Abstract. We present an institution of observational logic suited for state-based systems specifications. The institution is based on the notion of an observational signature (which incorporates the declaration of a distinguished set of observers) and on observational algebras whose operations are required to be compatible with the indistinguishability relation determined by the given observers. In particular, we introduce a homomorphism concept for observational algebras which adequately expresses observational relationships between algebras. Then we consider a flexible notion of observational signature morphism which guarantees the satisfaction condition of institutions w.r.t. observational satisfaction of arbitrary first-order sentences. From the proof theoretical point of view we construct a sound and complete proof system for the observational consequence relation. Then we consider structured observational specifications and we provide a sound and complete proof system for such specifications by using a general, institution-independent result of [6]. 1