6.94%       7.46%       7.69%
    5.50%         6.11%       6.47%       7.33%       7.64%       8.21%       8.46%
    6.00%         6.67%       7.06%       8.00%       8.33%       8.96%       9.23%
    6.50%         7.22%       7.65%       8.67%       9.03%       9.70%       10.00%
    7.00%         7.78%       8.24%       9.33%       9.72%       10.45%      10.77%
    7.50%         8.33%       8.82%       10.00%      10.42%      11.19%      11.54%
    8.00%         8.89%       9.41%       10.67%      11.11%      11.94%      12.31%
    8.50%         9.44%       10.00%      11.33%      11.81%      12.69%      13.08%
    9.00%         10.00%      10.59%      12.00%      12.50%      13.43%      13.85%
    9.50%         10.56%      11.18%      12.67%      13.19%      14.18%      14.62%
    10.00%        11.11%      11.76%      13.33%      13.89%      14.93%      15.38%
    10.50%        11.67%      12.35%      14.00%      14.58%      15.67%      16.15%
    11.00%        12.22%      12.94%      14.67%      15.28%      16.42%      16.92%

Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent.
- --------------------------------------------------------------------------------
</R>

PERFORMANCE COMPARISONS
Advertising and sales literature may include:

o    references  to  ratings,   rankings,   and  financial  publications  and/or
     performance comparisons of Shares to certain indices;

o    charts,  graphs and illustrations  using the Fund's returns,  or returns in
     general,   that  demonstrate   investment  concepts  such  as  tax-deferred
     compounding, dollar-cost averaging and systematic investment;

o    discussions  of economic,  financial and political  developments  and their
     impact on the securities market, including the portfolio manager's views on
     how such developments could impact the Fund; and

o    information  about  the  mutual  fund  industry  from  sources  such as the
     Investment Company Institute.

The Fund may compare its performance, or performance for the types of securities
in which it  invests,  to a variety of other  investments,  including  federally
insured bank products such as bank savings accounts, certificates of deposit and
Treasury bills.

The Fund may  quote  information  from  reliable  sources  regarding  individual
countries  and regions,  world stock  exchanges,  and  economic and  demographic
statistics.

You may use financial publications and/or indices to obtain a more complete view
of Share  performance.  When  comparing  performance,  you should  consider  all
relevant  factors such as the composition of the 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, Inc.
Lipper,  Inc.  ranks  funds in various  fund  categories  by making  comparative
calculations  using total return.  Total return assumes the  reinvestment of all
capital  gains  distributions  and income  dividends  and takes into account any
change in net asset value over a specific period of time. From time to time, the
Fund will quote its Lipper ranking in the general  municipal bond funds category
in advertising and sales literature.

<R>

Lehman Brothers Municipal Bond Index
Lehman  Brothers  Municipal Bond Index is an unmanaged  index comprised of bonds
with a minimum credit rating of at least Baa. They must have an outstanding  par
value of at least $3 million and be issued as part of a transaction  of at least
$50 million.  The index includes both zero coupon bonds and bonds subject to the
federal alternative minimum tax.

</R>

Morningstar, Inc.
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.

WHO IS FEDERATED INVESTORS, INC.?

Federated  is  dedicated  to  meeting  investor  needs  by  making   structured,
straightforward  and  consistent  investment  decisions.   Federated  investment
products  have  a  history  of  competitive  performance  and  have  gained  the
confidence of thousands of financial institutions and individual investors.

Federated's   disciplined  investment  selection  process  is  rooted  in  sound
methodologies  backed by  fundamental  and  technical  research.  At  Federated,
success in investment management does not depend solely on the skill of a single
portfolio  manager.  It is a fusion of individual  talents and  state-of-the-art
industry tools and resources.  Federated's  investment process involves teams of
portfolio  managers  and  analysts,  and  investment  decisions  are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.

<R>

Federated Funds overview

Municipal Funds
In the  municipal  sector,  as of December 31, 2003,  Federated  managed 14 bond
funds with  approximately  $3.8 billion in assets and 22 money market funds with
approximately $23.0 billion in total assets. In 1976,  Federated  introduced one
of the first  municipal  bond mutual funds in the industry and is now one of the
largest  institutional  buyers  of  municipal  securities.  The  Funds may quote
statistics  from  organizations  including The Tax  Foundation  and the National
Taxpayers Union regarding the tax obligations of Americans.

Equity Funds
In the  equity  sector,  Federated  has more  than 32 years'  experience.  As of
December 31, 2003,  Federated  managed 36 equity  funds  totaling  approximately
$25.6 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.

Corporate Bond Funds
In the  corporate  bond sector,  as of December 31, 2003,  Federated  managed 11
money market funds and 4 bond funds with assets  approximating $61.7 billion and
$3.4 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 30 years of experience in
the  corporate  bond  sector.  In 1972,  Federated  introduced  one of the first
high-yield bond funds in the industry.  In 1983,  Federated was one of the first
fund managers to participate  in the asset backed  securities  market,  a market
totaling more than $209 billion.

Government Funds
In the government sector, as of December 31, 2003,  Federated managed 7 mortgage
backed, 3 multi-sector  government funds, 4 government/agency  and 19 government
money market mutual funds, with assets approximating $4.9 billion, $0.9 billion,
$2.9 billion and $56.2 billion,  respectively.  Federated  trades  approximately
$90.4 billion in U.S. government and mortgage backed securities daily and places
approximately  $35  billion  in  repurchase   agreements  each  day.   Federated
introduced  the first U.S.  government  fund to invest in U.S.  government  bond
securities  in  1969.  Federated  has  been a  major  force  in the  short-  and
intermediate-term   government   markets  since  1982  and   currently   manages
approximately $50 billion in government funds within these maturity ranges.

Money Market Funds
In the money  market  sector,  Federated  gained  prominence  in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously,  the company  pioneered the use of the amortized  cost method of
accounting for valuing  shares of money market funds, a principal  means used by
money  managers  today to value money  market  fund  shares.  Other  innovations
include the first  institutional  tax-free money market fund. As of December 31,
2003,  Federated  managed $136.2 billion in assets across 52 money market funds,
including 19  government,  10 prime,  22 municipal and 1  euro-denominated  with
assets  approximating  $56.2 billion,  $59.4  billion,  $20.6 billion and $173.9
million, respectively.

The  Chief  Investment  Officers   responsible  for  oversight  of  the  various
investment  sectors  within  Federated  are:  Global Equity - Stephen F. Auth is
responsible   for  overseeing   the  management  of  Federated's   domestic  and
international  equity products;  Global Fixed Income - Mary Jo Ochson and Robert
J.  Ostrowski are  responsible  for  overseeing  the  management of  Federated's
domestic and international fixed income and high yield products.

Mutual Fund Market
Forty-nine  percent of American  households are pursuing their  financial  goals
through mutual funds.  These investors,  as well as businesses and institutions,
have entrusted over $6.2 trillion to the  approximately  8,300 funds  available,
according to the Investment Company Institute.

Federated Clients Overview
Federated  distributes  mutual funds through its  subsidiaries  for a variety of
investment purposes. Specific markets include:

Institutional Clients
Federated  meets  the  needs  of  approximately  3,035   institutional   clients
nationwide  by managing and servicing  separate  accounts and mutual funds for a
variety  of  purposes,   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
advisers.

Bank Marketing
Other   institutional   clients   include   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.

Broker/Dealers and Bank Broker/Dealer Subsidiaries
Federated  funds are  available  to  consumers  through  major  brokerage  firms
nationwide--Federated  has  over  2,000  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.

FINANCIAL INFORMATION

The Financial  Statements  for the Fund for the fiscal year ended March 31, 2004
are  incorporated  herein by reference to the Annual Report to  Shareholders  of
Federated Municipal Securities Fund, Inc. dated March 31, 2004.

INVESTMENT RATINGS

Standard and Poor's Long-Term Debt Rating Definitions
AAA--Highest  credit  quality.  'AAA' ratings  denote the lowest  expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments.  This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA--Very high credit  quality.  'AA' ratings  denote a very low  expectation  of
credit risk.  They indicate very strong capacity for timely payment of financial
commitments.  This  capacity  is not  significantly  vulnerable  to  foreseeable
events.

A--High credit quality. 'A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial  commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.

BBB--Good  credit quality.  'BBB' ratings indicate that there is currently a low
expectation  of credit  risk.  The  capacity  for timely  payment  of  financial
commitments is considered adequate,  but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.  This is the lowest
investment-grade category.

BB--Speculative.  'BB' ratings  indicate that there is a  possibility  of credit
risk  developing,  particularly  as the result of adverse  economic  change over
time;  however,  business or  financial  alternatives  may be available to allow
financial  commitments  to be met.  Securities  rated in this  category  are not
investment grade.

B--Highly  speculative.  'B' ratings  indicate that  significant  credit risk is
present,  but a limited  margin of safety  remains.  Financial  commitments  are
currently being met; however,  capacity for continued payment is contingent upon
a sustained, favourable business and economic environment.

CCC, CC,  C--High  default  risk.  Default is a real  possibility.  Capacity for
meeting  financial  commitments  is solely  reliant upon  sustained,  favourable
business or economic developments.  A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.

Moody's Investors Service Commercial Paper Ratings

Prime-1--Issuers  rated  Prime-1 (or  supporting  institutions)  have a superior
ability for repayment of senior short-term debt  obligations.  Prime-1 repayment
ability  will  often  be  evidenced  by many of 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, and well-established access
to a range of financial markets and assured sources of alternate liquidity.

Prime-2--Issuers  rated  Prime-2  (or  supporting  institutions)  have a  strong
ability for repayment of senior short-term debt obligations.  This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings  trends and  coverage  ratios,  while  sound,  will be more  subject to
variation. Capitalization characteristics,  while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

Standard and Poor's Commercial Paper Ratings

A-1-- A short-term  obligation  rated 'A-1' is rated in the highest  category by
Standard & Poor's.  The obligor's capacity to meet its financial  commitment
on the  obligation is strong.  Within this  category,  certain  obligations  are
designated  with a plus sign (+). This indicates that the obligor's  capacity to
meet its financial commitment on these obligations is extremely strong.

A-2-- A short-term  obligation  rated 'A-2' is somewhat more  susceptible to the
adverse  effects  of changes  in  circumstances  and  economic  conditions  than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

Fitch Ratings Commercial Paper Rating Definitions

F-1--Indicates   the  strongest   capacity  for  timely   payment  of  financial
commitments relative to other issuers or issues in the same country. Under their
national  rating  scale,  this  rating is  assigned  to the "best"  credit  risk
relative  to all others in the same  country  and is  normally  assigned  to all
financial  commitments  issued or guaranteed by the sovereign  state.  Where the
credit risk is particularly strong, a "+" is added to the assigned rating.

F-2--  Indicates  a  satisfactory  capacity  for  timely  payment  of  financial
commitments  relative to other issuers or issues in the same  country.  However,
the margin of safety is not as great as in the case of the higher ratings.



</R>
Addresses

Federated Municipal Securities 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
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779


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


Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600


Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072










PART C.    OTHER INFORMATION.

Item 23.    Exhibits:

            a)                Conformed Copy of Articles of Restatement of the
                              Registrant (including Amendment Nos. 4-13); (20)
            b)    (i)         Copy of By-Laws of the Registrant (including
                              Amendment Nos. 11-13); (20)
                  (ii)        Copy of Amendment #14 to the By-Laws (22)
                  (iii)       Copy of Amendment #15 to the By-Laws +
            c)                Copies of Specimen Certificates for Shares of
                              Capital Stock of the Registrant's Class A
                              Shares, Class B Shares and Class C Shares; (16)
            d)    (i)         Conformed Copy of Investment Advisory Contract
                              of the Registrant;(9)
                  (ii)        Conformed copy of Amendment to the Investment
                              Advisory Contract of the Registrant; (21)
            e)    (i)         Conformed Copy of Distributor's Contract of the
                              Registrant; (12)
                  (ii)        Conformed Copy of Exhibit A to the Distributor's
                              Contract of the Registrant; (20)
                  (iii)       Conformed Copy of Exhibit B to the Distributor's
                              Contract of the Registrant; (20)
                  (iv)        Conformed Copy of Distributor's Contract (Class
                              B Shares) including Exhibit 1 and Schedule A and
                              B; (17)
                  (v)         The Registrant hereby incorporates the conformed
                              copy of the specimen Mutual Funds Sales and
                              Service Agreement; Mutual Funds Service
                              Agreement; and Plan Trustee/Mutual Funds Service
                              Agreement from Item 24(b)(6) of the Cash Trust
                              Series II Registration Statement on Form N-1A,
                              filed with the Commission on July 24, 1995 (File
                              Numbers 33-38550 and 811-6269);
                  (vi)        Conformed copy of Amendment to Distributor's Contract
                              of the Registrant; (21)
                  (vii)       Conformed copy of Amendment to Distributor's Contract
                              of the Registrant +
            f)                Not applicable;
            g)    (i)         Conformed Copy of Custodian Contract of the
                              Registrant; (13)
                  (ii)        Conformed Copy of Custodian Fee Schedule; (17)
                  (iii)       Conformed copy of Amendment to Custodian
                              Contract of the Registrant; (21)
            h)    (i)         Conformed Copy of Amended and Restated Agreement
                              for Fund Accounting Services, Administrative
                              Services, Transfer Agency Services and Custodian
                              Services Procurement; (15)
                  (ii)        The responses described in Item 23(e)(v) are
                              hereby incorporated by reference.
                  (iii)       The Registrant hereby incorporates the conformed
                              copy of Amendment No. 2 to the
                              Amended & Restated Agreement for Fund Accounting
                              Services, Administrative Services, Transfer
                              Agency Services and Custody Services Procurement
                              from Item 23 (h)(v) of the Federated U.S.
                              Government Securities:  2-5 Years Registration
                              Statement on Form N-1A, filed with the
                              Commission on March 30, 2004. (File Nos. 2-75769
                              and 811-3387);
                  (iv)        The Registrant hereby incorporates the conformed
                              copy of Amendment No. 3 to the
                              Amended & Restated Agreement for Fund Accounting
                              Services, Administrative Services, Transfer
                              Agency Services and Custody Services Procurement
                              from Item 23 (h)(v) of the Federated U.S.
                              Government Securities:  2-5 Years Registration
                              Statement on Form N-1A, filed with the
                              Commission on March 30, 2004. (File Nos. 2-75769
                              and 811-3387);
                  (v)         The Registrant hereby incorporates the conformed
                              copy of the Second Amended and Restated Services
                              Agreement from Item (h)(v) of the Investment
                              Series Funds, Inc. Registration Statement on
                              Form N-1A, filed with the Commission on January
                              23, 2002 (File Nos. 33-48847 and 811-07021).
                  (vi)        Conformed Copy of Principal Shareholder Services
                              Agreement (Class B Shares) including Exhibit 1
                              and Schedule A and B; (17)
                  (vii)       Conformed Copy of Shareholders Services
                              Agreement (Class B Shares) including Exhibit 1
                              and Schedule A; (17)
                  (viii)      The Registrant hereby incorporates by reference
                              the conformed copy of the
                              Agreement for Administrative Services from Item
                              23 (h)(vix) of the Federated Index Trust
                              Registration Statement on Form N-1A, filed with
                              the Commission on December 30, 2003. (File Nos.
                              33-33852 and 811-6061).
                  (ix)        The Registrant hereby incorporates by reference
                              the conformed copy of the
                              Financial Administration and Accounting Services
                              Agreement from Item 23 (h) (v) of the Federated
                              Limited Duration Government Fund, Inc.
                              Registration Statement on Form N-1A, filed with
                              the Commission on April 28, 2004 (File Nos.
                              33-41004 and 811-6307).
            i)                Conformed Copy of Opinion and Consent of Counsel
                              as to legality of shares being registered; (2);
            j)                Conformed Copy of Independent Auditors' Consent; +
            k)                Not applicable;
            l)                Conformed Copy of Initial Capital Understanding;
                              (2)
            m)    (i)         Conformed Copy of the 12b-1 Distribution Plan of
                              the Registrant; (12)
                  (ii)        Conformed Copy of Exhibit A of the 12b-1
                              Distribution Plan of the Registrant; (20)
                  (iii)       The responses described in Item 23(e)(v) are
                              hereby incorporated by reference.
                  (iv)        Conformed Copy of Exhibit 1 and Schedule A to the
                              12b-1 Distribution Plan
                              (Class B Shares) of the Registrant; (17)
                  (v)         Conformed copy of the 12b-1 Distribution Plan of
                              the Registrant;+
            n)                The Registrant hereby incorporates the conformed
                              copy of the Multiple Class Plan from Item (n) of
                              the Federated GNMA Trust Registration Statement
                              on Form N-1A, filed with the Commission on March
                              29, 2004. (File Nos. 2-75670 and 811-3375);
            o)                Conformed Copy of Power of Attorney of the
                              Registrant; (20)
            p)                The Registrant hereby incorporates the copy of
                              the Code of Ethics for Access Persons from Item
                              23(p) of the Money Market Obligations Trust
                              Registration Statement on Form N-1A filed with
                              the Commission on February 26,2004. (File Nos.
                              33-31602 and 811-5950.)

+     All exhibits have been filed electronically.

2.   Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment No. 1 on Form S-5 filed November 29, 1976. (File Nos. 2-57181 and
     811-2677)

9.   Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment No. 36 on Form N-1A filed July 17, 1990.  (File Nos.  2-57181 and
     811-2677)

11.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment No. 38 on Form N-1A filed July 22, 1992.  (File Nos.  2-57181 and
     811-2677)

12.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 42 on Form N-1A filed May 25, 1994.  (File Nos.  2-57181 and
     811-2677)

13.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 45 on Form N-1A filed May 25, 1995.  (File Nos.  2-57181 and
     811-2677)

15.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 48 on Form N-1A filed May 28, 1996.  (File Nos.  2-57181 and
     811-2677)

16.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 50 on Form N-1A filed May 29, 1997.  (File Nos.  2-57181 and
     811-2677)

17.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 51 on Form N-1A filed May 29, 1998.  (File Nos.  2-57181 and
     811-2677)

20.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 56 on Form N-1A filed May 25, 2001.  (File Nos.  2-57181 and
     811-2677)

21.  Response  is  incorporated  by  reference  to  Registrant's  Post-Effective
     Amendment  No. 57 on Form N-1A filed May 29, 2002.  (File Nos.  2-57181 and
     811-2677)

22.  Response is  incorporated  by  reference  to  Registrant's  Post  Effective
     Amendment  No. 58 on Form N-1A filed May 28, 2003.  (File Nos.  2-57181 and
     811-2677)


Item 24.    Persons Controlled by or Under Common Control with the Fund:

            None

Item 25.    Indemnification: (11)


Item 26.    Business and Other Connections of Investment Adviser:

          For a description of the other business of the investment adviser, see
          the  section   entitled  "Who  Manages  the  Fund?"  in  Part  A.  The
          affiliations  with the  Registrant  of four of the Trustees and one of
          the Officers of the investment  adviser are included in Part B of this
          Registration Statement under "Who Manages and Provides Services to the
          Fund?" The  remaining  Trustees  of the  investment  adviser  and,  in
          parentheses,  their  principal  occupations  are:  Thomas R.  Donahue,
          (Chief Financial  Officer,  Federated  Investors,  Inc.), 1001 Liberty
          Avenue,  Pittsburgh,  PA, 15222-3779 and Mark D. Olson (a principal of
          the firm, Mark D. Olson &  Company,  L.L.C.  and Partner,  Wilson,
          Halbrook &  Bayard,  P.A.),  800 Delaware  Avenue,  P.O. Box 2305,
          Wilmington, DE 19899-2305.

The remaining Officers of the investment adviser are:


President/ Chief Executive Officer
and Trustee:                                    Keith M. Schappert


Vice Chairman:                                  William D. Dawson, III

Senior Vice Presidents:                         Joseph M. Balestrino
                                                Jonathan C. Conley
                                                Deborah A. Cunningham
                                                Mark E. Durbiano
                                                Robert M. Kowit
                                                Jeffrey A. Kozemchak
                                                Susan M. Nason
                                                Mary Jo Ochson
                                                Robert J. Ostrowski
                                                Richard Tito





Vice Presidents:
                                                Todd A. Abraham
                                                J. Scott Albrecht
                                                Randall S. Bauer
                                                Nancy J.Belz
                                                G. Andrew Bonnewell
                                                Lee R. Cunningham, II
                                                B. Anthony Delserone,Jr.
Donald T. Ellenberger
                                                Eamonn G. Folan
                                                John T. Gentry
                                                Patricia L. Heagy
                                                Susan R. Hill
                                                Nikola A. Ivanov
                                                Gina Jacobs
                                                William R. Jamison
                                                Nathan H. Kehm
                                                John C. Kerber
                                                J. Andrew Kirschler
                                                Marian R. Marinack
                                                Kevin McCloskey
                                                Natalie F. Metz
                                                Thomas J. Mitchell
                                                Joseph M. Natoli
                                                Mary Kay Pavuk
                                                Jeffrey A. Petro
                                                Ihab L. Salib
                                                Roberto Sanchez-Dahl, Sr.
                                                John Sidawi
                                                Michael W. Sirianni, Jr.
Christopher Smith
                                                Timothy G. Trebilcock
                                                Paolo H. Valle
                                                Stephen J. Wagner
                                                Paige M. Wilhelm
                                                George B. Wright

Assistant Vice Presidents:                      Lori Andrews
                                                Hanan Callas
                                                Jerome Conner
                                                James R. Crea, Jr.
                                                Karol M. Crummie
                                                Richard Cumberledge
                                                Richard J. Gallo
                                                Kathyrn P. Glass
                                                James Grant
                                                Tracy L. Lusk
                                                Ann Manley
                                                Karl Mocharko
                                                Teri Lynn Moore
                                                Bob Nolte
                                                Rae Ann Rice
                                                Brian Ruffner
                                                Kyle D. Stewart
                                                Mary Ellen Tesla
                                                Nichlas S. Tripodes
                                                Mark Weiss


Secretary:                                      G. Andrew Bonnewell

Treasurer:                                      Thomas R. Donahue

Assistant Secretaries:                          Jay S. Neuman


Assistant Treasurer:                            Denis McAuley, III

          The business address of each of the Officers of the investment adviser
          is  Federated  Investors  Tower,  1001  Liberty  Avenue,   Pittsburgh,
          Pennsylvania  15222-3779.  These  individuals  are also  officers of a
          majority of the investment advisers to the investment companies in the
          Federated  Fund  Complex  described  in  Part B of  this  Registration
          Statement.


Item 27.  Principal Underwriters:

     (a)  Federated   Securities   Corp.  the  Distributor  for  shares  of  the
          Registrant,  acts as principal  underwriter for the following open-end
          investment companies, including the Registrant:

          Cash Trust Series,  Inc.; Cash Trust Series II;  Federated  Adjustable
          Rate Securities Fund; Federated American Leaders Fund, Inc.; Federated
          Core Trust;  Federated  Core Trust II, L.P.;  Federated  Equity Funds;
          Federated Equity Income Fund, Inc.; Federated Fixed Income Securities,
          Inc.;  Federated GNMA Trust;  Federated  Government Income Securities,
          Inc.;  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  International  Series,  Inc.;  Federated
          Investment Series Funds, Inc.;  Federated Limited Duration  Government
          Fund,  Inc.;  Federated  Managed  Allocation   Portfolios;   Federated
          Municipal  Opportunities Fund, Inc.;  Federated  Municipal  Securities
          Fund, Inc.;  Federated  Municipal  Securities Income Trust;  Federated
          Premier   Intermediate   Municipal  Income  Fund;   Federated  Premier
          Municipal Income Fund; Federated Short-Term Municipal Trust; Federated
          Stock and Bond Fund,  Inc.;  Federated  Stock Trust;  Federated  Total
          Return  Government  Bond Fund;  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  World  Investment  Series,  Inc.;  Intermediate
          Municipal  Trust;   Edward  Jones  Money  Market  Fund;  Money  Market
          Obligations  Trust;  Regions Morgan Keegan Select Funds and SouthTrust
          Funds.


         (b)

         (1)                        (2)                        (3)
Positions and Offices                                 Positions and Offices
  With Distributor                  Name                 With Registrant
_____________________         _________________       ______________________

Chairman:                     Richard B. Fisher       Vice President


President-Institutional
Sales and Director:           John B. Fisher

Executive Vice
Vice President, Assistant
Secretary and Director:       Thomas R. Donahue

President-Broker/Dealer
And Director:                 James F. Getz

Senior Vice Presidents:
                              Mark W. Bloss
                              Richard W. Boyd
                              Laura M. Deger
                              Peter W. Eisenbrandt
                              Theodore Fadool, Jr.
                              Christopher T. Fives
                              James S. Hamilton
                              James M. Heaton
                              H. Joseph Kennedy
                              Amy Michaliszyn
                              Keith Nixon
                              Solon A. Person, IV
                              Ronald M. Petnuch
                              Thomas E. Territ
                              Robert F. Tousignant
                              Paul Uhlman

Vice Presidents:              Irving Anderson
                              Dan Berry
                              John B. Bohnet
                              Edward R. Bozek
                              Jane E. Broeren-Lambesis
                              Brian Burke
                              Craig Burness
                              David J. Callahan
                              Mark Carroll
                              Dan Casey
                              Scott Charlton
                              Steven R. Cohen
                              Mary J. Combs
                              James Conely
                              R. Edmond Connell, Jr.
                              Kevin J. Crenny
                              Daniel T. Culbertson
                              G. Michael Cullen
                              Beth C. Dell
                              Robert J. Deuberry
                              Ron Dorman
                              William C. Doyle
                              Donald C. Edwards
                              Lee England
                              Timothy Franklin
                              Peter J. Germain
                              James F. Getz Jr.
                              Joseph D. Gibbons
                              J. Todd Glickson
                              G. Tad Gullickson
                              Scott Gundersen
                              Dayna C. Haferkamp
                              Raymond J. Hanley
                              Vincent L. Harper, Jr.
                              Bruce E. Hastings
                              Teresa M. Johnson
                              Christopher L. Johnston
                              William Kastroll
                              Stephen Kittel
                              Michael W. Koenig
                              Ed Koontz
                              Theodore J. Kravits, Jr.
                              Christopher A. Layton
                              Michael H. Liss
                              Michael R. Manning
                              Martin J. McCaffrey
                              Mary A. McCaffrey
                              Richard C. Mihm
                              Chris Milliken
                              Vincent T. Morrow
                              Alec H. Neilly
                              Rebecca Nelson
                              James E. Ostrowski
                              Thomas A. Peter III
                              Raleigh Peters
                              Robert F. Phillips
                              Josh Rasmussen
                              Richard A. Recker
                              Christopher Renwick
                              Brian S. Ronayne
                              Timothy A. Rosewicz
                              Thomas S. Schinabeck
                              Edward J. Segura
                              Peter Siconolfi
                              Edward L. Smith
                              David W. Spears
                              John A. Staley
                              Colin B. Starks
                              Jeffrey A. Stewart
                              Kevin Stutz
                              William C. Tustin
                              G. Walter Whalen
                              Stephen White
                              Patrick M. Wiethorn
                              Edward J. Wojnarowski
                              Michael P. Wolff


Assistant Vice Presidents:    Lisa A. Toma
                              Robert W. Bauman
                              Charles L. Davis, Jr.
                              Brian F. Paluso
                              William Rose


Treasurer:                    Denis McAuley, III

Secretary:                    Stephen A. Keen

Assistant Secretaries:        Thomas R. Donahue
                              Peter J. Germain

The business  address of each of the Officers of Federated  Securities  Corp. is
Federated  Investors  Tower,  1001  Liberty  Avenue,  Pittsburgh,   Pennsylvania
15222-3779.

         (c)     Not applicable


Item 28.    Location of Accounts and Records

All  accounts  and records  required to be  maintained  by Section  31(a) of the
Investment  Company  Act of 1940  and  Rules  31a-1  through  31a-3  promulgated
thereunder are maintained at one of the following locations:

Registrant                    Reed Smith LLP
                              Investment Management
                              Group (IMG)
                              Federated Investors Tower
                              12th Floor
                              1001 Liberty Avenue
                              Pittsburgh, PA  15222-3779

                              (Notices should be sent to the Agent for
                              Service at above address)

Federated Investors Funds     5800 Corporate Drive
                              Pittsburgh, PA 15237-7000

Federated Shareholder         P.O. Box 8600
  Services Company            Boston, MA 02266-8600
("Transfer Agent and
Dividend Disbursing Agent")

Federated Services Company    Federated Investors Tower
("Administrator")             1001 Liberty Avenue
                              Pittsburgh, PA  15222-3779

Federated Investment          Federated Investors Tower
Management Company            1001 Liberty Avenue
("Adviser")                   Pittsburgh, PA  15222-3779

State Street Bank and         P.O. Box 8600
Trust Company                 Boston, MA 02266-8600
("Custodian")

Item 29.    Management Services:  Not applicable

Item 30.    Undertakings:

          Registrant  hereby undertakes to comply with the provisions of Section
          16  (c)  of  the  1949   Act   with   respect   to  the   removal   of
          Trustees/Directors  and the calling of special shareholder meetings by
          shareholders.


                                   SIGNATURES

     Pursuant  to  the  requirements  of the  Securities  Act of  1933  and  the
Investment Company Act of 1940, the Registrant,  FEDERATED MUNICIPAL  SECURITIES
FUND, INC., certifies that it meets all of the requirements for effectiveness of
this Amendment to its Registration  Statement  pursuant to Rule 485(b) under the
Securities  Act of 1933 and has duly caused this  Amendment to its  Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in the
City of Pittsburgh and  Commonwealth  of  Pennsylvania,  on the 1st day of June,
2004.

                FEDERATED MUNICIPAL SECURITIES FUND, INC.
                        BY: /s/ George F. Magera
                        George F. Magera, Assistant Secretary
                        June 1, 2004


     Pursuant to the  requirements of the Securities Act of 1933, this Amendment
to its  Registration  Statement has been signed below by the following person in
the capacity and on the date indicated:

    NAME                            TITLE                  DATE

By: /s/ George F. Magera            Attorney In Fact       June 1, 2004
    George F. Magera                For the Persons
    ASSISTANT SECRETARY             Listed Below

John F. Donahue*                    Chairman and Director

J. Christopher Donahue*             President and Director
                                    (Principal Executive Officer)

Richard B. Fisher*                  Vice Chairman

Richard J. Thomas*                  Treasurer (Principal Financial Officer)


Thomas G. Bigley*                   Director

John T. Conroy, Jr.*                Director

Nicholas P. Constantakis*           Director

John F. Cunningham*                 Director

Lawrence D. Ellis, M.D.*            Director

Peter E. Madden*                    Director

Charles F. Mansfield, Jr.*          Director

John E. Murray, Jr., J.D., S.J.D.*  Director

Marjorie P. Smuts*                  Director

John S. Walsh*                      Director

* By Power of Attorney

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M`.`H`)(96-,X7[-?O%,GU&I.Q`$B7U#D.+,Q31,R.]/LI$\40C]T(N]B1#-S&9@/$B-30#="09A3+%1&4>2"D]5,BOA0NAK43W55?/OYORS M$D@U55?2'#F"5)NA5AO25CNE/W?Q8#SQ\OA#1\0Q`Y/@-G?_80F,H`:=T%C% M<`$=[CKOL@B(]=A84!V1=1[9P3"?$Q1"*@DE\.'$L5F(L!,M\%J-55M=4"W6 M\"\S-2<2H%B1@ET=P@GU<"$G(3;=KDAY43-B$1']]1WCD_(VSF0@$&`*4`5Q MT"-A8&%A$?]ADJUDHB%F#I!"0SKR?8T0+'KQR2`K0D3S65M<;ZDQS. MA3_.L`([5J](`5[C%?Q$5CW)H61'ED-PMJ%`H66I#Q;.8?_$051WP1-#%D9C MTQ6^5!4Q9/2J]?YJ-FEWMAQTPDYQD_B`-@91SQQ`(6MGU3>>@A18'J M3B8R%H"^"N`;.J,H):,\=W5$$I)O0\,#_I;H_-9!=Z'GOB1Q%?+F&K?I#$)O MPPZOV,YO<29R'P!SXQ!R21?T3/<((,`_G*'H0M#=)&-$'`IW;W=VD0[L%!=G M?I?G`F]P>U?JC=K=OIU?EK/=ZL3=[M7=[N;=[ 2O?=[P3=\Q7=\R;=\YR@(```[ ` end EX-99.AMEND BYLAWS 3 bylawsamendment.txt Exhibit (b) (iii) under Form N-1A Exhibit 3 (ii) under Item 601/Reg. S-K Federated Municipal Securities Fund, Inc. Amendment #15 to the By-Laws Effective August 25, 2003 Insert the following into Article IV, Officers, and renumber Section 14 as Section 15: Section 14. Chief Legal Officer. The Chief Legal Officer shall serve as Chief Legal Officer for the Corporation, solely for purposes of complying with the attorney conduct rules ("Attorney Conduct Rules") enacted by the Securities Exchange Commission pursuant to Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act"). The Chief Legal Officer shall have the authority to exercise all powers permitted to be exercised by a chief legal officer pursuant to Section 307 of the Act. The Chief Legal Officer, in his sole discretion, may delegate his responsibilities as Chief Legal Officer under the Attorney Conduct Rules to another attorney or firm of attorneys. EX-99.AMEND DISTIB K 4 distribkamendment.txt Exhibit (e) (vii) under Form N-1A Exhibit 1 under Item 601/Reg. S-K Amendment to Distributor's Contracts between the Federated Funds and Federated Securities Corp. This Amendment to the Distributor's Contracts (each an "Agreement" and together, the "Agreements") between the Federated Funds listed on Exhibit A, (each a "Fund" and collectively, the "Funds") and Federated Securities Corp. ("Distributor") is made and entered into as of the 1st day of October, 2003. WHEREAS, each Fund has entered into an Agreement with the Distributor under and pursuant to which the Distributor is the principal underwriter of the shares of the Fund; WHEREAS, the Securities and Exchange Commission and the United States Treasury Department ("Treasury Department") have adopted a series of rules and regulations arising out of the USA PATRIOT Act (together with such rules and regulations, the "Applicable Law"), specifically requiring certain financial institutions, including the Funds and the Distributor, to establish a written anti-money laundering and customer identification program ("Program"); WHEREAS, each of the Funds and the Distributor have established a Program and wish to amend the Agreements to reflect the existence of such Programs and confirm the allocation of responsibility for the performance of certain required functions; NOW, THEREFORE, the parties intending to be legally bound agree and amend each Agreement as follows: 1. The Funds and the Distributor each represent, warrant and certify that they have established, and covenant that at all times during the existence of each respective Agreement they will maintain, a Program in compliance with Applicable Law. 2. The Funds each represent and warrant that the Funds have entered into an amendment to the agreement with the transfer agent of the Funds, pursuant to which the transfer agent has agreed to perform all activities, including the establishment and verification of customer identities as required by Applicable Law or its Program, with respect to all customers on whose behalf Distributor maintains an account with the Funds. 3. Distributor covenants that it will enter into appropriate amendments to selling or other agreements with financial institutions that establish and maintain accounts with the Funds on behalf of their customers, pursuant to which such financial institutions covenant to establish and maintain a Program with respect to those customers in accordance with Applicable Law. In all other respects, each Agreement first referenced above shall remain in full force and effect. WITNESS the due execution hereof as of the 1st day of October, 2003. FUNDS By: /s/ John W. McGonigle Name: John W. McGonigle Title: Executive Vice President Federated Securities Corp. By: /s/ James F. Getz Name: James F. Getz Title: President - Broker/Dealer EXHIBIT A Funds Distributor's Contract Date Cash Trust Series, Inc. March 1, 1993 Cash Trust Series II January 25, 1991 Edward Jones Money Market Fund April 1, 2001 Edward Jones Tax-Free Money Market Fund March 1, 2001 Federated Adjustable Rate Securities Fund April 24, 1992 Federated American Leaders Fund, Inc. March 1, 1993 Federated Equity Funds June 1, 1995 Federated Equity Income Fund, Inc. March 1, 1993 Federated Fixed Income Securities Fund, Inc. December 24, 1991 Federated GNMA Trust May 29, 1992 Federated Government Income Securities, Inc. July 17, 1996 Federated High Income Bond Fund, Inc. March 1, 1993 Federated High Yield Trust August 1, 1989 Federated Income Securities Trust December 31, 1991 Federated Income Trust June 1, 1992 Federated Index Trust September 3, 1991 Federated Institutional Trust September 1, 1994 Federated Insurance Series December 1, 1993 Federated International Series, Inc. February 11, 1991 Federated Investment Series Funds, Inc. June 22, 1992 Federated Limited Duration Government Fund, Inc. July 22, 1991 Federated Managed Allocation Portfolios December 1, 1993 Federated Municipal Opportunities Fund, Inc. July 17, 1996 Federated Municipal Securities Fund, Inc. March 1, 1993 Federated Municipal Securities Income Trust September 9, 1991 Federated Short-Term Municipal Trust June 1, 1993 Federated Stock and Bond Fund, Inc. March 1, 1993 Federated Stock Trust August 1, 1989 Federated Total Return Government Bond Fund September 1, 1995 Federated Total Return Series, Inc. December 1, 1993 Federated U.S. Government Bond Fund August 1, 1989 Federated U.S. Government Securities Fund: 1-3 Years May 29, 1992 Federated U.S. Government Securities Fund: 2-5 Years May 29, 1992 Federated World Investment Series, Inc. March 1, 1994 Intermediate Municipal Trust June 1, 1993 Money Market Obligations Trust March 1, 1994 EX-99.AUDIT CONSENT 5 auditconsent.txt Exhibit (j) under Form N-1A Exhibit (23) under Item 601/Reg. S-K Consent of Ernst & Young LLP, Independent Auditors We consent to the references to our firm under the caption "Financial Highlights" in the Class A Shares, Class B Shares and Class C Shares Prospectus and "Independent Auditors" in the Class A Shares, Class B Shares and Class C Shares Statement of Additional Information in Post-Effective Amendment Number 59 to the Registration Statement (Form N-1A, No. 2-57181) of Federated Municipal Securities Fund, Inc. and to the incorporation by reference of our report dated May 10, 2004 on Federated Municipal Securities Fund, Inc. included in the Annual Report to Shareholders for the fiscal year ended March 31, 2004. ERNST & YOUNG LLP Boston, Massachusetts May 27, 2004 EX-99.12B1 PLAN 6 plan12b1.txt Exhibit (m) (v) under Form N-1A Exhibit 1 under Item 601/Reg. S-K FEDERATED MUNICIPAL SECURITIES FUND, INC. DISTRIBUTION PLAN This Distribution Plan ("Plan") is adopted as of the 12th day of February, 2004, by the Board of Directors of Federated Municipal Securities Fund, Inc. (the "Corporation"), a Maryland Corporation with respect to certain classes of shares ("Classes") of the portfolios of the Corporation (the "Funds") set forth in exhibits hereto. 1. This Plan is adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended ("Act"), so as to allow the Corporation to make payments as contemplated herein, in conjunction with the distribution of Classes of the Funds ("Shares") and pursuant to the "Distributor's Contract" entered into by the Corporation and FSC. 2. This Plan is designed to finance activities of Federated Securities Corp. ("FSC") principally intended to result in the sale of Shares to include: (a) providing incentives to financial institutions ("Financial Institutions") to sell Shares and; (b) advertising and marketing of Shares to include preparing, printing and distributing prospectuses and sales literature to prospective shareholders and with Financial Institutions. The Plan is also designed to cover the costs of administrative services performed in connection with the sale of Shares, but are not limited to shareholder services, recordkeeping services and educational services, as well as the costs of implementing and operating the Plan. 3. As compensation for services provided pursuant to this Plan, FSC will be paid a fee in respect of the following Classes set forth on the exhibits to this Agreement. FSC may use all or any of the fees received pursuant to the Plan to pay any of the expenses associated with the activities under Paragraph 2 hereof whether incurred directly, or through Financial Institutions. 4. Any payments by FSC to Financial Institutions with funds received as compensation under this Plan will be made pursuant to an agreement entered into by FSC and the Financial Institution ("Financial Institution Agreement"). FSC has the right (i) to select, in its sole discretion, the Financial Institutions to participate in the Plan and (ii) to terminate without cause and in its sole discretion any Financial Institution Agreement. 5. Quarterly in each year that this Plan remains in effect, FSC shall prepare and furnish to the Board of Directors of the Corporation, and the Board of Directors shall review, a written report of the amounts expended under the Plan and the purpose for which such expenditures were made. 6. This Plan shall become effective with respect to each Class (i) after approval as required by Rule 12b-1 under the Act as in effect on the date of the execution hereof; and (ii) upon execution of an exhibit adopting this Plan with respect to such Class. 7. This Plan shall remain in effect with respect to each Class presently set forth on an exhibit and any subsequent Classes added pursuant to an exhibit during the initial year of this Plan for the period of one year from the date set forth above and may be continued thereafter if this Plan is approved with respect to each Class at least annually by a majority of the Corporation's Board of Directors and a majority of the Disinterested Directors, cast in person at a meeting called for the purpose of voting on such Plan. If this Plan is adopted with respect to a Class after the first annual approval by the Directors as described above, this Plan will be effective as to that Class upon execution of the applicable exhibit pursuant to the provisions of paragraph 6(ii) above and will continue in effect until the next annual approval of this Plan by the Directors and thereafter for successive periods of one year subject to approval as described above. 8. All material amendments to this Plan must be approved by a vote of the Board of Directors of the Corporation and of the Disinterested Directors, cast in person at a meeting called for the purpose of voting on it. 9. This Plan may not be amended in order to increase materially the costs which the Classes may bear for distribution pursuant to the Plan without being approved by a majority vote of the outstanding voting securities of the Classes as defined in Section 2(a)(42) of the Act. 10. This Plan may be terminated with respect to a particular Class at any time by: (a) a majority vote of the Disinterested Directors; or (b) a vote of a majority of the outstanding voting securities of the particular Class as defined in Section 2(a)(42) of the Act; or (c) by FSC on 60 days' notice to the Corporation. 11. While this Plan shall be in effect, the selection and nomination of Disinterested Directors of the Corporation shall be committed to the discretion of the Disinterested Directors then in office. 12. All agreements with any person relating to the implementation of this Plan, including, but not limited to Financial Institution Agreements, shall be in writing and any agreement related to this Plan shall be subject to termination, without penalty, pursuant to the provisions of Paragraph 10 herein. 13. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania. EXHIBIT A to the Distribution Plan FEDERATED MUNICIPAL SECURITIES FUND, INC. Class C Shares This Distribution Plan is adopted as of the 12th day of February, 2004, by Federated Municipal Securities Fund, Inc. with respect to the Class C Shares of the Corporation set forth above. As compensation for the services provided pursuant to this Plan, FSC will be paid a monthly fee computed at the annual rate of 0.75 of 1% of the average aggregate net asset value of the Class C Shares of Federated Municipal Securities Fund, Inc. held during the month. Witness the due execution hereof this 1st day of March, 2004. FEDERATED MUNICIPAL SECURITIES FUND, INC. By: /s/ J. Christopher Donahue Name: J. Christopher Donahue Title: President -----END PRIVACY-ENHANCED MESSAGE-----

Federated Municipal Securities Fund, Inc.

PROSPECTUS

CLASS A SHARES CLASS B SHARES CLASS C SHARES

CONTENTS

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

Average Annual Total Return Table

(For the periods ended December 31, 2003)

What are the Fund's Fees and Expenses?

FEDERATED MUNICIPAL SECURITIES FUND, INC.

FEES AND EXPENSES

EXAMPLE

What are the Fund's Investment Strategies?

HEDGING

Temporary Defensive Investments

What are the Principal Securities in Which the Fund Invests?

TAX-EXEMPT SECURITIES

Municipal Leases

Inverse Floaters

Zero Coupon Securities

General Obligation Bonds

Special Revenue Bonds

Private Activity Bonds

Tax Increment Financing Bonds

Variable Rate Demand Instruments

Municipal Notes

Credit Enhancement

DERIVATIVE CONTRACTS

Futures Contracts

Options

Swaps

SPECIAL TRANSACTIONS

Delayed Delivery Transactions

Asset Coverage

Investment Ratings for Investment Grade Securities

What are the Specific Risks of Investing in the Fund?

INTEREST RATE RISKS

CREDIT RISKS

LIQUIDITY RISKS

CALL RISKS

SECTOR RISKS

LEVERAGE RISKS

TAX RISKS

RISKS OF INVESTING IN DERIVATIVES CONTRACTS

What Do Shares Cost?

SALES CHARGE WHEN YOU PURCHASE

SALES CHARGE WHEN YOU REDEEM

How is the Fund Sold?

RULE 12B-1 PLAN

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Wire

By Check

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARING HOUSE (ACH)

How to Redeem and Exchange Shares

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

By Mail

Signature Guarantees

PAYMENT METHODS FOR REDEMPTIONS

Redemption in Kind

LIMITATIONS ON REDEMPTION PROCEEDS

EXCHANGE PRIVILEGE

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

Systematic Withdrawal Program (SWP) on Class B Shares

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES