FEDERATED EQUITY FUNDS, 485BPOS, 1996-12-30

FEDERATED EQUITY FUNDS
485BPOS, 1996-12-30

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1933 Act File No. 2-91090
1940 Act File No. 811-4017

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

Pre-Effective Amendment No. ...........

Post-Effective Amendment No. 34 ............. X
-

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 28 ........................... X
-

FEDERATED EQUITY FUNDS
(formerly, Federated Growth Trust)

(Exact Name of Registrant as Specified in Charter)

Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)

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

John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of 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.

Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24e-2 under the Investment Company Act of
1940, and:

filed the Notice required by that Rule on ; or
-- ---------------
intends to file the Notice required by that Rule on or about
December 15, 1996; or
-
X during the most recent fiscal year did not sell any securities
- -
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.

Copy to:
Charles H. Morin, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037

CROSS-REFERENCE SHEET

This amendment to the Registration Statement of Federated Equity Funds
(formerly, Federated Growth Trust), which is comprised of four portfolios:
(1) Federated Growth Strategies Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares; (2)
Federated Small Cap Strategies Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares; (3)
Federated Capital Appreciation Fund consisting of three classes of shares,
(a) Class A Shares, (b) Class B Shares, and (c) Class C Shares, and (4)
Federated Aggressive Growth Fund consisting of three classes of shares, (a)
Class A Shares, (b) Class B Shares, and (c) Class C Shares, relates only to
Federated Growth Strategies Fund, Federated Small Cap Strategies Fund, and
Federated Capital Appreciation Fund and is comprised of the following
(with the exception of Item 23, the remaining references to other
portfolios have been kept for easier cross- reference):

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. Cover Page...............(1-4) Cover Page.
Item 2. Synopsis.................(1-4) Summary of Fund Expenses.
Item 3. Condensed Financial
Information..............(1) Financial Highlights.
Item 4. General Description of
Registrant...............(1-4) General Information; 1-4)
Investment Information; (1-4) Investment
Objective; (1-4) Investment Policies;
(1-4) Investment Limitations; (1-4)
Performance Information;
(1,3,4)Portfolio Turnover.

Item 5. Management of the Fund...(1-4) Trust Information; (1-4)
Management of the Trust; (1-4)
Distribution of Shares; (1-4)
Administration of the Fund;
(1(a),(b),(c)-4) Expenses of the Fund
and Class A Shares, Class B Shares, and
Class C Shares; (1-4) Brokerage
Transactions.
Item 6. Capital Stock and Other
Securities...............(1-4) Shareholder Information; (1-4)
Voting Rights; (1-4) Tax Information;
(1-4) Federal Income Tax; (1-4) State
and Local Taxes.

Item 7. Purchase of Securities Being
Offered..................(1-4) Net Asset Value; (1-4) Investing
in the Fund; (1(a),(b),(c)-4) How to
Purchase Shares; (1(a))What Shares Cost;
(1(a),(b),(c)-4) Investing in Class A
Shares; (1(a),(b),(c)-4) Investing in
Class B Shares; (1(a),(b),(c)-4)
Investing in Class C Shares; (1-4)
Special Purchase Features; (1-4)
Exchange Privilege.

Item 8. Redemption or Repurchase.(1-4) How to Redeem Shares; (1-4)
Special Redemption Features; (1-4)
Contingent Deferred Sales Charge; (1-4)
Elimination of Contingent Deferred Sales
Charge.

Item 9. Pending Legal Proceedings None.

PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.

Item 10. Cover Page...............(1-4) Cover Page.
Item 11. Table of Contents........(1-4) Table of Contents.
Item 12. General Information and
History..................(1-4) General Information About the
Fund; (1-4) About Federated Investors;
(1,4) Massachusetts Partnership Law.
Item 13. Investment Objectives and
Policies.................(1-4) Investment Objective and Policies.
Item 14. Management of the Fund...(1-4) Federated Equity Funds Management.
Item 15. Control Persons and Principal
Holders of Securities....(1-4) Fund Ownership.
Item 16. Investment Advisory and Other
Services.................(1-4) Investment Advisory Services; (1-
4) Other Services; (1-4) Fund
Administration; (1-3) Transfer Agent;
(1-3) Custodian; (1-3) Independent
Auditors; (1-4) Distribution Plan and
Shareholder Services Agreement.
Item 17. Brokerage Allocation.....(1-4) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered .................(1-4) Purchasing Shares; (1-4)
Determining Net Asset Value; (1-4)
Redeeming Shares; (1-4) Exchanging
Securities for Shares; (3) Current
Distributions.
Item 20. Tax Status...............(1-4) Tax Status.
Item 21. Underwriters.............Not applicable.
Item 22. Calculation of Performance
Data.....................(1-4) Total Return; (1-4) Yield; (1-4)
Performance Comparisons; (1-4) Appendix.
Item 23. Financial Statements..... (1-3) To be filed by Amendment

FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)

CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

COMBINED PROSPECTUS

The shares of Federated Capital Appreciation Fund (the "Fund") represent
interests in a diversified investment portfolio of Federated Equity Funds
(the "Trust"), an open-end management investment company (a mutual fund).
The Fund invests primarily in equity securities that offer opportunities for
capital appreciation.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

The Fund has also filed a Statement of Additional Information dated December
31, 1996, with the Securities and Exchange Commission ("SEC"). The
information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request a copy of
the Statement of Additional Information or a paper copy of this prospectus,
if you have received your prospectus electronically, free of charge by
calling 1-800-341-7400. To obtain other information or to make inquiries
about the Fund, contact your financial institution. The Statement of
Additional Information, material incorporated by reference into this
document, and other information regarding the Fund is maintained
electronically with the SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated December 31, 1996

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights 4
General Information 7
Investment Information 8
Investment Objective 8
Investment Policies 8
Investment Limitations 15
Net Asset Value 16
Investing in the Fund 17
How to Purchase Shares 18
Investing in Class A Shares 18
Reducing or Eliminating the
Sales Charge 19
Investing in Class B Shares 20
Investing in Class C Shares 21
Special Purchase Features 22
Exchange Privilege 22
How to Redeem Shares 24
Special Redemption Features 25
Contingent Deferred Sales Charge 25
Elimination of Contingent
Deferred Sales Charge 26
Account and Share Information 27
Fund Information 28
Management of the Trust 28
Distribution of Shares 29
Administration of the Fund 31
Brokerage Transactions 31
Shareholder Information 32
Voting Rights 32
Tax Information 32
Federal Income Tax 32
State and Local Taxes 32
Performance Information 33
Appendix 33
Addresses Inside Back Cover
</TABLE>

SUMMARY OF FUND EXPENSES
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)(1) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
</TABLE>

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2) 0.48%
12b-1 Fee(3) 0.00%
Total Other Expenses 0.75%
Shareholder Services Fee 0.25%
Total Operating Expenses(4) 1.23%
</TABLE>

(1) Class A Shares purchased with the proceeds of a redemption of shares of
an unaffiliated investment company purchased or redeemed with a sales
charge and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year of purchase. See "Contingent Deferred Sales Charge."

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.

(3) The Class A Shares has no present intention of paying or accruing the
12b-1 fee during the fiscal year ending October 31, 1997. If the Class A
Shares were paying or accruing the 12b-1 fee, the Class A Shares would be
able to pay up to 0.25% of its average daily net assets for the 12b-1 fee.
See "Fund Information."

(4) The total operating expenses would have been 1.50% absent the voluntary
waiver of a portion of the management fee.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares of the Fund
will bear, either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "Investing in Class A Shares" and "Fund
Information." Wire-transferred redemptions of less than $5,000 may be
subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period; and (3) payment of the maximum
sales charge $67 $92 $119 $196
</TABLE>

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

SUMMARY OF FUND EXPENSES
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES

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

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2) 0.48%
12b-1 Fee 0.75%
Total Other Expenses 0.75%
Shareholder Services Fee 0.25%
Total Operating Expenses(3)(4) 1.98%
</TABLE>

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

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

(4) The total operating expenses would have been 2.25% absent the voluntary
waiver of a portion of the management fee.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period $77 $106 $130 $210

You would pay the following expenses on the same
investment, assuming no redemption $20 $62 $107 $210
</TABLE>

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

SUMMARY OF FUND EXPENSES
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES

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

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of
the original purchase price or the net asset value of Shares redeemed
within one year of their purchase date. For a more complete description,
see "Redeeming Class C Shares."

(3) The total operating expenses would have been 2.25% absent the voluntary
waiver of a portion of the management fee.

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

You would pay the following expenses on the same
investment, assuming no redemption $20 $62 $107 $231
</TABLE>

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

FINANCIAL HIGHLIGHTS -- CLASS A SHARES
FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, is included in the
Annual Report, which is incorporated by reference. This table should be read
in conjunction with the Fund's Financial Statements and Notes thereto, which
may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD
ENDED
OCTOBER 31, YEAR ENDED DECEMBER 31,(A)
1996(B) 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19 $48.39
INCOME FROM
INVESTMENT
OPERATIONS
Net investment income 0.24 1.05 1.18 1.13 1.36 1.16 1.46 1.37 1.31 1.29
Net realized and
unrealized
gain (loss) on
investments 11.35 24.39 (1.39) 6.30 5.57 12.62 (3.86) 7.34 5.08 (0.45)
Total from investment
operations 11.59 25.44 (0.21) 7.43 6.93 13.78 (2.40) 8.71 6.39 0.84
LESS DISTRIBUTIONS
Distributions from
net investment income (0.16) (1.09) (1.14) (1.16) (1.38) (1.15) (1.51) (1.32) (1.29) (1.30)
Distributions from
net realized gain on
investments (2.00) (5.61) (1.20) (0.71) (1.37) (1.54) (0.46) (2.49) (1.26) (1.74)
Total distributions (2.16) (6.70) (2.34) (1.87) (2.75) (2.69) (1.97) (3.81) (2.55) (3.04)
NET ASSET
VALUE, END OF
PERIOD $97.01 $87.58 $68.84 $71.39 $65.83 $61.65 $50.56 $54.93 $50.03 $46.19
TOTAL RETURN(C) 13.36% 37.17% (0.30)% 11.31% 11.38% 27.42% (4.43)% 17.58% 13.97% 0.88%
RATIOS TO AVERAGE
NET ASSETS
Expenses 1.23%* 1.08% 1.15% 1.15% 1.11% 1.12% 1.07% 1.13% 1.08% 0.92%
Net investment
income 0.31%* 1.29% 1.63% 1.59% 2.13% 1.97% 2.76% 2.45% 2.61% 2.29%
Expense waiver/
reimbursement(d) 0.27%* 0.15% -- -- -- -- -- -- -- --
SUPPLEMENTAL DATA
Net assets, end of
period
(000 omitted) $108,804 $98,200 $81,377 $88,949 $91,551 $90,503 $79,114 $95,422 $89,228 $89,371
Average commission
rate paid $0.0012 -- -- -- -- -- -- -- -- -- --
Portfolio turnover 79% 81% 23% 26% 47% 54% 61% 41% 36% 39%
</TABLE>

* Computed on an annualized basis.

(a) Amounts presented prior to January 1, 1996 represent results of
operations for Federated Exchange Fund, Ltd.

(b) Reflects operations for the period from January 1, 1996 (start of
business) to October 31, 1996.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be
obtained free of charge.

FINANCIAL HIGHLIGHTS -- CLASS B SHARES
FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

* Computed on an annualized basis.

(a) Reflects operations for the period from January 4, 1996 (date of initial
public offering) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be
obtained free of charge.

FINANCIAL HIGHLIGHTS -- CLASS C SHARES
FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

* Computed on an annualized basis.

(a) Reflects operations for the period from January 4, 1996 (date of initial
public offering) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be
obtained free of charge.

GENERAL INFORMATION

Federated Capital Appreciation Fund (the "Fund") is an investment portfolio
of Federated Equity Funds (the "Trust"). The Trust was established as a
business trust under the laws of the Commonwealth of Massachusetts pursuant
to a Declaration of Trust dated April 17, 1984, under the name "Federated
Growth Trust." The Trust later changed its name to "Federated Equity Funds."
The Fund was created for the purpose of soliciting the shareholders of
Federated Exchange Fund, Ltd., a California Limited Partnership, to exchange
their partnership interests for shares of beneficial interest in the Class A
Shares of the Fund. Until this transaction is completed, or until management
of the Fund determines that it will abandon its plan to acquire the assets
of Federated Exchange Fund, Ltd. in a reorganization transaction, shares of
the Fund will not be available for public investment. The Fund's address is
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.

The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest representing interests in separate portfolios
of securities. The shares in any one portfolio may be offered in separate
classes. With respect to this Fund, as of the date of this prospectus, the
Board of Trustees (the "Trustees") has established three classes of shares,
known as Class A Shares, Class B Shares, and Class C Shares (referred to as
"Shares," individually and collectively as the context requires).

Shares of the Fund are designed primarily for individuals and institutions
seeking capital appreciation through a professionally managed, diversified
portfolio consisting primarily of equity securities.

For information on how to purchase the Shares offered by this prospectus,
please refer to "How to Purchase Shares." The minimum initial investment for
Class A Shares is $500. The minimum initial investment for Class B Shares
and Class C Shares is $1,500. However, the minimum initial investment for a
retirement account in any class is $50. Subsequent investments in any class
must be in amounts of at least $100, except for retirement plans which must
be in amounts of at least $50.

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus.

INVESTMENT POLICIES

The investment policies described below may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS

The Fund attempts to achieve its objectives by investing at least 65% of its
assets in equity securities. Equity securities include common stocks,
preferred stocks, and securities (including debt securities) that are
convertible into common stocks. The portion of the Fund's total assets
invested in common stocks, preferred stocks, and convertible securities will
vary according to the Fund's assessment of market and economic conditions
and outlook.

The Fund's stock selection emphasizes those common stocks in each industry
sector that offer significant potential for capital appreciation based upon
factors such as price/cash flow, price/book value, and projected earnings
growth. The Fund may also invest in the securities of companies involved in
mergers or restructuring, and may invest up to 20% of its total assets in
foreign securities.

COMMON STOCK

As described above, the Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Fund is
subject to market risks. That is, the possibility exists that common stocks
will decline over short or even extended periods of time, and the United
States equity market tends to be cyclical, experiencing both periods when
stock prices generally increase and periods when stock prices generally
decrease. However, since the Fund invests in growth-oriented equity
securities, there are some additional risk factors associated with
investment in the Fund. Growth-oriented stocks may include issuers with
smaller capitalization. Small and medium capitalization stocks have
historically been more volatile in price than larger capitalization stocks,
such as those included in the Standard & Poor's 500 Index. This is because,
among other things, smaller companies have a lower degree of liquidity in
the equity market and tend to have a greater sensitivity to changing
economic conditions. That is, the stock of small and medium capitalization
companies may decline in price as the price of large company stocks rise, or
vice versa. Therefore, investors should expect that the Fund will be more
volatile than, and may fluctuate independently of, broad market indices such
as the Standard & Poor's 500 Index.

CORPORATE SECURITIES

The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors
Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings
Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated,
are deemed to be of comparable quality by the Fund's Adviser), and warrants
of these companies. Corporate fixed income securities are subject to market
and credit risks. In addition, the prices of fixed income securities
fluctuate inversely to the direction of interest rates. It should be noted
that securities receiving the lowest investment grade rating are considered
to have some speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated securities. In the event
that a security which had an eligible rating when purchased is downgraded
below Baa or BBB, the Adviser will promptly reassess whether continued
holding of the security is consistent with the Fund's objective.

CONVERTIBLE SECURITIES

The Fund may invest up to, but not including, 35% of the value of its total
assets in convertible securities that are not investment grade bonds or are
not rated but are determined by the Adviser to be of comparable quality.
Convertible securities are fixed-income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common
stock at the option of the holder during a specified time period.
Accordingly, the Fund considers convertible securities to be equity
securities. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several of
these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives. The Fund invests in convertible securities
irrespective of their ratings. Therefore, the convertible securities in
which the Fund invests may be rated below investment grade and considered
speculative.

Convertible bonds and convertible preferred stocks are fixed-income
securities that generally retain the investment characteristics of
fixed-income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed-income of a bond or the dividend preference of a preferred
stock until the holder elects to exercise the conversion privilege. Usable
bonds are corporate bonds that can be used in whole or in part, customarily
at full face value, in lieu of cash to purchase the issuer's common stock.
When owned as part of a unit along with warrants, which are options to buy
the common stock, they function as convertible bonds, except that the
warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and, therefore, have a claim to
assets of the corporation prior to the holders of common stock in the case
of liquidation. However, convertible securities are generally subordinated
to similar nonconvertible securities of the same company. The interest
income and dividends from convertible bonds and preferred stocks provide a
stable stream of income with generally higher yields than common stocks, but
lower than non-convertible securities of similar quality.

In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e. its value upon conversion into its
underlying common stock). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the
security's underlying common stock. The price of a convertible security
tends to increase as the market value of the underlying stock rises, whereas
it tends to decrease as the market value of the underlying stock declines.
While no securities investment is without some risk, investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.

The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the Adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objectives.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the Adviser evaluates the
investment characteristics of the convertible security as a fixed-income
instrument, and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.

SYNTHETIC CONVERTIBLES

A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a
fixed-income component and a convertibility component. This combination is
achieved by investing in nonconvertible fixed-income securities
(nonconvertible bonds, preferred stocks, and money market instruments) and
in warrants or call options traded on U. S. of foreign exchanges or in the
over-the-counter markets granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.

Synthetic convertibles differ from true convertible securities in several
respects. Unlike a true convertible, which is a single security having a
unitary market value, a synthetic convertible is comprised of two distinct
securities, each with its own market value. Therefore, the "market value" of
a synthetic convertible is the sum of the values of its fixed-income
component and its separate convertibility component. For this reason, the
values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations.

A synthetic convertible may be more flexible than a convertible security.
For example, a synthetic convertible may offer different issuers in the
fixed-income component than are offered in the stock underlying the
convertibility component. A synthetic convertible allows the Adviser to
combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when it
determines that such a combination would better promote the Fund's
investment objective and diversification. A synthetic convertible may also
offer flexibility in that its two components may be purchased separately.
For example, the Adviser may purchase a listed call option for inclusion in
a synthetic convertible, but temporarily hold short-term investments while
postponing purchase of a corresponding bond pending development of more
favorable market conditions.

A holder of a synthetic convertible faces the risk that the price of the
stock, or the level of the market index underlying the convertibility
component, will decline, causing a decline in the value of the call option
or warrant. Should the price of the stock or the level of the index fall
below the exercise period, the entire amount paid for the call option or
warrant would be lost. Since a synthetic convertible includes a fixed-income
component, the holder of a synthetic convertible also faces the risk that
interest rates will rise, causing a decline in the value of the fixed-income
instrument. Finally, a synthetic convertible can be expected to have greater
transaction costs than a true convertible security.

A combination of convertible securities and synthetic convertibles may offer
certain advantages over an investment policy that allows for only one of
these investment vehicles. Since convertible securities and synthetic
convertibles may respond differently to varying market conditions, the
ability to invest in both types of securities should afford greater
flexibility in managing the Fund's portfolio.

ZERO COUPON CONVERTIBLE SECURITIES

Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero
coupon convertible securities accretes at a stated yield until the security
reaches its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock.
In addition, zero coupon convertible securities usually have put features
that provide the holder with the opportunity to sell the bonds back to the
issuer at a stated price before maturity. Generally, the prices of zero
coupon convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.

Federal income tax law requires the holder of a zero coupon convertible
security to recognize income from the security prior to the receipt of cash
payments. To maintain its qualification as a regulated investment company
and avoid liability of federal income taxes, the Fund will be required to
distribute income accrued from zero coupon convertible securities which it
owns, and may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution requirements.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

The convertible, synthetic, and zero convertible securities in which the
Fund invests are usually not in the three highest rating categories of a
nationally recognized statistical rating organization (AAA, AA, or A for S&P
or Fitch and Ass, Aa, or A for Moody's), but are in the lower rating
categories or are unrated, but are of comparable quality and have
speculative characteristics or are speculative. Lower-rated bonds or unrated
bonds are commonly referred to as "junk bonds." There is no minimal
acceptable rating for a security to be purchased or held in the Fund's
portfolio, and the Fund may, from time to time, purchase or hold convertible
and synthetic securities rated in the lowest rating category. A description
of the rating categories is contained in the Appendix to the prospectus.

Debt obligations that are not determined to be investment grade are
high-yield, high-risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an
issuer's default. To a greater extent than investment-grade bonds,
lower-rated bonds tend to reflect short-term corporate, economic, and market
developments, as well as investor perceptions of the issuer's credit
quality. In addition, lower-rated bonds may be more difficult to dispose of
or to value than higher-rated, lower yielding bonds.

The Adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as
well as by monitoring broad economic trends and corporate and legislative
developments.

FOREIGN SECURITIES

The Fund reserves the right to invest up to 20% of its assets in foreign
debt and equity securities. These securities may be either
dollar-denominated or denominated in foreign currencies. Investments in
foreign securities, particularly those of non- governmental issuers, involve
considerations which are not ordinarily associated with investments in
domestic issuers. These considerations include the possibility of
expropriation, confiscatory taxation, currency fluctuations, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of
assessing economic trends in foreign countries. It may also be more
difficult to enforce contractual obligations abroad than would be the case
in the United States because of differences in the legal systems.
Transaction costs in foreign securities may be higher. The Adviser will
consider these and other factors before investing in foreign securities and
will not make such investments unless, in its opinion, such investments will
meet the Fund's standards and objectives.
FOREIGN CURRENCY TRANSACTIONS

The Fund may enter into foreign currency transactions to obtain the
necessary currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis at prevailing
rates or through forward foreign currency exchange contracts.

The Fund may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or
exchange control regulations. Such changes could unfavorably affect the
value of Fund assets which are denominated in foreign currencies, such as
foreign securities or funds deposited in foreign banks, as measured in U.S.
dollars. Although foreign currency exchanges may be used by the Fund to
protect against a decline in the value of one or more currencies, such
efforts may also limit any potential gain that might result from a relative
increase in the value of such currencies and might, in certain cases, result
in losses to the Fund.

CURRENCY RISKS

To the extent that debt securities purchased by the Fund are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Fund's net asset value; the value of interest earned;
gains and losses realized on the sale of securities; and net investment
income and capital gain, if any, to be distributed to shareholders by the
Fund. If the value of a foreign currency rises against the U.S. dollar, the
value of the Fund's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the
U.S. dollar, the value of the Fund's assets denominated in that currency
will decrease.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.

Generally no commission charges or deposits are involved. At the time the
Fund enters into a forward contract, Fund assets with a value equal to the
Fund's obligation under the forward contract are segregated and are
maintained until the contract has been settled. The Fund will not enter into
a forward contract with a term of more than one year.

The Fund will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction
occurs ("trade date"). The period between trade date and settlement date
will vary between 24 hours and 30 days, depending upon local custom.

The Fund may also protect against the decline of a particular foreign
currency by entering into a forward contract to sell an amount of that
currency approximating the value of all or a portion of the Fund's assets
denominated in that currency ("hedging"). The success of this type of
short-term hedging strategy is highly uncertain due to the difficulties of
predicting short-term currency market movements and of precisely matching
forward contract amounts and the constantly changing value of the securities
involved. Although the adviser will consider the likelihood of changes in
currency values when making investment decisions, the adviser believes that
it is important to be able to enter into forward contracts when it believes
the interests of the Fund will be served. The Fund will not enter into
forward contracts for hedging purposes in a particular currency in an amount
in excess of the Fund's assets denominated in that currency. The Fund will
not invest more than 20% of its total assets in forward foreign currency
exchange contracts.

PUT AND CALL OPTIONS

The Fund may purchase put options on its portfolio securities. These options
will be used as a hedge to attempt to protect securities which the Fund
holds against decreases in value. The Fund may also write call options on
all or any portion of its portfolio to generate income for the Fund. The
Fund will write call options on securities either held in its portfolio or
for which it has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration.

The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers
of the options since options on the portfolio securities held by the Fund
are not traded on an exchange. The Fund purchases and writes options only
with investment dealers and other financial institutions (such as commercial
banks or savings associations) deemed creditworthy by the Adviser.

Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded options
have a continuous liquid market while over-the-counter options may not. The
Fund will not buy call options or write put options without further
notification to shareholders.

FINANCIAL FUTURES AND
OPTIONS ON FUTURES

The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its
portfolio against decreases in value. When the Fund writes a call option on
a futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the
option is exercised. Conversely, as purchaser of a put option on a futures
contract, the Fund is entitled (but not obligated) to sell a futures
contract at the fixed price during the life of the option.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the
Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. When the
Fund purchases futures contracts, an amount of cash and U.S. Treasury
securities, equal to the underlying commodity value of the futures contracts
(less any related margin deposits), will be deposited in a segregated
account with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such futures
contract is unleveraged.

RISKS

It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the Adviser will consider
liquidity before entering into options transactions, there is no assurance
that a liquid secondary market on an exchange or otherwise will exist for
any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest up to 10% of its net assets in restricted securities.
This restriction is not applicable to commercial paper issued under Section
4(2) of the Securities Act of 1933, as amended. Restricted securities are
any securities in which the Fund may otherwise invest pursuant to its
investment objectives and policies but which are subject to restriction on
resale under federal securities law. The Fund will limit investments in
illiquid securities, including certain restricted securities determined by
the Trustees not to be liquid, non-negotiable time deposits and repurchase
agreements providing for settlement in more than seven days after notice, to
15% of its net assets.

The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors,
such as the Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) commercial
paper is normally resold to other institutional investors like the Fund
through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity.
TEMPORARY INVESTMENTS

The Fund may also invest temporarily, in amounts of 35% or less of the
Fund's assets, in cash and cash items during times of unusual market
conditions to maintain liquidity. Cash items may include the following
short-term obligations:

* commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);

* instruments of domestic and foreign banks and savings associations (such
as certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances);

* obligations of the U.S. government or its agencies or instrumentalities;

* repurchase agreements; and

* other short-term instruments.

REPURCHASE AGREEMENTS

Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price.

WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS

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

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

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the Fund may lend portfolio
securities, on a short-term or a long-term basis, up to one-third of the
value of its total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements
with broker/dealers, banks, or other institutions which the Adviser has
determined are creditworthy under guidelines established by the Trustees and
will receive collateral in the form of cash or U.S. government securities
equal to at least 100% of the value of the securities loaned.

There is the risk that when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In
addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.

DERIVATIVE CONTRACTS AND SECURITIES
The term "derivative" has traditionally been applied to certain contract
(including future, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency,
commodity, or index. Certain types of securities that incorporate the
performance characteristics of these contracts are also referred to as
"derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.

Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the
response of certain derivative contracts and securities to market changes
may differ from traditional investments, such as stock and bonds,
derivatives do not necessarily present greater market risks than traditional
investments. The Fund will only use derivative contracts for the purposes
disclosed in the applicable prospectus sections above. To the extent that
the Fund invests in securities that could be characterized as derivatives,
it will only do so in a manner consistent with its investment objectives,
policies, and limitations.

PORTFOLIO TURNOVER

Securities in the Fund's portfolio will be sold whenever the Adviser
believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may
have been held. The Adviser to the Fund does not anticipate that portfolio
turnover will result in adverse tax consequences. Any such trading will
increase the Fund's portfolio turnover rate and transaction costs.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except that the Fund may borrow up to one-third of the
value of its total assets and pledge up to 10% of the value of those assets
to secure such borrowings;

* sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions;

* lend any of its assets except portfolio securities up to one-third of the
value of its total assets;

* underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in connection with
the sale of restricted securities which the Fund may purchase pursuant to
its investment objectives, policies, and limitations; or

* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government, its
agencies, or instrumentalities, and repurchase agreements collateralized by
such securities); or

* acquire more than 10% of any class of voting securities of any one issuer.

For these purposes, the Fund takes all common stock and all preferred stock
of an issuer each as a single class, regardless of priorities, series,
designations, or other differences.

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for
shares is determined by adding the interest of each class of shares in the
market value of all securities and other assets of the Fund, subtracting the
interest of each class of shares in the liabilities of the Fund and those
attributable to each class of shares, and dividing the remainder by the
total number of each class of shares outstanding. The net asset value 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.

The net asset value of each class of shares of the Fund is determined as of
the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during
which no shares are tendered for redemption and no orders to purchase Shares
are received; or (iii) the following holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.

INVESTING IN THE FUND

This prospectus offers investors three classes of shares that carry sales
charge and contingent deferred sales charges in different forms and amounts
and which bear different levels of expenses.

CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of
5.50% at the time of purchase. As a result, Class A Shares are not subject
to any charges when they are redeemed (except for special programs offered
under "Purchases with Proceeds From Redemptions of Unaffiliated Investment
Companies.") Certain purchases of Class A Shares are not subject to a sales
charge. See "Investing in Class A Shares." Certain purchases of Class A
Shares qualify for reduced sales charges. See "Reducing or Eliminating the
Sales Charge." Class A Shares have no conversion feature.

CLASS B SHARES

Class B Shares are sold without an initial sales charge, but are subject to
a contingent deferred sales charge of up to 5.50% if redeemed within six
full years following purchase. Class B Shares also bear a higher 12b-1 fee
than Class A Shares. Class B Shares will automatically convert into Class A
Shares, based on relative net asset value, on or around the fifteenth of the
month eight full years after the purchase date. Class B Shares provide an
investor the benefit of putting all of the investor's dollars to work from
the time the investment is made, but (until conversion) will have a higher
expense ratio and pay lower dividends than Class A Shares due to the higher
12b-1 fee.

CLASS C SHARES

Class C Shares are sold without an initial sales charge, but are subject to
a 1.00% contingent deferred sales charge on assets redeemed within the first
12 months following purchase. Class C Shares provide an investor the benefit
of putting all of the investor's dollars to work from the time the
investment is made, but will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee. Class C Shares
have no conversion feature.

HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either
through a financial institution (such as a bank or broker/dealer which has a
sales agreement with the distributor) or by wire or by check directly to the
Fund, with a minimum initial investment of $500 for Class A Shares and
$1,500 for Class B Shares and Class C Shares. Additional investments can be
made for as little as $100. The minimum initial and subsequent investment
for retirement plans is only $50. (Financial institutions may impose
different minimum investment requirements on their customers.)

In connection with any sale, Federated Securities Corp. may, from time to
time, offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request. An account must
be established at a financial institution or by completing, signing, and
returning the new account form available from the Fund before shares can be
purchased.

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER
AS A AS A CONCESSION
PERCENTAGE PERCENTAGE AS A PERCENTAGE
AMOUNT OF OF PUBLIC OF NET AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000
but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million
or greater 0.00% 0.00% 0.25%*
</TABLE>

* See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other
fee by the financial intermediary. Additionally, no sales charge is imposed
on shareholders designated as Liberty Life Members or on shares purchased
through "wrap accounts" or similar programs, under which clients pay a fee
for services.

DEALER CONCESSION

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

The sales charge for shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp. Federated
Securities Corp. may pay fees to banks out of the sales charge in exchange
for sales and/or administrative services performed on behalf of the bank's
customers in connection with the initiation of customer accounts and
purchases of shares.

REDUCING OR ELIMINATING
THE SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of Class A
Shares through:

* quantity discounts and accumulated purchases;

* concurrent purchases;

* signing a 13-month letter of intent;

* using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment
company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales charge paid.
The Fund will combine purchases of Class A Shares made on the same day by
the investor, the investor's spouse, and the investor's children under age
21 when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.

If an additional purchase of Class A Shares is made, the Fund will consider
the previous purchases still invested in the Fund. For example, if a
shareholder already owns Class A Shares having a current value at the public
offering price of $30,000 and he purchases $20,000 more at the current
public offering price, the sales charge on the additional purchase according
to the schedule now in effect would be 4.50%, not 5.50%.

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has
the privilege of combining concurrent purchases of Class A Shares of two or
more funds for which affiliates of Federated Investors serve as investment
adviser or principal underwriter (the "Federated Funds"), the purchase price
of which includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in one of the Class A Shares in the Federated Funds with a
sales charge, and $20,000 in this Fund, the sales charge would be reduced.

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

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of shares of Class A
Shares of Federated Funds (excluding money market funds) over the next 13
months, the sales charge may be reduced by signing a letter of intent to
that effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the 13-month
period and a provision for the custodian to hold up to 5.50% of the total
amount intended to be purchased in escrow (in shares) until such purchase is
completed.

The shares held in escrow in the shareholder's account will be released upon
fulfillment of the letter of intent or the end of the 13-month period,
whichever comes first. If the amount specified in the letter of intent is
not purchased, an appropriate number of escrowed shares may be redeemed in
order to realize the difference in the sales charge.

While this letter of intent will not obligate the shareholder to purchase
shares, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares of any Federated Funds, excluding money market accounts, will be
aggregated to provide a purchase credit towards fulfillment of the letter of
intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated
Securities Corp. must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his Class A Shares in the Fund, there may
be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES

Investors may purchase Class A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge or
commission and were not distributed by Federated Securities Corp. The
purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for shares purchased under this
program. If shares are purchased in this manner, Fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of any
special offering, as described above.

INVESTING IN CLASS B SHARES

Class B Shares are sold at their net asset value next determined after an
order is received. While Class B Shares are sold without an initial sales
charge, under certain circumstances described under "Contingent Deferred
Sales Charge -- Class B Shares," a contingent deferred sales charge may be
applied by the distributor at the time Class B Shares are redeemed.

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around
the end of the month eight full years after the purchase date, except as
noted below, and will no longer be subject to a distribution services fee
(see "Distribution of Shares"). Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales
charge, fee or other charge. Class B Shares acquired by exchange from Class
B Shares of another fund in the Federated Funds will convert into Class A
Shares based on the time of the initial purchase. For purposes of conversion
to Class A Shares, shares purchased through the reinvestment of dividends
and distributions paid on Class B Shares will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account will also
convert to Class A Shares. The conversion of Class B Shares to Class A
Shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversions will
not constitute taxable events for federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the conversion
of Class B Shares to Class A Shares will not occur if such ruling or opinion
is not available. In such event, Class B Shares would continue to be subject
to higher expenses than Class A Shares for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested
in Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on
assets redeemed within the first full 12 months following purchase. For a
complete description of this charge see, "Contingent Deferred Sales Charge
- -- Class C Shares."

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

An investor may call his financial institution (such as a bank or an
investment dealer) to place an order to purchase shares. Orders placed
through a financial institution are considered received when the Fund is
notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a registered broker/dealer must be received
by the broker before 4:00 p.m. (Eastern time) and must be transmitted by the
broker to the Fund before 5:00 p.m. (Eastern time) in order for shares to be
purchased at that day's price. Purchase orders through other financial
institutions must be received by the financial institution and transmitted
to the Fund before 4:00 p.m. (Eastern time) in order for shares to be
purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly. Financial institutions may
charge additional fees for their services.

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

PURCHASING SHARES BY WIRE

Once an account has been established, shares may be purchased by wire by
calling the Fund. All information needed will be taken over the telephone,
and the order is considered received when State Street Bank receives payment
by wire Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund
Number-this number can be found on the account statement or by contacting
the Fund); Account Number; Trade Date and Order Number; Group Number or
Dealer Number; Nominee or Institution Name; and ABA Number 011000028.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

PURCHASING SHARES BY CHECK

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

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member
and invested in the Fund at the net asset value next determined after an
order is received by the Fund, plus the sales charge, if applicable.
Shareholders should contact their financial institution or the Fund to
participate in this program.

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE

CLASS A SHARES

Class A shareholders may exchange all or some of their shares for Class A
Shares of Federated Funds at net asset value. Neither the Fund nor any of
the funds in the Federated Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange their shares for
Class A Shares.

CLASS B SHARES

Class B shareholders may exchange all or some of their shares for Class B
Shares of other Federated Funds. (Not all Federated Funds currently offer
Class B Shares. Contact your financial institution regarding the
availability of Class B Shares of the Federated Funds.) Exchanges are made
at net asset value without being assessed a contingent deferred sales charge
on the exchanged shares. To the extent that a shareholder exchanges shares
for Class B Shares of other Federated Funds, the time for which the
exchanged-for shares are to be held will be added to the time for which
exchanged-from shares were held for purposes of satisfying the applicable
holding period. For more information, see "Contingent Deferred Sales
Charge."

CLASS C SHARES

Class C shareholders may exchange all or some of their Shares for Class C
Shares in other Federated Funds at net asset value without a contingent
deferred sales charge. (Not all Federated Funds currently offer Class C
Shares. Contact your financial institution regarding the availability of
Class C Shares of the Federated Funds.) To the extent that a shareholder
exchanges shares for Class C Shares of other Federated Funds, the time for
which the exchanged-for shares are to be held will be added to the time for
which exchanged-from Shares were held for purposes of satisfying the
applicable holding period. For more information, see "Contingent Deferred
Sales Charge."

Please contact your financial institution directly or Federated Securities
Corp. at 1-800-341-7400 for information on and prospectuses for the
Federated Funds into which your Shares may be exchanged free of charge.

Shareholders of Class A Shares who have been designated Liberty Life Members
are exempt from sales charges on future purchases in and exchanges between
the Class A Shares of any Federated Fund, as long as they maintain a $500
balance in one of the Federated Funds.

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange shares having a net asset
value equal to the minimum investment requirements of the fund into which
the exchange is being made. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.

This privilege is available to shareholders resident in any state in which
the shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, shares submitted for exchange are
redeemed and proceeds invested in the same class of shares of the other
fund. The exchange privilege may be modified or terminated at any time.
Shareholders will be notified of the modification or termination of the
exchange privilege.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a capital gain or
loss may be realized.

MAKING AN EXCHANGE

Instructions for exchanges for Federated Funds (where applicable) may be
given in writing or by telephone. Written instructions may require a
signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions
during times of drastic economic or market changes. If a shareholder cannot
contact his broker or financial institution by telephone, it is recommended
that an exchange request be made in writing and sent by overnight mail to
Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.

TELEPHONE INSTRUCTIONS

Telephone instructions made by the investor may be carried out only if a
telephone authorization form completed by the investor is on file with the
Fund. If the instructions are given by a broker, a telephone authorization
form completed by the broker must be on file with the Fund. If reasonable
procedures are not followed by the Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. Shares may be exchanged
between two funds by telephone only if the two funds have identical
shareholder registrations.

Any shares held in certificate form cannot be exchanged by telephone but
must be forwarded to Federated Shareholder Services Company, P.O. Box 8000,
Boston, Massachusetts 02266-8000 and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and
will be binding upon the shareholder. Such instructions will be processed as
of 4:00 p.m. (Eastern time) and must be received by the Fund before that
time for shares to be exchanged the same day. Shareholders exchanging into a
Fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.

HOW TO REDEEM SHARES

Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the
redemption request. Redemptions will be made on days on which the Fund
computes its net asset value. Investors who redeem shares through a
financial intermediary may be charged a service fee by that financial
intermediary. Redemption requests must be received in proper form and can be
made as described below.

REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION
Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less
any applicable contingent deferred sales charge next determined after the
Fund receives the redemption request from the financial institution.
Redemption requests through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be transmitted by the
broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares to be
redeemed at that day's net asset value. Redemption requests through other
financial institutions (such as banks) must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this service.

REDEEMING SHARES BY TELEPHONE

Shares may be redeemed in any amount by calling the Fund provided the Fund
has a properly completed authorization form. These forms can be obtained
from Federated Securities Corp. Proceeds will be mailed in the form of a
check, to the shareholder's address of record or by wire transfer to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. The minimum amount for a wire transfer is $1,000.
Proceeds from redeemed shares purchased by check or through ACH will not be
wired until that method of payment has cleared. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be
wired the following business day. Questions about telephone redemptions on
days when wire transfers are restricted should be directed to your
shareholder services representative at the telephone number listed on your
account statement.

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

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box
8600, Boston, Massachusetts 02266-8600. If certificates have been issued,
they should be sent unendorsed with the written request by registered or
certified mail to the address noted above.

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

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

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not
less than $100 may take advantage of the Systematic Withdrawal Program.
Under this program, shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder.

Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares, and
the fluctuation of the net asset value of shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that Class A Shares are sold with a sales charge, it is not advisable
for shareholders to continue to purchase Class A Shares while participating
in this program. A contingent deferred sales charge may be imposed on Class
B Shares and Class C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:

CLASS A SHARES

Class A Shares purchased under a periodic special offering with the proceeds
of a redemption of Shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge of .50% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption.

CLASS B SHARES

Shareholders redeeming Class B Shares from their Fund accounts within six
full years of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption in accordance with the following
schedule:
<TABLE>
<CAPTION>
<S> <C>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one
full year of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor of 1.00%. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption.

CLASS A SHARES, CLASS B SHARES,
AND CLASS C SHARES.

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) shares held for more than
six full years from the date of purchase with respect to Class B Shares and
one full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to a
contingent deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have occurred in
the following order: (1) shares acquired through the reinvestment of
dividends and long-term capital gains; (2) shares held for more than six
full years from the date of purchase with respect to Class B Shares and one
full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares; (3) shares held for fewer than six years with
respect to Class B Shares and one full year from the date of purchase with
respect to Class C Shares and applicable Class A Shares on a first-in,
first-out basis. A contingent deferred sales charge is not assessed in
connection with an exchange of Fund Shares for Shares of other funds in the
Liberty Family of Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged for
shares are redeemed is calculated as if the shareholder had held the shares
from the date on which he became a shareholder of the exchanged-from shares.
Moreover, the contingent deferred sales charge will be eliminated with
respect to certain redemptions (see "Elimination of Contingent Deferred
Sales Charge").

ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions 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; (3) involuntary redemptions
by the Fund of Shares in shareholder accounts that do not comply with the
minimum balance requirements; and (4) qualifying redemptions of Class B
Shares must be from an account: that is at least 12 months old, has all Fund
distributions reinvested in Fund Shares, and has a value of at least $10,000
when the Systematic Withdrawal Program is established. Qualifying
redemptions may not exceed 1.00% monthly of the account value as
periodically determined by the Fund. For more information regarding the
elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary of the Fund. No
contingent deferred sales charge will be imposed on redemptions of shares
held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor, and their immediate
family members; employees of any financial institution that sells shares of
the Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Fund reserves the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any shares purchased prior to the termination
of such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the shares.
If a shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to
such elimination.

ACCOUNT AND SHARE INFORMATION

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested in writing to Federated Shareholder Services
Company.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Confirmations are sent to report dividends paid.

DIVIDENDS

Dividends are declared and paid quarterly to all shareholders invested in
the Fund on the record date. Dividends and distributions are automatically
reinvested in additional shares of the Fund on payment dates at the
ex-dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by contacting the transfer
agent. All shareholders on the record date are entitled to the dividend. If
shares are redeemed or exchanged prior to the record date or purchased after
the record date, those shares are not entitled to that quarter's dividend.

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds
to the shareholder if the account balance falls below the Class A Share
required minimum value of $500 or the required minimum value of $1,500 for
Class B Shares and Class C Shares. This requirement does not apply, however,
if the balance falls below the required minimum value because of changes in
the net asset value of the respective share class. Before shares are
redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum
requirement.

FUND INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

The Trust is managed by a Board of Trustees. The Trustees are responsible
for managing the Trust's business affairs and for exercising all the Trust's
powers except those reserved for the shareholders. An Executive Committee of
the Board of Trustees handles the Board's responsibilities between meetings
of the Board.

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Management, the
Fund's investment adviser ("the Adviser"), subject to direction by the
Trustees. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
The Adviser's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to .75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than
the advisory fees paid by other mutual funds in general, is comparable to
fees paid by other mutual funds with similar objectives and policies. The
Adviser may voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses. The Adviser can terminate this voluntary waiver
at any time at its sole discretion. The Adviser has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.

ADVISER'S BACKGROUND

Federated Management, a Delaware business trust organized on April 11, 1989,
is a registered investment adviser under the Investment Advisers Act of
1940, as amended. It is a subsidiary of Federated Investors. All of the
Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.

Peter R. Anderson has been the Fund's portfolio manager since the Fund's
inception date. Mr. Anderson joined Federated Investors in 1977 and has been
an Executive Vice President of the Fund's investment adviser from 1989 to
1993. Mr. Anderson is a Chartered Financial Analyst and received his M.B.A.
with a concentration in Finance from the University of Virginia.

J. Thomas Madden has been the Fund's portfolio manager since the Fund's
inception date. Mr. Madden joined Federated Investors in 1977, and has been
an Executive Vice President of the Fund's investment adviser since 1994. Mr.
Madden served as a Senior Vice President of the Fund's investment adviser
from 1989 to 1993. Mr. Madden is a Chartered Financial Analyst and received
his M.B.A. with a concentration in Finance from the University of Virginia.

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

DISTRIBUTION OF SHARES

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

The distributor will pay dealers an amount equal to 5.5% of the net asset
value of Class B Shares purchased by their clients or customers. These
payments will be made directly by the distributor from its assets, and will
not be made from the assets of the Fund. Dealers may voluntarily waive
receipt of all or any portion of these payments. The distributor may pay a
portion of the distribution fee discussed below to financial institutions
that waive all or any portion of the advance payments.

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

DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the distributor may be paid a fee in
an amount computed at an annual rate of up to .25% for Class A Shares and up
to .75% for Class B Shares and Class C Shares of the average daily net
assets of each class of shares to finance any activity which is principally
intended to result in the sale of shares subject to the Distribution Plan.
The Fund does not currently make payments to the distributor or charge a fee
under the Distribution Plan for Class A Shares, and shareholders of Class A
Shares will be notified if the Fund intends to charge a fee under the
Distribution Plan. For Class A Shares and Class C Shares, the distributor
may select financial institutions such as banks, fiduciaries, custodians for
public funds, investment advisers, and broker/dealers to provide sales
services or distribution-related support services as agents for their
clients or customers. With respect to Class B Shares, because distribution
fees to be paid by the Fund to the distributor may not exceed an annual rate
of .75% of each class of shares' average daily net assets, it will take the
distributor a number of years to recoup the expenses it has incurred for its
sales services and distribution-related services pursuant to the
Distribution Plan.

The Distribution Plan is a compensation type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the
Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it from
the Fund, interest, carrying, or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit
from future payments made by shares under the Distribution Plan.

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the
Fund may make payments of up to 0.25% of the average daily net asset value
of Class A Shares, Class B Shares, and Class C Shares to obtain certain
personal services for shareholders and for the maintenance of shareholder
accounts ("shareholder services"). Under the Shareholder Services Agreement,
Federated Shareholder Services will either perform shareholder services
directly or will select financial institutions to perform shareholder
services. Financial institutions will receive fees based upon shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the
Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

Federated Securities Corp. will pay financial institutions, at the time of
purchase, an amount equal to .50% of the net asset value of shares purchased
by their clients or customers under certain qualified retirement plans as
approved by Federated Securities Corp. (Such payments are subject to a
reclaim from the financial institution should the assets leave the program
within 12 months after purchase.)

Furthermore, in addition to payments made pursuant to the Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder
Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. The support may include
sponsoring sales, educational and training seminars for their employees,
providing sales literature, and engineering computer software programs that
emphasize the attributes of the Fund. Such assistance will be predicated
upon the amount of shares the financial institution sells or may sell,
and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Fund's Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services
Company provides these at an annual rate which relates to the average
aggregate daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
</TABLE>

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

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally
utilize those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria, the
Adviser may give consideration to those firms which have sold or are selling
shares of the Fund and other funds distributed by Federated Securities Corp.
The Adviser makes decisions on portfolio transactions and selects brokers
and dealers subject to review by the Trustees.

SHAREHOLDER INFORMATION

VOTING RIGHTS

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

As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust's or the Fund's operation and for the election of
Trustees under certain circumstances.

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

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code of 1986, as amended, applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.

Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as
long-term capital gains no matter how long the shareholders have held the
shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed.

STATE AND LOCAL TAXES

In the opinion of Houston, Donnelly & Meck, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for each
class of shares.

Total return represents the change, over a specific period of time, in the
value of an investment in each class of shares after reinvesting all income
and capital gains distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.

The yield of each class of shares is calculated by dividing the net
investment income per share (as defined by the SEC) earned by each class of
shares over a thirty-day period by the maximum offering price per share of
each class on the last day of the period. This number is then annualized
using semi-annual compounding. The yield does not necessarily reflect income
actually earned by each class of shares and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges,
such as the maximum sales charge or contingent deferred sales charges,
which, if excluded, would increase the total return and yield.

Total return and yield will be calculated separately for Class A Shares,
Class B Shares, and Class C Shares. Expense differences among Class A
Shares, Class B Shares, and Class C Shares may affect the performance of
each class.

From time to time, advertisements for Class A Shares, Class B Shares, and
Class C Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the performance
of Class A Shares, Class B Shares, and Class C Shares to certain indices.

APPENDIX

DESCRIPTION OF BOND RATINGS

A rating by a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general
and are not absolute standards of quality or guarantees as to the
creditworthiness of an issuer.

Consequently, the Adviser believes that the quality of fixed income
securities in which the Fund invests should be continuously reviewed and
that individual analysts give different weightings to the various factors
involved in credit analysis. A rating is not a recommendation to purchase,
sell, or hold a security, because it does not take into account market value
or suitability for a particular investor. When a security has received a
rating from more than one service, each rating is evaluated independently.
Ratings are based on current information furnished by the issuer or obtained
by the rating services from other sources that they consider reliable.
Ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information, or for other reasons.

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS

AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.

AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effect of
changes in circumstances and economic conditions than debt in higher rated
categories.

BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.

BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.

B -- Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.

CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.

CC -- The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.

C -- The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC- " debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.

CI -- The rating "CI" is reserved for income bonds on which no interest is
being paid.

D -- Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.

MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS

AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.

AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.

BAA -- Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.

CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS

AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."

A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered strong,
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.

BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.

B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.

CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C -- Bonds are in imminent default in payment of interest or principal.

DDD, DD, and D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D"' represents the lowest potential for recovery.

ADDRESSES

Federated Capital Appreciation Fund
(formerly, Federated Exchange Fund, Ltd.)
Class A Shares
Class B Shares
Class C Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219
FEDERATED CAPITAL
APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

COMBINED PROSPECTUS

An Open-End,
Diversified Management
Investment Company

December 31, 1996

[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

[Graphic]

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

Cusip 314172701
Cusip 314728800
Cusip 314172883
G01489-01 (12/96)

FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

The Class A Shares of Federated Capital Appreciation Fund (the "Fund")
represent interests in a diversified investment portfolio of Federated
Equity Funds, an open-end management investment company (a mutual fund). The
Fund invests primarily in equity securities that offer opportunities for
capital appreciation.

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

The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated December 31, 1996, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional
Information or a paper copy of this prospectus, if you have received your
prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).

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

Prospectus dated December 31, 1996

TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights 2
General Information 3
Investment Information 4
Investment Objective 4
Investment Policies 4
Investment Limitations 11
Net Asset Value 12
How to Purchase Shares 13
Investing in Class A Shares 13
Reducing or Eliminating the
Sales Charge 14
Special Purchase Features 16
Exchange Privilege 16
How to Redeem Shares 17
Special Redemption Features 18
Contingent Deferred Sales Charge 19
Elimination of Contingent
Deferred Sales Charge 19
Account and Share Information 20
Fund Information 21
Management of the Trust 21
Distribution of Class A Shares 22
Administration of the Fund 23
Brokerage Transactions 23
Shareholder Information 24
Voting Rights 24
Tax Information 24
Federal Income Tax 24
State and Local Taxes 24
Performance Information 25
Other Classes of Shares 25
Appendix 26
Addresses Inside Back Cover

SUMMARY OF FUND EXPENSES
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

</TABLE>
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)(1) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
</TABLE>

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver)(2) 0.48%
12b-1 Fee(3) 0.00%
Total Other Expenses 0.75%
Shareholder Services Fee 0.25%
Total Operating Expenses(4) 1.23%
</TABLE>

(4) The total operating expenses would have been 1.50% absent the voluntary
waiver of a portion of the management fee.

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

FINANCIAL HIGHLIGHTS -- CLASS A SHARES
FEDERATED CAPITAL APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

* Computed on an annualized basis.

(a) Amounts presented prior to January 1, 1996 represent results of
operations for Federated Exchange Fund, Ltd.

(b) Reflects operations for the period from January 1, 1996 (start of
business) to October 31, 1996.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996, which can be
obtained free of charge.

GENERAL INFORMATION

The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest representing interests in separate portfolios
of securities. The shares in any one portfolio may be offered in separate
classes. With respect to this Fund, as of the date of this prospectus, the
Board of Trustees (the "Trustees") has established three classes of shares,
known as Class A Shares, Class B Shares, and Class C Shares. This prospectus
relates only to the Class A Shares (the "Shares") of the Fund.

For information on how to purchase the shares offered by this prospectus,
please refer to "How to Purchase Shares." The minimum initial investment for
Class A Shares is $500. However, the minimum initial investment for a
retirement account is $50. Subsequent investments must be in amounts of at
least $100, except for retirement plans which must be in amounts of at least
$50.

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus.

INVESTMENT POLICIES

The investment policies described below may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.

ACCEPTABLE INVESTMENTS

The Fund attempts to achieve its objectives by investing at least 65% of its
assets in equity securities. Equity securities include common stocks,
preferred stocks, and investment grade securities (including debt
securities) that are convertible into common stocks. The portion of the
Fund's total assets invested in common stocks, preferred stocks, and
convertible securities will vary according to the Fund's assessment of
market and economic conditions and outlook.

COMMON STOCK

CORPORATE SECURITIES

CONVERTIBLE SECURITIES

Convertible bonds and convertible preferred stocks are fixed-income
securities that generally retain the investment characteristics of
fixed-income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed-income of a bond or the dividend preference of a preferred
stock until the security holder elects to exercise the conversion privilege.
Usable bonds are corporate bonds that can be used in whole or in part,
customarily at full face value, in lieu of cash to purchase the issuer's
common stock. When owned as part of a unit along with warrants, which are
options to buy the common stock, they function as convertible bonds, except
that the warrants generally will expire before the bond's maturity.
Convertible securities are senior to equity securities and, therefore, have
a claim to assets of the corporation prior to the holders of common stock in
the case of liquidation. However, convertible securities are generally
subordinated to similar nonconvertible securities of the same company. The
interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.

In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income
security) or its "conversion value" (i.e., its value upon conversion into
its underlying common stock). As a fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
tends to decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the
security's underlying common stock. The price of a convertible security
tends to increase as the market value of the underlying stock rises, whereas
it tends to decrease as the market value of the underlying stock declines.
While no securities investment is without some risk, investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.

SYNTHETIC CONVERTIBLES

A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a
fixed-income component and a convertibility component. This combination is
achieved by investing in nonconvertible fixed-income securities
(nonconvertible bonds, preferred stocks, and money market instruments) and
in warrants or call options traded on U.S. or foreign exchanges or in the
over-the-counter markets granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.

A holder of a synthetic convertible faces the risk that the price of the
stock, or the level of the market index underlying the convertibility
component, will decline, causing a decline in the value of the call option
or warrant. Should the price of the stock or the level of the index fall
below the exercise price, and remain there throughout the exercise period,
the entire amount paid for the call option or warrant would be lost. Since a
synthetic convertible includes a fixed-income component, the holder of a
synthetic convertible also faces the risk that interest rates will rise,
causing a decline in the value of the fixed-income instrument. Finally, a
synthetic convertible can be expected to have greater transaction costs than
a true convertible security.

ZERO COUPON CONVERTIBLE SECURITIES

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

The convertible, synthetic, and zero convertible securities in which the
Fund invests are usually not in the three highest rating categories of a
nationally recognized statistical rating organization (AAA, AA, or A for S&P
or Fitch and Aaa, Aa, or A for Moody's), but are in the lower rating
categories or are unrated, but are of comparable quality and have
speculative characteristics or are speculative. Lower-rated bonds or unrated
bonds are commonly referred to as "junk bonds." There is no minimal
acceptable rating for a security to be purchased or held in the Fund's
portfolio, and the Fund may, from time to time, purchase or hold convertible
and synthetic convertible securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to the
prospectus.

FOREIGN SECURITIES

The Fund reserves the right to invest up to 20% of its assets in foreign
debt and equity securities. These securities may be either
dollar-denominated or denominated in foreign currencies. Investments in
foreign securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investments in
domestic issuers. These considerations include the possibility of
expropriation, confiscatory taxation, currency fluctuations, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social, or diplomatic developments, and the difficulty of
assessing economic trends in foreign countries. It may also be more
difficult to enforce contractual obligations abroad than would be the case
in the United States because of differences in the legal systems.
Transaction costs in foreign securities may be higher. The Adviser will
consider these and other factors before investing in foreign securities and
will not make such investments unless, in its opinion, such investments will
meet the Fund's standards and objectives.

FOREIGN CURRENCY TRANSACTIONS
The Fund may enter into foreign currency transactions to obtain the
necessary currencies to settle securities transactions. Currency
transactions may be conducted either on a spot or cash basis at prevailing
rates or through forward foreign currency exchange contracts.

CURRENCY RISKS

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.

PUT AND CALL OPTIONS

Exchange-traded options have a continuous liquid market while
over-the-counter options may not. The Fund will not buy call options or
write put options without further notification to shareholders.

FINANCIAL FUTURES AND
OPTIONS ON FUTURES

The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial
futures contracts call for the delivery of particular debt instruments at a
certain time in the future. The seller of the contract agrees to make
delivery of the type of instrument called for in the contract and the buyer
agrees to take delivery of the instrument at the specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its
portfolio against decreases in value. When the Fund writes a call option on
a futures contract, it is undertaking the obligation of selling a futures
contract at a fixed price at any time during a specified period if the
option is exercised. Conversely, as purchaser of a put option on a futures
contract, the Fund is entitled (but not obligated) to sell a futures
contract at the fixed price during the life of the option.

RISKS

When the Fund uses financial futures and options on financial futures as
hedging devices, much depends on the ability of the Adviser to predict
market conditions based upon certain economic analysis and factors. There is
a risk that the prices of the securities subject to the futures contracts
may not correlate perfectly with the prices of the securities in the Fund's
portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In
addition, the Adviser could be incorrect in its expectations about the
direction or extent of market factors such as interest rate movements. In
these events, the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the Adviser will consider
liquidity before entering into options transactions, there is no assurance
that a liquid secondary market on an exchange or otherwise will exist for
any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.

RESTRICTED AND ILLIQUID SECURITIES

TEMPORARY INVESTMENTS

* commercial paper and Europaper (dollar denominated commercial paper issued
outside the United States);

* instruments of domestic and foreign banks and savings associations (such
as certificates of deposit, demand and time deposits, savings shares, and
bankers' acceptances);

* obligations of the U.S. government or its agencies or instrumentalities;

* repurchase agreements; and

* other short-term instruments.

REPURCHASE AGREEMENTS

WHEN-ISSUED AND DELAYED
DELIVERY TRANSACTIONS

LENDING OF PORTFOLIO SECURITIES

DERIVATIVE CONTRACTS AND SECURITIES

The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option, and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency,
commodity, or index. Certain types of securities that incorporate the
performance characteristics of these contracts are also referred to as
"derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.

PORTFOLIO TURNOVER

INVESTMENT LIMITATIONS

The Fund will not:

* sell securities short except, under strict limitations, it may maintain
open short positions so long as not more than 10% of the value of its net
assets is held as collateral for those positions;

* lend any of its assets except portfolio securities up to one-third of the
value of its total assets;

* acquire more than 10% of any class of voting securities of any one issuer.

For these purposes, the Fund takes all common stock and all preferred stock
of an issuer each as a single class, regardless of priorities, series,
designations, or other differences.

The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective. The Fund will not:
invest more than 5% of its total assets in securities of issuers that have
records of less than three years of continuous operations.

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for
shares is determined by adding the interest of Class A Shares in the market
value of all securities and other assets of the Fund, subtracting the
interest of Class A Shares in the liabilities of the Fund and those
attributable to Class A Shares, and dividing the remainder by the total
number of Class A Shares outstanding. The net asset value for Class A Shares
may differ from the net asset values of other classes of shares 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.

The net asset value of Class A Shares of the Fund is determined as of the
close of trading (normally 4:00 p.m., Eastern time) on the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the Fund's portfolio securities that its
net asset value might be materially affected; (ii) days during which no
shares are tendered for redemption and no orders to purchase shares are
received; or (iii) the following holidays: New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.

HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either
through a financial institution (such as a bank or broker/dealer which has a
sales agreement with the distributor) or by wire or by check directly to the
Fund, with a minimum initial investment of $500. Additional investments can
be made for as little as $100. The minimum initial and subsequent investment
for retirement plans is only $50. (Financial institutions may impose
different minimum investment requirements on their customers.)

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an
order is received, plus a sales charge, if applicable, as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER
AS A AS A CONCESSION
PERCENTAGE PERCENTAGE AS A PERCENTAGE
AMOUNT OF OF PUBLIC OF NET AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000
but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million
or greater 0.00% 0.00% 0.25%*
</TABLE>

* See sub-section entitled "Dealer Concession."

DEALER CONCESSION

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

REDUCING OR ELIMINATING THE
SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of Class A
Shares through:

* quantity discounts and accumulated purchases; concurrent purchases;
signing a 13-month letter of intent; using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment
company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales charge paid.
The Fund will combine purchases of shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21
when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.

If an additional purchase of shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$30,000 and he purchases $20,000 more at the current public offering price,
the sales charge on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has
the privilege of combining concurrent purchases of Class A Shares of two or
more funds for which affiliates of Federated Investors serve as investment
adviser or principal underwriter (the "Federated Funds"), the purchase price
of which includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in the Class A Shares of one of the other Federated Funds
with a sales charge, and $20,000 in this Fund, the sales charge would be
reduced.

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of Class A Shares of
any Federated Funds (excluding money market funds) over the next 13 months,
the sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the 13-month
period and a provision for the custodian to hold up to 5.50% of the total
amount intended to be purchased in escrow (in shares) until such purchase is
completed.

While this letter of intent will not obligate the shareholder to purchase
shares, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares of Federated Funds, excluding money market accounts, will be
aggregated to provide a purchase credit towards fulfillment of the letter of
intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If shares in the Fund have been redeemed, the shareholder has the privilege,
within 120 days to reinvest the redemption proceeds at the next-determined
net asset value without any sales charge. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his Class A Shares in the Fund, there may be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly.
Financial institutions may charge additional fees for their services.

PURCHASING SHARES BY WIRE

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

PURCHASING SHARES BY CHECK

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE
Class A shareholders may exchange all or some of their shares for Class A
Shares of other Federated Funds in the Federated Funds at net asset value.
Neither the Fund nor any of the Federated Funds imposes any additional fees
on qualifying exchanges. Shareholders in certain other Federated Funds may
exchange their shares for Class A Shares.

REQUIREMENTS FOR EXCHANGE

Shareholders using this privilege must exchange Shares having a net asset
value equal to the minimum investment requirements of the fund into which
the exchange is being made. Before the exchange, the shareholder must
receive a prospectus of the fund for which the exchange is being made.

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a capital gain or
loss may be realized.

MAKING AN EXCHANGE

Instructions for exchanges for the Liberty Family of Funds or certain
Federated Funds (where applicable) may be given in writing or by telephone.
Written instructions may require a signature guarantee. Shareholders of the
Fund may have difficulty in making exchanges by telephone through brokers
and other financial institutions during times of drastic economic or market
changes. If a shareholder cannot contact his broker or financial institution
by telephone, it is recommended that an exchange request be made in writing
and sent by overnight mail to Federated Shareholder Services Company, 1099
Hingham Street, Rockland, Massachusetts 02370-3317.

TELEPHONE INSTRUCTIONS

HOW TO REDEEM SHARES
Shares are redeemed at their net asset value, less any applicable contingent
deferred sales charge, next determined after the Fund receives the
redemption request. Investors who redeem shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemptions will be made on days on which the Fund computes its net asset
value. Redemption requests must be received in proper form and can be made
as described below.

REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION

Shares of the Fund may be redeemed by calling your financial institution to
request the redemption. Shares will be redeemed at the net asset value, less
any applicable contingent deferred sales charge next determined after the
Fund receives the redemption request from the financial institution.
Redemption requests through a registered broker/dealer must be received by
the broker before 4:00 p.m. (Eastern time) and must be transmitted by the
broker to the Fund before 5:00 p.m. (Eastern time) in order for shares to be
redeemed at that day's net asset value. Redemption requests through other
financial institutions (such as banks) must be received by the financial
institution and transmitted to the Fund before 4:00 p.m. (Eastern time) in
order for shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this service.

REDEEMING SHARES BY TELEPHONE

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

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, MA
02266-8600. If certificates have been issued, they should be sent unendorsed
with the written request by registered or certified mail to the address
noted above.

The written request should state: the Fund name and the Share Class name;
the account name as registered with the Fund; the account number; and the
number of shares to be redeemed or the dollar amount requested. All owners
of the account must sign the request exactly as the shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.

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

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares, and
the fluctuation of the net asset value of shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that shares are sold with a sales charge, it is not advisable for
shareholders to continue to purchase shares while participating in this
program.

CONTINGENT DEFERRED SALES CHARGE

Class A Shares purchased under a periodic special offering with the proceeds
of a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge of .50 of 1.00% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption.

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) shares held for more than
one full year from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will not be
subject to a contingent deferred sales charge. In computing the amount of
the applicable contingent deferred sales charge, redemptions are deemed to
have occurred in the following order: (1) shares acquired through the
reinvestment of dividends and long-term capital gains; (2) shares held for
more than one full year from the date of purchase; and (3) shares held for
less than one full year from the date of purchase on a first-in, first-out
basis. A contingent deferred sales charge is not assessed in connection with
an exchange of Fund Shares for shares of other funds in the Federated Funds
in the same class (see "Exchange Privilege"). Any contingent deferred sales
charge imposed at the time the exchanged for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which
he became a shareholder of the exchanged-from shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT
DEFERRED SALES CHARGE

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions 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; and (3) involuntary
redemptions by the Fund of shares in shareholder accounts that do not comply
with the minimum balance requirements. No contingent deferred sales charge
will be imposed on redemptions of shares held by Trustees, employees and
sales representatives of the Fund, the distributor, or affiliates of the
Fund or distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the distributor; and
their immediate family members; and spouses and children under the age of 21
of the aforementioned persons. Finally, no contingent deferred sales charge
will be imposed on the redemption of shares originally purchased through a
bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940, as amended, or retirement plans where the third party
administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates, or any other financial institution, to
the extent that no payments were advanced for purchases made through such
entities. The Fund reserves the right to discontinue elimination of the
contingent deferred sales charge. Shareholders will be notified of such
elimination. Any shares purchased prior to the termination of such waiver
would have the contingent deferred sales charge eliminated as provided in
the Fund's prospectus at the time of the purchase of the shares. If a
shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to
such elimination.

ACCOUNT AND SHARE
INFORMATION

CERTIFICATES AND CONFIRMATIONS

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Confirmations are sent to report dividends paid.

DIVIDENDS

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES

FUND INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

INVESTMENT ADVISER

Investment decisions for the Fund are made by Federated Management (the
"Adviser"), the Fund's investment adviser, subject to direction by the
Trustees. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
The Adviser's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to .75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than
the advisory fees paid by other mutual funds in general, is comparable to
fees paid by other mutual funds with similar objectives and policies. The
Adviser may voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses. This does not include reimbursement to the Fund
of any expenses incurred by shareholders who use the transfer agent's
subaccounting facilities. The Adviser can terminate this voluntary waiver at
any time at its sole discretion. The Adviser has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.

ADVISER'S BACKGROUND

Federated Management, a Delaware business trust organized on April 11, 1989,
is a registered investment adviser under the Investment Advisers Act of
1940, as amended. It is a subsidiary of Federated Investors. All of the
Class A (voting) Shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.

Federated Management and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private
accounts. Certain other subsidiaries also provide administrative services to
a number of investment companies. With over $72 billion invested across more
than 260 funds under management and/or administration by its subsidiaries,
as of December 31, 1995, Federated Investors is one of the largest
investment managers in the United States. With more than 1,750 employees,
Federated continues to be led by the management who founded the company in
1955. Federated funds are presently at work in and through 4,000 financial
institutions nationwide. More than 100,000 investment professionals have
selected Federated funds for their clients.
Peter R. Anderson has been the Fund's portfolio manager since the Fund's
inception date. Mr. Anderson joined Federated Investors in 1977 and has been
an Executive Vice President of the Fund's investment adviser from 1989 to
1993. Mr. Anderson is a Chartered Financial Analyst and received his M.B.A.
with a concentration in Finance from the University of Virginia.

DISTRIBUTION OF CLASS A SHARES

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

State securities laws may require certain financial institutions such as
depository institutions to register as dealers.

DISTRIBUTION PLAN AND
SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the distributor may be paid a fee in
an amount computed at an annual rate of up to .25% for Class A Shares of the
average daily net assets of shares to finance any activity which is
principally intended to result in the sale of shares subject to the
Distribution Plan. The Fund does not currently make payments to the
distributor or charge a fee under the Distribution Plan for Class A Shares,
and shareholders of Class A Shares will be notified if the Fund intends to
charge a fee under the Distribution Plan. For Class A Shares, the
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales services or distribution-related support services as agents
for their clients or customers.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Fund may make payments of up to 0.25% of the average daily net
asset value of Class A Shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts ("Shareholder
Services"). Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The scheduled of such fees and the basis upon which such fees
will be paid will be determined from time to time by the Fund and Federated
Shareholder Services.

SHAREHOLDER SERVICES

The Fund has entered into a Shareholder Services Agreement with Federated
Shareholder Services, a subsidiary of Federated Investors, under which the
Fund may make payments of up to 0.25% of the average daily net asset value
of Shares to obtain certain personal services for shareholders and for the
maintenance of shareholder accounts ("Shareholder Services"). Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions
to perform shareholder services. Financial institutions will receive fees
based upon shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be determined from
time to time by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on assets in excess of $750 million
</TABLE>

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

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION

VOTING RIGHTS

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund. Unless otherwise exempt, shareholders are required to
pay federal income tax on any dividends and other distributions, including
capital gains distributions, received. This applies whether dividends and
distributions are received in cash or as additional shares. Distributions
representing long-term capital gains, if any, will be taxable to
shareholders as long-term capital gains no matter how long the shareholders
have held the shares. No federal income tax is due on any dividends earned
in an IRA or qualified retirement plan until distributed.

STATE AND LOCAL TAXES

In the opinion of Houston, Houston & Donnelly, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for each
class of shares.

Total return represents the change, over a specific period of time, in the
value of an investment in Class A Shares after reinvesting all income and
capital gains distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.

The yield of Class A Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by Class A Shares over a thirty-day period by the maximum offering
price per share of each class on the last day of the period. This number is
then annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by Class A Shares and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.

From time to time, advertisements for Class A Shares of the Fund may refer
to ratings, rankings, and other information in certain financial
publications and/or compare the performance of Class A Shares to certain
indices.

OTHER CLASSES OF SHARES

As of the date of this prospectus, the Fund also offers two other classes of
shares called Class B Shares and Class C Shares. This prospectus relates
only to Class A Shares.

Class B Shares are sold primarily to customers of financial institutions,
subject to a maximum contingent deferred sales charge of 5.50%. The Fund has
also adopted a Distribution Plan whereby the distributor is paid a fee of up
to .75% and a Shareholder Services fee of up to .25% of the Class B Shares'
average daily net assets with respect to Class B Shares. Investments in
Class B Shares are subject to a minimum initial investment of $1,500, unless
the investment is in a retirement account, in which case the minimum
investment is $50.

Class C Shares are sole primarily to customers of financial institutions at
net asset value with no initial sales charge. Class C Shares are distributed
pursuant to a Distribution Plan adopted by the Fund whereby the distributor
is paid a fee of up to .75%, in addition to a Shareholder Services fee of
.25% of the Class C Shares' average daily net assets. In addition, Class C
Shares may be subject to certain contingent deferred sales charges.
Investments in Class C Shares are subject to a minimum initial investment of
$1,500, unless the investment is in a retirement account, in which case the
minimum investment is $50.

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

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

APPENDIX

DESCRIPTION OF BOND RATINGS

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATINGS

AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

CC -- The rating "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" debt rating.

C -- The rating "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.

CI -- The rating "CI" is reserved for income bonds on which no interest is
being paid.

MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS

AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in AAA securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.

Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.

CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.

C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

FITCH INVESTORS SERVICE, INC.,
LONG-TERM DEBT RATINGS

CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C -- Bonds are in imminent default in payment of interest or principal.

DDD, DD, AND D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.

ADDRESSES

Federated Capital Appreciation Fund
(formerly, Federated Exchange Fund, Ltd.)
Class A Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779

INVESTMENT ADVISER

Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219

FEDERATED CAPITAL
APPRECIATION FUND

(FORMERLY, FEDERATED EXCHANGE FUND, LTD.)
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

An Open-End,
Diversified Management
Investment Company

December 31, 1996

[Graphic]
Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

[Graphic]

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

Cusip 314172701
G01489-03-A (12/96)

FEDERATED CAPITAL APPRECIATION FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
combined prospectus for Class A Shares, Class B Shares, and Class C
Shares of Federated Capital Appreciation Fund (the "Fund") dated
December 31, 1996. This Statement is not a prospectus. You may request
a copy of a prospectus or a paper copy of this Statement, if you have
received it electronically, free of charge by calling 1-800-341-7400.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

[LOGO]

Federated Securities Corp. is the distributor of the Fund and is a
subsidiary of Federated Investors.
Cusip 314172701
Cusip 314172800
Cusip 314172883
G01489-02 (12/96)

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Convertible Securities 1
Temporary Investments 1
Warrants 2
When-Issued and Delayed Delivery Transactions 2
Repurchase Agreements 2
Futures and Options Transactions 2
Foreign Currency Transactions 4
Restricted and Illiquid Securities 6
Lending of Portfolio Securities 6
Reverse Repurchase Agreements 6
Portfolio Turnover 6
INVESTMENT LIMITATIONS 7

FEDERATED EQUITY FUNDS MANAGEMENT 9

Fund Ownership 13
Trustees Compensation 14
Trustee Liability 14
INVESTMENT ADVISORY SERVICES 15

Adviser to the Fund 15
Advisory Fees 15
Other Related Services 15
BROKERAGE TRANSACTIONS 15

OTHER SERVICES 16

Fund Administration 16

Custodian 16
Transfer Agent 16
Independent Auditors 16
PURCHASING SHARES 16

Distribution Plan and Shareholder Services
Agreement 16
Conversion to Federal Funds 17
Purchases by Sales Representatives, Trustees,
and Employees 17
Exchanging Securities for Fund Shares 17
DETERMINING NET ASSET VALUE 18

Determining Market Value of Securities 18
REDEEMING SHARES 18

Redemption in Kind 18
MASSACHUSETTS PARTNERSHIP LAW 19

EXCHANGING SECURITIES FOR SHARES 19

Tax Consequences 19
TAX STATUS 19

The Fund's Tax Status 19
Shareholders' Tax Status 19
TOTAL RETURN 20

YIELD 20

PERFORMANCE COMPARISONS 21

ABOUT FEDERATED INVESTORS 22

APPENDIX 24

GENERAL INFORMATION ABOUT THE FUND

Federated Capital Appreciation Fund (the `Fund'') is an investment
portfolio of Federated Equity Funds (the "Trust"). The Trust was
established as a business trust under the laws of the Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated April 17, 1984,
under the name `Federated Growth Trust.'' The Trust later changed its name
to `Federated Equity Funds.'' The Declaration of Trust permits the Trust
to offer separate series and classes of shares. The Fund was created for
the purpose of soliciting the shareholders of Federated Exchange Fund,
Ltd., a California Limited Partnership, to exchange their partnership
interests for shares of beneficial interest in the Class A Shares of the
Fund. Until this transaction is completed, or until management of the Fund
determines that it will abandon its plan to acquire the assets of Federated
Exchange Fund, Ltd. in a reorganization transaction, shares of the Fund
will not be available for public investment. The Fund's address is Liberty
Center, Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.
Shares of the Fund are offered in three classes known as Class A Shares,
Class B Shares, and Class C Shares (individually and collectively referred
to as "Shares" as the context may require). This Combined Statement of
Additional Information relates to all three classes of Shares.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
CONVERTIBLE SECURITIES
As with all fixed-income securities, various market forces influence the
market value of convertible securities, including changes in the level if
interest rates. As the level of interest rates increases, the market value

of convertible securities may decline and, conversely, as interest rates
decline, the market value of convertible securities may increase. The
unique investment characteristic of convertible securities, the right to be
exchanged for the issuer's common stock, causes the market value of
convertible securities to increase when the underlying common stock
increases. However, since securities prices fluctuate, there can be no
assurance of capital appreciation, and most convertible securities will not
reflect quite as much capital appreciation as their underlying common
stocks. When the underlying common stock is experiencing a decline, the
value of the convertible security tends to decline to a level approximating
the yield-to maturity basis of straight nonconvertible debt of similar
quality, often called `investment value,'' and may not experience the same
decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege. If this appreciation
potential is not realized, the premium may not be recovered.

TEMPORARY INVESTMENTS
The temporary investments in which the Fund may invest include, but are not
limited to:
commercial paper rated A-1 or A-2 by Standard & Poor's Ratings
Group, Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1
or F-2 by Fitch Investors Service, Inc., and Europaper rated A-1, A-2,
Prime-1, or Prime-2. In the case where commercial paper or Europaper
has received different ratings from different rating services, such

commercial paper or Europaper is an acceptable temporary investment so
long as at least one rating is one of the preceding high-quality
ratings and provided the Fund's investment adviser, Federated
Management (the `Adviser''), has determined that such investment
presents minimal credit risks;
instruments of domestic and foreign banks and savings and loans if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is insured
by the Federal Deposit Insurance Corporation. These instruments may
include Eurodollar Certificates of Deposits (`ECDs''), Yankee
Certificates of Deposit (`Yankee CDs''), and Eurodollar Time Deposits
(`ETDs'');

obligations of the U.S. government or its agencies or
instrumentalities;
repurchase agreements; and
other short-term instrument which are not rated but are determined
by the Adviser to be of comparable quality to the other temporary
obligations in which the Fund may invest.
INVESTMENT RISKS
ECDs, ETDs, Yankee CDs, and Europaper are subject to somewhat
different risks than domestic obligations of domestic banks or
corporations. Examples of these risks include international, economic
and political developments, foreign governmental restrictions that may
adversely affect the payment of principal or interest, foreign
withholding or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing entity, and the
possible impact of interruptions in the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and

Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing and
recordkeeping, and the public availability of information. These
factors will be carefully considered by the Adviser in selecting
investments for the Fund.
WARRANTS
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock
at issuance) valid for a specific period of time. Warrants may have a life
ranging from less than a year to twenty years or may be perpetual. However,
most warrants have expiration dates after which they are worthless. In
addition, if the market price of the common stock does not exceed the
warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them.
The percentage increase or decrease in the market price of the warrant may
tend to be greater than the percentage increase or decrease in the market
price of the optioned common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery

transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy pursuant
to guidelines established by the Board of Trustees (the "Trustees").
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put options on portfolio
securities and put options on financial futures contracts, and writing call
options on futures contracts. The Fund may also write covered call options
on portfolio securities to attempt to increase its current income.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract (`going short'') and the buyer who agrees to take
delivery of the security (`going long'') at a certain time in the
future.

In the fixed-income securities market, price moves inversely to
interest rates. A rise in rates means a drop in price. Conversely, a
drop in rates means a rise in price. In order to hedge its holdings of
fixed-income securities against a rise in market interest rates, the
Fund could enter into contracts to deliver securities at a
predetermined price (i.e., `go short'') to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would `go
long''(agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures
contracts. Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set date at
a specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or before
a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the
hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and
the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale
of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.

Alternatively, the Fund may exercise its put option. To do so, it
would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the
option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the
Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the
premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio
against an increase in market interest rates. When the Fund writes a
call option on a futures contract, it is undertaking the obligation of
assuming a short futures position (selling a futures contract) at the
fixed strike price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing the prices
of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can offset the drop in value of the Fund's fixed-income
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second
option will be less than the premium received by the Fund for the

initial option. The net premium income of the Fund will then offset
the decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the
futures contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
``MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of `initial margin'' in
cash or U.S. Treasury bills with its custodian (or the broker, if
legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve
the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good-faith
deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called `variation margin,'' equal to the
daily change in value of the futures contract. This process is known

as `marking to market.'' Variation margin does not represent a
borrowing or loan by the Fund but is instead settlement between the
Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, the
Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put option gives the Fund, in return for a premium, the right to sell
the underlying security to the writer (seller) at a specifies price
during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call
options either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any additional
consideration).
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are
a function of such factors as supply and demand in the currency
exchange markets, international balances of payments, governmental
intervention, speculation and other economic and political conditions.
Although the Fund values its assets daily in U.S. dollars, the Fund

may not convert its holdings of foreign currencies to U.S. dollars
daily. The Fund may incur conversion costs when it converts its
holdings to another currency. Foreign exchange dealers may realize a
profit on the difference between the price at which the Fund buy and
sell currencies.
The Fund will engage in foreign currency exchange transactions in
connection with their investments in the securities. The Fund will
conduct their foreign currency exchange transactions either on a spot
(i.e. cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward contracts to purchase or sell
foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a
foreign currency involved in an underlying transaction. However,
forward foreign currency exchange contracts may limit potential gains
which could result from a positive change in such currency
relationships. The Fund's investment adviser believes that it is
important to have the flexibility to enter into forward foreign
currency exchange contracts whenever it determines that it is in the
Fund's best interest to do so. The Fund will not speculate in foreign
currency exchange.
The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when the Fund
would be obligated to deliver an amount of foreign currency in excess
of the value of their portfolio securities or other assets
denominated in that currency or, in the case of a `cross-hedge''
denominated in a currency or currencies that the Fund's investment

adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund does not
enter into a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price
on a specified date or during the option period. The owner of a call
option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the
obligation to sell the currency.
When the option is exercised, the seller (i.e., writer) of the option
is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its
position during the option period at any time prior to expiration.
A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency
depreciates in value. Although purchasing a foreign currency option
can protect the Fund against an adverse movement in the value of a
foreign currency, the option will not limit the movement in the value
of such currency. For example, if the Fund were holding securities
denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the
value of the currency, the Fund would not have to exercise its put
option. Likewise, if the Fund were to enter into a contract to
purchase a security denominated in foreign currency and, in
conjunction with that purchase, were to purchase a foreign currency
call options to hedge against a rise in value of the currency, and if

the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the
amount of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets
in foreign currency options are relatively new, and the Fund's ability
to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Fund's investment adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options
are not greater than the risks in connection with the underlying
currency, there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the
price of the option position may vary with changes in the value of
either or both currencies and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign
currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than

$1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of
very large transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e. less than $1 million)
where rates may be less favorable. The interbank market in foreign
currencies is a global, around-the-clock market. To the extent that
the U.S. option markets are closed while the markets for the
underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives
as it would through the use of forward foreign currency exchange
contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions
instead of forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND
RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those
associated with options on foreign currencies, as described above.

Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish and close out
positions on such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Fund will not purchase or
write options on foreign currency futures contracts unless and until,
in the opinion of the Fund's investment adviser, the market for such
options has developed sufficiently that the risks in connection with
such options are not greater than the risks in connection with
transactions in the underlying foreign currency futures contracts.
Compared to the purchase or sale of foreign currency futures
contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Fund because the maximum amount at
risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or
futures contract.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under an Securities and Exchange
Commission staff position set forth in the adopting release for Rule 144A
under the Securities Act of 1933, as amended, (the `Rule''). The Rule is a
non-exclusive safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under Rule 144A. The

Fund believes that the staff of the Securities and Exchange Commission has
left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trustees.
The Trustees consider the following criteria in determining the liquidity
of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and

agrees that on a stipulated date in the future, the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able to
avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objective. Securities in the Fund's
portfolio will be sold whenever the Adviser believes it is appropriate to
do so in light of the Fund's investment objective, without regard to the
length of time a particular security may have been held. The Adviser does
not anticipate that portfolio turnover will result in adverse tax
consequences. Any such trading will increase the Fund's portfolio turnover
rate and transaction costs. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 100%.

During the period from January 1, 1996 (start or business) to October 31,
1996, the Fund's portfolio turnover rate was 79%. For the year ended
December 31, 1995 the portfolio turnover rate was 81%.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying index futures
contracts, put options on stock index futures, put options on
financial futures and portfolio securities, and writing covered call
options, but may obtain such short-term credits as are necessary for
the clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.

ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure, or to facilitate management of
the portfolio by enabling the Fund to meet redemption requests where
the liquidation of portfolio securities is deemed to be inconvenient
or disadvantageous. The Fund will not purchase any securities while
any such borrowings are outstanding.

PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing. Margin deposits for the purchase and sale of financial
futures contracts and related options are not deemed to be a pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities.
This shall not prevent the purchase or holding of corporate or
government bonds, debentures, notes, certificates of indebtedness, or
other debt securities of an issuer, repurchase agreements, or other
transactions which are permitted by the Fund's investment objective
and policies or Declaration of Trust.
DIVERSIFICATION OF INVESTMENTS

The Fund will not purchase the securities of any issuer (other than
securities of the U.S. government, its agencies, or instrumentalities,
or instruments secured by securities of such issuers, such as
repurchase agreements) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of such issuer or
acquire more than 10% of any class of voting securities of any issuer.
For these purposes, the Fund takes all common stock and all preferred

stock of an issuer each as a single class, regardless of priorities,
series, designations, or other differences.

INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material changes in these limitations become effective.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank or savings association having capital, surplus,
and undivided profits in excess of $100,000,000 at the time of investment
to be "cash items."
The Fund has no present intent to borrow money or sell securities short in
excess of 5% of the value of its total assets in the coming fiscal year.
To comply with registration requirements in certain states, the Fund will
not invest in real estate limited partnerships or oil, gas, or other
mineral leases.

FEDERATED EQUITY FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Equity Funds, and principal occupations.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee,
University of Pittsburgh; Director or Trustee of the Funds.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.;
formerly, Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.;
Director, Ryan Homes, Inc.; Director or Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director,
University of Pittsburgh Medical Center - Downtown; Member, Board of
Directors, University of Pittsburgh Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian and Montefiore Hospitals; Director
or Trustee of the Funds.

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense University, U.S. Space Foundation
and Czech Management Center; President Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory Council for Environmental Policy and
Technology, Federal Emergency Management Advisory Board and Czech
Management Center; Director or Trustee of the Funds.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929
President
Trustee, Federated Investors; President and/or Trustee of some of the
Funds; staff member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.

Edward C. Gonzales
Federated Investors Tower

Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of
some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds; Treasurer of some of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923

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

*This Trustee is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.
@Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal

Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 4, 1996, the following shareholder of record owned 5% or
more of the outstanding Class A Shares of the Fund: Paulette M Boiardi, New
York, NY , owned approximately 91,356 shares (8.03%).
As of December 4, 1996, the following shareholder of record owned 5% or
more of the outstanding Class C Shares of the Fund: MLPF&S for the sloe
benefit of its customers, Jacksonville, Florida, owned approximately 3,208
shares (36.57%); Painewebber for the sole benefit of David A Garza &
Stephanie K Garza, Austin, Texas, 1,033 shares (11.79%).

TRUSTEES COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +

John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 54 other investment companies in the Fund
Complex
Thomas G. Bigley $1,312.97 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John T. Conroy, Jr. $1439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
William J. Copeland $1439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
James E. Dowd $1439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D. $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr. $1439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund
Complex
Peter E. Madden $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Gregor F. Meyer $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John E. Murray, Jr. $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Wesley W. Posvar $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Marjorie P. Smuts$1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex

TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It
is a subsidiary of Federated Investors. All the voting securities of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue.
The Adviser shall not be liable to the Trust, the Fund, or any shareholder
of the Fund 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
Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus.

During the fiscal year ended January 1, 1996, December 31, 1995 and
December 31, 1994, the Fund's adviser earned $671,263, $605,742 and
$585,292, respectively, of which $244,717, $0 and $0, respectively, was
voluntarily waived.

STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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 shares of funds offered by Federated Securities
Corp.
BROKERAGE TRANSACTIONS

securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its in advising the Fund and other accounts. To the extent
that receipt of these services may supplant services for which the Adviser
or its affiliates might otherwise have paid, it would tend to reduce their
expenses. The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided.

For the fiscal year ended October 31, 1996, the Fund paid total brokerage
commissions of $186,964.

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

OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative Services, and
Federated Administrative Services, Inc. may hereinafter collectively be
referred to as the "Administrators." For the fiscal years ended October,
1996, December 31, 1995 and December 31, 1994, the Administrators earned
$154,165, 125,000 and $145,638, respectively.
CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Federated Services Company,
Pittsburgh, Pennsylvania, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid
for this service is based upon the level of the Fund's average net assets
for the period plus out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records and receives a fee based on the size, type, and number of accounts
and transactions made by shareholders.

INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford
Centre, Pittsburgh, Pennsylvania 15219.

PURCHASING SHARES

Except under certain circumstances described in the prospectus, Shares are
sold at their net asset value (plus a sales load on Class A Shares only) on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares is explained in each prospectus under "How To Purchase
Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services as appropriate, to
stimulate distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Class A
Shares, Class B Shares and Class C Shares of the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying

potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.

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

For the fiscal year ended October 31, 1996, the Fund paid distribution fees
for Class B Shares and Class C Shares in the amounts of $15,000 and $1,642,
respectively.
For the fiscal year ended October 31, 1996, the Fund paid shareholder
service fees for Class A Shares, Class B Share and Class C Shares in the
amounts of $218,207, $5,000 and $547, respectively.

CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds before shareholders
begin to earn dividends. Federated Services Company acts as the
shareholder's agent in depositing checks and converting them to federal
funds.
PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES
Trustees, employees, and sales representatives of the Fund, the Adviser,
and Federated Securities Corp., or their affiliates, or any investment
dealer who has a sales agreement with Federated Securities Corp., and their

spouses and children under 21, may buy Class A Shares at net asset value
without a sales charge. Shares may also be sold without a sales charge to
trusts or pension or profit-sharing plans for these persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange convertible securities they already own for Shares,
or they may exchange a combination of convertible securities and cash for
Shares. Any securities to be exchanged must meet the investment objective
and policies of the Fund, must have a readily ascertainable market value,
must be liquid, and must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund reserves
the right to reject any security, even though it appears on the list, and
the right to amend the list of acceptable securities at any time without
notice to brokers or investors.
An investment broker acting for an investor should forward the securities
in negotiable form with an authorized letter of transmittal to Federated
Securities Corp. Federated Securities Corp. will determine that the
transmittal papers are in good order and will then forward them to the
Fund's custodian, State Street bank and Trust Company,. The Fund will
notify the broker of its acceptance and valuation of the securities within
five business days of their receipt by State Street Bank and Trust Company.
The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will
be issued for each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities become
the property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in each prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities, other than options, are
determined as follows:
o according to the last sale price on a national securities exchange, if
available;
o in the absence of recorded sales for equity securities, according to
the mean between the last closing bid and asked prices and for bonds
and other fixed income securities as determined by an independent
pricing service;
o for unlisted equity securities, the latest bid prices; or
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or at fair
value as determined in good faith by the Board of Trustees.

Options are valued at the market values established by the exchanges at the
close of option trading unless the Trustees determine in good faith that
another method of valuing option positions is necessary.
REDEEMING SHARES

The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus
under "How To Redeem Shares." Although the transfer agent does not charge
for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Class B Shares redeemed within one to six years of purchase and Class C
Shares and applicable Class A Shares redeemed within one year of purchase
may be subject to a contingent deferred sales charge. The amount of the
contingent deferred sales charge is based upon the amount of the
administrative fee paid at the time of purchase by the distributor to the
financial institution for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial institutions
elect to receive an amount less than the administrative fee that is stated
in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder
will be reduced accordingly.
REDEMPTION IN KIND
Although the Fund intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To
the extent available, such securities will be readily marketable.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, as amended, under which the Fund is obligated to

redeem Shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of the respective class's net asset value during any 90-day
period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will
pay all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way as the Fund determines net asset value.
The portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.

ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales
Charge may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the fiscal year end. Redemptions on a qualifying
Systematic Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%
quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the Contingent Deferred Sales
Charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated Funds, the time for which the exchanged-for
Shares are to be held will be added to the time for which exchanged-from

Shares were held for purposes of satisfying the 12-month holding
requirement. However, for purposes of meeting the $10,000 minimum account
value requirement, Class B Share account values will not be aggregated.
MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect
its shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of its shareholders for acts or
obligations of the Trust. These documents require notice of this
disclaimer to be given in each agreement, obligation, or instrument the
Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required to use its property to protect
or compensate the shareholder. On request, the Trust will defend any claim
made and pay any judgment against a shareholder for any act or obligation
of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations
to indemnify shareholders and pay judgments against them.

EXCHANGING SECURITIES FOR SHARES

Investors may exchange securities they already own for Shares, or they may
exchange a combination of securities and cash for Shares. An investor
should forward the securities in negotiable form with an authorized letter
of transmittal to Federated Securities Corp. The Fund will notify the
investor of its acceptance and valuation of the securities within five
business days of their receipt by State Street Bank.

The Fund values securities in the same manner as the Fund values its
assets. The basis of the exchange will depend upon the net asset value of
Shares on the day the securities are valued. One Share of the Fund will be
issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, or other rights attached to the securities become the
property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Shares, a gain or loss may be realized by the investor.
TAX STATUS

THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies and to receive the
special tax treatment afforded to such companies. To qualify for this
treatment, the Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.

SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional Shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any short-term capital
gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have
held the Fund Shares.
TOTAL RETURN

The Funds average annual total returns for Class A Shares for the period
from January 1, 1996 (start of business), to October 31, 1996, was 7.13%.
The Fund's average annual total returns for Class A Shares for the one-
year, five-year and ten-year periods ended October 31, 1996 was 13.53%,
13.88% and 11.56%.
The Fund's average annual total returns for Class B Shares and Class C
Shares, for the period from January 4, 1996 (date of initial public
offering), to October 31, 1996, was 6.38% and 11.03%, respectively.

The average annual total return for each class of Shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the net asset value per
share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge adjusted over the

period by any additional Shares, assuming the quarterly reinvestment of all
dividends and distributions. Any applicable contingent deferred sales
charge is deducted from the ending value of the investment based on the
lesser of the original purchase price or the net asset value of Shares
redeemed.
YIELD

The Fund's yield for Class A Shares, Class B Shares and Class C Shares
for the thirty-day period ended October 31, 1996 were 0.67%, <0.04%> and
<0.04%>, respectively.

The yield for all classes of Shares of the Fund is determined by dividing
the net investment income per share (as defined by the Securities and
Exchange Commission) earned by any class of Shares over a thirty-day period
by the maximum offering price per Share of the respective class of Shares
on the last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any class of Shares because of certain
adjustments required by the Securities and Exchange Commission and,
therefore, may not correlate to the dividends or other distributions paid
to the shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any
class of Shares, the performance will be reduced for those shareholders
paying those fees.

PERFORMANCE COMPARISONS

The performance of each of the classes of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or any class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
The Fund may compare the performance of equity income funds to other types
of stock funds and indices.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
O LIPPER ANALYTICAL SERVICES, 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 specified period of time. From time to
time, the Fund will quote its Lipper ranking in the "convertible
securities" and `fixed income funds'' categories in advertising and
sales literature.
O DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in the
average price of stocks in any of its categories. It also reports
total sales for each group of industries. Because it represents the
top corporations of America, the DJIA index is a leading economic
indicator for the stock market as a whole.
O STANDARD & POOR'S RATINGS GROUP DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS (S&P 500), is a composite index of common stocks in industry,
transportation, and financial and public utility companies, which
compares total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the S&P 500 assumes
reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
O LIPPER GROWTH FUND AVERAGE is an average of the total returns for 580
growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.
O LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical
Services, Inc., an independent mutual fund rating service.
O 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.
VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common
equity securities. It is based on a geometric average of relative
price changes of the component stocks and does not include income.
O VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing,
Inc., analyzes price, yield, risk, and total return for equity and
fixed income mutual funds. The highest rating is One, and ratings are
effective for two weeks.
O CDA MUTUAL FUND REPORT, published by CDA Investment Technologies,
Inc., analyzes price, current yield, risk, total return, and average
rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.
O STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, 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 specified period of time. From time
to time, the Fund will quote its Strategic Insight ranking in the
"growth funds" category in advertising and sales literature.
O MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes
price, yield, risk, and total return for equity and fixed income
funds.
O STRATEGIC INSIGHT GROWTH FUNDS INDEX consists of mutual funds that
invest in well-established companies primarily for long-term capital
gains rather than current income.
O FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money Magazines,

among others--provide performance statistics over specified time
periods.
In addition, the Fund will, from time to time, use the following standard
convertible securities indices against which it will compare its
performance: Goldman Sachs Convertible 100; Kidder Peabody Convertible Bond
Index; Value Line Convertible Bond Index; and Dow Jones Utility Index.
The Fund may compare the performance of equity funds to other types of
stock funds and indices.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in any class of Shares based on quarterly reinvestment of
dividends over a specified period of time.
From time to time, the Fund may advertise the performance of any class of
Shares using charts, graphs, and descriptions, compared to federally
insured bank products, including certificates of deposit and time deposits
and to money market funds using the Lipper Analytical Services money market
instruments average. In addition, advertising and sales literature for the
Fund may use charts and graphs to illustrate the principles of dollar-cost
averaging and may disclose the amount of dividends paid by the Fund over
certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge or contingent deferred sales charge, as
applicable.
Advertising and other promotional literature may include charts, graphs,
and other illustrations using the Fund's returns, or returns in general,
that demonstrate basic investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment. In addition,
the Fund can compare its performance, or performance of the types of

securities in which it invests, to a variety of other investments, such as
bank savings accounts, certificates of deposit, and Treasury bills.

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

ABOUT FEDERATED INVESTORS

In the equity sector, Federated has more than 25 years' experience. As
of December 31, 1995, Federated managed 22 equity funds totaling

approximately $5.4 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated's value-
oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system that
was developed in the 1970s.

J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.**
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.

* Source: Investment Company Institute

TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated mutual funds are available to consumers through major brokerage
firms nationwide--including 200 New York Stock Exchange firms--supported by
more wholesalers than any other mutual fund distributor. Federated
Investors' service to financial professionals and institutions has earned
it high rankings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Division.

*source: Investment Company Institute

APPENDIX

STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
P-1--Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of senior short-term promissory
obligations. P-1 repayment capacity 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 earnings 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.
P-2--Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity 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, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATINGS
F-1+-- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1-- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issued rated
F-1+.
F-2-- Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment.

FEDERATED SMALL CAP STRATEGIES FUND

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

COMBINED PROSPECTUS

The shares of Federated Small Cap Strategies Fund (the "Fund") represent
interests in a diversified portfolio of Federated Equity Funds (the
"Trust"), an open-end management investment company (a mutual fund). The
investment objective of the Fund is to provide capital appreciation. Any
income received from the portfolio is entirely incidental. The Fund pursues
its investment objective by investing primarily in a portfolio of common
stocks of small capitalization companies.

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

The Fund has also filed a Statement of Additional Information dated December
31, 1996, with the Securities and Exchange Commission ("SEC"). The information

contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have
received your prospectus electronically, free of charge by calling
1-800-341-7400. To obtain other information or to make inquiries about the
Fund, contact your financial institution. The Statement of Additional
Information, material incorporated by reference into this document, and
other information regarding the Fund is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).

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

Prospectus dated December 31, 1996

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights 4
General Information 7
Investment Information 7
Investment Objective 7
Investment Policies 7
Investment Limitations 14
Net Asset Value 15
Investing in the Fund 15
How to Purchase Shares 16
Investing in Class A Shares 16
Investing in Class B Shares 18
Investing in Class C Shares 19
Special Purchase Features 20
Exchange Privilege 20
How to Redeem Shares 22
Special Redemption Features 23
Contingent Deferred Sales Charge 23
Elimination of Contingent Deferred
Sales Charge 24
Account and Share Information 25
Trust Information 26
Management of the Trust 26
Distribution of Shares 27
Administration of the Fund 29
Brokerage Transactions 29
Shareholder Information 30

Voting Rights 30
Tax Information 30
Federal Income Tax 30
State and Local Taxes 30
Performance Information 31
Addresses 32
</TABLE>

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee(3) 0.00%
Total Other Expenses (after expense reimbursement) 1.35%
Shareholder Services Fee 0.25%
Total Operating Expenses(4) 1.35%
</TABLE>

(1) Class A Shares purchased with the proceeds of a redemption of shares of
an unaffiliated investment company purchased or redeemed with a sales
charge and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1.00% for redemptions made
within one year of purchase. (See "Contingent Deferred Sales Charge.")

(2) The management fee has been reduced to reflect the voluntary waiver of
the management fee. The adviser can terminate this anticipated voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.75%.

(3) The Class A Shares has no present intention of paying or accruing the
12b-1 fee during the period ending October 31, 1997. If Class A Shares were
paying or accruing the 12b-1 fee, the Class A Shares would be able to pay up
to 0.25% of its average daily net assets for the 12b-1 fee. See "Trust
Information."

(4) The total Class A Shares operating expenses would have been 3.05% absent
the voluntary waiver of the management fee and the voluntary reimbursement
of certain other operating expenses.

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

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period; and
(3) payment of the maximum sales charge $68 $95 $125 $208
</TABLE>

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

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES

<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement) 1.35%
Shareholder Services Fee 0.25%
Total Operating Expenses(3)(4) 2.10%
</TABLE>

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

(2) The management fee has been reduced to reflect the voluntary waiver of
the management fee. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.75%.

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

(4) The total Class B Shares operating expenses would have been 3.80% absent
the voluntary waiver of the management fee and the voluntary reimbursement
of certain other operating expenses.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

You would pay the following expenses on the same
investment, assuming no redemption
$21 $66 $113 $223

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

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES

<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
<CAPTION>
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver)(2) 0.00%
12b-1 Fee 0.75%
Total Other Expenses (after expense reimbursement) 1.35%
Shareholder Services Fee 0.25%
Total Operating Expenses(3) 2.10%
</TABLE>

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of
the original purchase price or the net asset value of shares redeemed
within one year of their purchase date. (See "Contingent Deferred sales
Charge.")

(3) The total Class C Shares operating expenses would have been 3.80% absent
the voluntary waiver of the management fee and the voluntary reimbursement
of certain other operating expenses.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

You would pay the following expenses on the same
investment, assuming no redemption
$21 $66 $113 $243

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

FINANCIAL HIGHLIGHTS -- CLASS A SHARES
FEDERATED SMALL CAP STRATEGIES FUND

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

YEAR ENDED
OCTOBER 31,
1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.05)(b)
Net realized and unrealized gain (loss) on investments 4.75
Total from investment operations 4.70
LESS DISTRIBUTIONS
Distributions in excess from net investment income (0.02)(e)
NET ASSET VALUE, END OF PERIOD $14.68
TOTAL RETURN(C) 47.06%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.35%
Net operating loss (0.39%)
Expense waiver/reimbursement(d) 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $23,242
Average commission rate paid $0.0264
Portfolio turnover 83%
</TABLE>

(a) Reflects operations for the period from November 1, 1995 (date of
initial public investment) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

(e) Distributions in excess of net investment income were a result of
certain book and tax timing differences. These distributions do not
represent a return of capital for federal income tax purposes.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996 which can be
obtained free of charge.

FINANCIAL HIGHLIGHTS -- CLASS B SHARES
FEDERATED SMALL CAP STRATEGIES FUND

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

YEAR ENDED
OCTOBER 31,
1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.16)(b)
Net realized and unrealized gain (loss) on investments 4.78
Total from investment operations 4.62
NET ASSET VALUE, END OF PERIOD $14.62
TOTAL RETURN(C) 46.20%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.10%
Net operating loss (1.27%)
Expense waiver/reimbursement(d) 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $32,112
Average commission rate paid $0.0264
Portfolio turnover 83%
</TABLE>

(a) Reflects operations for the period from November 1, 1995 (date of
initial public offering) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996 which can be
obtained free of charge.

FINANCIAL HIGHLIGHTS -- CLASS C SHARES
FEDERATED SMALL CAP STRATEGIES FUND

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

Annual Report, which is incorporated by reference. This table should be read
in conjunction with the Fund's Financial Statements and Notes thereto, which
may be obtained from the Fund.

YEAR ENDED
OCTOBER 31,
1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.16)(b)
Net realized and unrealized gain (loss) on investments 4.76
Total from investment operations 4.60
NET ASSET VALUE, END OF PERIOD $14.60
TOTAL RETURN(C) 46.00%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.10%
Net operating loss (1.28%)
Expense waiver/reimbursement(d) 1.70%
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $5,496
Average commission rate paid $0.0264
Portfolio turnover 83%

(a) Reflects operations for the period from November 1, 1995 (date of
initial public offering) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996 which can be
obtained free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 17, 1984 under the name "Federated Growth
Trust." The Trust later changed its name to "Federated Equity Funds." The
Trust's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. The Declaration of Trust permits the Trust to offer separate
series of shares of beneficial interest representing interests in separate
portfolios of securities. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has established three classes of shares for the
Fund, known as Class A Shares, Class B Shares, and Class C Shares
(individually and collectively as the context requires, "Shares").

Shares of the Fund are designed for individuals and institutions seeking
capital appreciation by investing primarily in a portfolio of common stocks
of small capitalization companies.

For information on how to purchase shares of the Fund, please refer to "How
to Purchase Shares." The minimum initial investment for Class A Shares is
$500. The minimum initial investment for Class B Shares and Class C Shares
is $1500.

The Fund's current net asset value and offering price can be found in the
mutual funds section of local newspapers under "Federated Liberty Funds."

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide capital appreciation. Any
income received from the portfolio is entirely incidental. The investment
objective cannot be changed without approval of shareholders. While there is
no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus.

INVESTMENT POLICIES

The Fund pursues its investment objective by investing primarily in a
portfolio of common stocks of small capitalization companies. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
common stocks of small capitalization companies. Unless indicated otherwise,
the investment policies of the Fund may be changed by the Trustees without
the approval of shareholders. Shareholders will be notified before any
material changes in these policies become effective.

ACCEPTABLE INVESTMENTS

The securities in which the Fund invests include, but are not limited to:

* common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the Adviser to have potential for above-average appreciation;

* corporate securities and convertible securities;

* securities of foreign issuers;

* restricted and illiquid securities;

* securities of other investment companies; and

* securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.

SMALL CAPITALIZATION COMPANIES

Small capitalization companies are those companies that have a market
capitalization of $1 billion or less at the time of purchase. Small
capitalization companies are positioned for rapid growth in revenues or
earnings and assets, characteristics which may provide for significant
capital appreciation. Small companies often pay no dividends and current
income is not a factor in the selection of stocks. Smaller companies often
have limited product lines, markets, or financial resources, and they may be

dependent upon one or a few key people for management. (See "Equity
Investment Risk Considerations.") Many small capitalization companies tend
to have operating histories of less than three years.

CORPORATE SECURITIES

CONVERTIBLE SECURITIES

preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several of
these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives. The Fund invests in securities irrespective
of their ratings. Therefore, the convertible securities in which the Fund
invests may be rated below investment grade and considered speculative.

In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income

security) or its "conversion value" (i.e. its value upon conversion into its
underlying common stock). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the
security's underlying common stock. The price of a convertible security
tends to increase as the market value of the underlying stock rises, whereas
it tends to decrease as the market value of the underlying stock declines.
While no securities investment is without some risk, investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.

SYNTHETIC CONVERTIBLES

A "synthetic convertible" is created by combining distinct securities that

possess the two principal characteristics of a true convertible: a
fixed-income component and a convertibility component. This combination is
achieved by investing in nonconvertible fixed-income securities
(nonconvertible bonds, preferred stocks, and money market instruments) and
in warrants or call options traded on U.S. or foreign exchanges or in the
over-the-counter markets granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.

postponing purchase of a corresponding bond pending development of more
favorable market conditions.

A holder of a synthetic convertible faces the risk that the price of the
stock, or the level of the market index underlying the convertibility
component, will decline, causing a decline in the value of the call option
or warrant. Should the price of the stock or the level of the index fall
below the exercise price, and remain there throughout the exercise period,
the entire amount paid for the call option or warrant would be lost. Since a
synthetic convertible includes a fixed-income component, the holder of a
synthetic convertible also faces the risk that interest rates will rise,
causing a decline in the value of the fixed-income instrument. Finally, a
synthetic convertible can be expected to have greater transaction costs than
a true convertible security.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

speculative characteristics or are speculative. Lower-rated bonds or unrated
bonds are commonly referred to as "junk bonds." There is no minimal
acceptable rating for a security to be purchased or held in the Fund's
portfolio, and the Fund may, from time to time, purchase or hold convertible
and synthetic convertible securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to the
Combined Statement of Additional Information.

SECURITIES OF FOREIGN ISSUERS

securities. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting requirements, and
the possibility that there will be less information on such securities and
their issuers available to the public. In addition, there are restrictions
on foreign investments in other jurisdictions and there tends to be
difficulty in obtaining judgments from abroad and affecting repatriation of
capital invested abroad. Delays could occur in settlement of foreign
transactions, which could adversely affect shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be
less marketable than comparable United States securities. As a matter of
practice, the Fund will not invest in the securities of a foreign issuer if
any risk identified above appears to the Adviser to be substantial. The Fund
will not invest more than 20% of its assets in foreign securities.

PUT AND CALL OPTIONS

The Fund may purchase put options on its portfolio securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may
also write covered call options on all or any portion of its portfolio to
generate income. As a writer of a call option, the Fund has the obligation
upon exercise of the option during the option period to deliver the
underlying security upon payment of the exercise price. The Fund will write
call options on securities either held in its portfolio, or which it has the
right to obtain without payment of further consideration, or for which it

has segregated cash or U.S. government securities in the amount of any
additional consideration.

The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange. The Fund purchases and writes options only with
investment dealers and other financial institutions (such as commercial
banks or savings associations) deemed creditworthy by the Adviser.

Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third-party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded options
have a continuous liquid market while over-the-counter options may not. The
Fund will not buy call options or write put options, other than to close out
open option positions, without further notification to shareholders.

FUTURES AND OPTIONS ON FUTURES

The Fund may purchase and sell futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions. Futures contracts call for
the delivery of particular instruments at a certain time in the future. The
seller of the contract agrees to make delivery of the type of instrument
called for in the contract, and the buyer agrees to take delivery of the
instrument at the specified future time.

Stock index futures contracts are based on indexes that reflect the market

value of common stock of the firms included in the indexes. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the differences between the value of
the index at the close of the last trading day of the contract and the price
at which the index contract was originally written.

The Fund may also write call options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at
a fixed price at any time during a specified period if the option is
exercised. Conversely, as purchaser of a put option on a futures contract,
the Fund is entitled (but not obligated) to sell a futures contract at the
fixed price during the life of the option.

The Fund may also write put options and purchase call options on futures
contracts as a hedge against rising purchase prices of portfolio securities.
The Fund will use these transactions to attempt to protect its ability to
purchase portfolio securities in the future at price levels existing at the
time it enters into the transactions. When the Fund writes a put option on a
futures contract, it is undertaking to buy a particular futures contract at
a fixed price at any time during a specified period if the option is
exercised. As a purchaser of a call option on a futures contract, the Fund
is entitled (but not obligated) to purchase a futures contract at a fixed
price at any time during the life of the option.

would exceed 5% of the market value of the Fund's total assets. When the
Fund purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
custodian (or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures contracts are
unleveraged. When the Fund sells futures contracts, it will either own or
have the right to receive the underlying future or security, or will make
deposits to collateralize the position as discussed above.

RISKS. When the Fund uses financial futures and options on futures as
hedging devices, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the Adviser could be incorrect in its
expectations about the direction or extent of market factors such as stock
price movements. In these events, the Fund may lose money on the futures
contract or option.

It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the Adviser will consider
liquidity before entering into these transactions, there is no assurance
that a liquid secondary market on an exchange or otherwise will exist for
any particular futures contract or option at any particular time. The Fund's
ability to establish and close out futures and options positions depends on
this secondary market.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restrictions on resale
under federal securities law. However, the Fund will limit investments in
illiquid securities, including certain restricted securities not determined
by the Trustees to be liquid, non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than
seven days after notice, to 15% of its net assets.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

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

TEMPORARY INVESTMENTS

In such proportions as, in the judgment of its Adviser, prevailing market
conditions warrant, the Fund may, for temporary defensive purposes, invest
in:

* short-term money market instruments;

* securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and

* repurchase agreements.

REPURCHASE AGREEMENTS

Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
other securities to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund
could receive less than the repurchase price on any sale of such securities.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

not yet been invested in other portfolio instruments. It should be noted
that investment companies incur certain expenses such as management fees
and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The Adviser will waive
its investment advisory fee on assets invested in securities of open-end
investment companies.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the Fund may lend portfolio
securities on a short-term or a long-term basis, to broker/dealers, banks,
or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral equal to at least
100% of the value of the securities loaned at all times.

DERIVATIVE CONTRACTS AND SECURITIES

commodity, or index. Certain types of securities that incorporate the
performance characteristics of these contracts are also referred to as
"derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages, or other obligations.

EQUITY INVESTMENT RISK CONSIDERATIONS

As with other mutual funds that invest primarily in equity securities, the
Fund is subject to market risks. That is, the possibility exists that common
stocks will decline over short or even extended periods of time, and the
United States equity market tends to be cyclical, experiencing both periods
when stock prices generally increase and periods when stock prices generally
decrease. However, because the Fund invests primarily in small
capitalization stocks, there are some additional risk factors associated
with investments in the Fund. In particular, stocks in the small
capitalization sector of the United States equity market have historically
been more volatile in price than larger capitalization stocks, such as those
included in the Standard & Poor's 500 Composite Stock Price Index ("Standard

& Poor's 500 Index"). This is because, among other things, small companies
have less certain growth prospects than larger companies; have a lower
degree of liquidity in the equity market; and tend to have a greater
sensitivity to changing economic conditions. Further, in addition to
exhibiting greater volatility, the stocks of small companies may, to some
degree, fluctuate independently of the stocks of large companies. That is,
the stocks of small companies may decline in price as the prices of large
company stocks rise or vice versa. Therefore, investors should expect that
the Fund will be more volatile than, and may fluctuate independently of,
broad stock market indices such as the Standard & Poor's 500 Index.

PORTFOLIO TURNOVER

Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular
security may have been held. A higher rate of portfolio turnover involves
correspondingly greater transaction expenses which must be borne directly by
the Fund and, thus, indirectly by its shareholders. In addition, a high rate
of portfolio turnover may result in the realization of larger amounts of
capital gains which, when distributed to the Fund's shareholders, are
taxable to them. Nevertheless, transactions for the Fund's portfolio will be
based only upon investment considerations and will not be limited by any
other considerations when the Adviser deems it appropriate to make changes
in the Fund's portfolio.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except, under certain circumstances, the Fund may
borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or

* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.

The above investment limitations cannot be changed without shareholder
approval.

NET ASSET VALUE

to which the shareholders of a particular class are entitled.

The net asset value of each class of shares of the Fund is determined as of
the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during
which no shares are tendered for redemption and no orders to purchase shares
are received; or (iii) the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.

INVESTING IN THE FUND

The Fund offers investors three classes of shares that carry sales loads and
contingent deferred sales charges in different forms and amounts and which
bear different levels of expenses.

CLASS A SHARES

An investor who purchases Class A Shares pays a maximum sales charge of
5.50% at the time of purchase. Certain purchases of Class A Shares are not
subject to a sales charge. See "Investing in Class A Shares." As a result,
Class A Shares are not subject to any charges when they are redeemed (except
for special programs offered under "Purchases with Proceeds From Redemptions
of Unaffiliated Investment Companies"). Certain purchases of Class A Shares
qualify for reduced sales charge. See "Reducing or Eliminating the Sales
Charge." Class A Shares have no conversion feature.

CLASS B SHARES

CLASS C SHARES

HOW TO PURCHASE SHARES

with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)

In connection with any sale, Federated Securities Corp. may from time to
time offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request. An account must
be established at a financial institution or by completing, signing, and
returning the new account form available from the Fund before shares can be
purchased.

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:

</TABLE>
<TABLE>
<CAPTION>

less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other fee
by the financial intermediary. Additionally, no sales charge is imposed on
shareholders designated as Liberty Life Members or on shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee for
services.

DEALER CONCESSION

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

end.

REDUCING OR ELIMINATING THE SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of Class A
Shares through:

* quantity discounts and accumulated purchases;

* concurrent purchases;

* signing a 13-month letter of intent;

* using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment
company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASE

As shown in the table above, larger purchases reduce the sales charge paid.

The Fund will combine purchases of Class A Shares made on the same day by
the investor, the investor's spouse, and the investor's children under age
21 when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has
the privilege of combining concurrent purchases of Class A Shares of two or
more funds for which affiliates of Federated Investors serve as investment
adviser or principal underwriter (the "Federated funds"), the purchase price
of which includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in one of the other funds of the Class A Shares in the
Federated Family of Funds with a sales charge, and $20,000 in this Fund, the
sales charge would be reduced.

LETTER OF INTENT

If a shareholder intends to purchase at least $50,000 of shares of the funds
of the Class A Shares of the Federated Family of Funds (excluding money
market funds) over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 5.50% of the total amount intended to be purchased in escrow (in
shares) until such purchase is completed.

intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If Class A Shares in the Fund have been redeemed, the shareholder has the
privilege, within 120 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Federated
Securities Corp. must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales
load. If the shareholder redeems his Class A Shares in the Fund, there may
be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES

Investors may purchase Class A Shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales load or
commission and were not distributed by Federated Securities Corp. The
purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for shares purchased under this
program. If shares are purchased in this manner, fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of any
special offering as described above.

INVESTING IN CLASS B SHARES

CONVERSION OF CLASS B SHARES

Class B Shares will automatically convert into Class A Shares on or around
the fifteenth of the month eight full years after the purchase date, except
as noted below, and may no longer be subject to a distribution services fee
(see "Distribution of Shares"). Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales
charge, fee or other charge. Class B Shares acquired by exchange from Class
B Shares of another fund in the Federated Funds will convert into Class A
Shares based on the time of the initial purchase. For purposes of conversion
to Class A Shares, shares purchased through the reinvestment of dividends
and distributions paid on Class B Shares will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account will also
convert to Class A Shares. The conversion of Class B Shares to Class A
Shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversions will
not constitute taxable events for federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the conversion
of Class B Shares to Class A Shares will not occur if such ruling or opinion
is not available. In such event, Class B Shares would continue to be subject

to higher expenses than Class A Shares for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested
in Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on
assets redeemed within the first full 12 months following purchase. For a
complete description of this charge, see "Contingent Deferred Sales Charge
- -- Class C Shares."

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

PURCHASING SHARES BY WIRE

Once an account has been established, shares may be purchased by wire by
calling the Fund. All information needed will be taken over the telephone,
and the order is considered received when State Street Bank receives payment
by wire Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number
- -- this number can be found on the account statement or by contacting the
Fund); Account Number; Trade Date and Order Number; Group Number or Dealer
Number; Nominee or Institution Name; and ABA Number 011000028. Questions on
wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

PURCHASING SHARES BY CHECK

when payment by check is converted into federal funds (normally the business
day after the check is received).

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member
and invested in the Fund at the net asset value next determined after an
order is received by the Fund, plus the sales load, if applicable.
Shareholders should contact their financial institution or the Fund to
participate in this program.

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE

CLASS A SHARES

Class A Shares.

CLASS B SHARES

CLASS C SHARES

Class C shareholders may exchange all or some of their shares for Class C
Shares in other Federated Funds at net asset value without a contingent
deferred sales charge. (Not all Federated Funds currently offer Class C
Shares. Contact your financial institution regarding the availability of
Class C Shares of the Federated Funds.) To the extent that a shareholder
exchanges shares for Class C Shares of other Federated Funds, the time for
which the exchanged-for shares are to be held will be added to the time for
which exchanged-from shares were held for purposes of satisfying the
applicable holding period. For more information, see "Contingent Deferred
Sales Charge."

REQUIREMENTS FOR EXCHANGE

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a capital gain or
loss may be realized.

MAKING AN EXCHANGE

TELEPHONE INSTRUCTIONS

of 4:00 p.m. (Eastern time) and must be received by the Fund before that
time for shares to be exchanged the same day. Shareholders exchanging into a
fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.

HOW TO REDEEM SHARES

REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION

providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this service.

REDEEMING SHARES BY TELEPHONE

REDEEMING SHARES BY MAIL

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders who desire to receive payments of a predetermined amount not

less than $100 may take advantage of the Systematic Withdrawal Program.
Under this program, shares are redeemed to provide for periodic withdrawal
payments in an amount directed by the shareholder.

Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares, and
the fluctuation of the net asset value of shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that Class A Shares are sold with a sales load, it is not advisable for
shareholders to continue to purchase Class A Shares while participating in
this program. A contingent deferred sales charge may be imposed on Class B
Shares and Class C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:

CLASS A SHARES

Class A Shares purchased under a periodic special offering with the proceeds
of a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales load and not distributed by Federated Securities Corp.
may be charged a contingent deferred sales charge of .50% for redemptions

made within one full year of purchase. Any applicable contingent deferred
sales charge will be imposed on the lesser of the net asset value of the
redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption.

CLASS B SHARES

YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%

CLASS C SHARES

Shareholders redeeming Class C Shares from their Fund accounts within one

full year of the purchase date of those shares will be charged a contingent
deferred sales charge by the Fund's distributor of 1.00%. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption.

CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES

contingent deferred sales charge imposed at the time the exchanged-for
shares are redeemed is calculated as if the shareholder had held the shares
from the date on which he became a shareholder of the exchanged-from shares.
Moreover, the contingent deferred sales charge will be eliminated with
respect to certain redemptions (see "Elimination of Contingent Deferred
Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Fund reserves the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any shares purchased prior to the termination
of such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the shares.
If a shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to
such elimination.

ACCOUNT AND SHARE INFORMATION

CERTIFICATES AND CONFIRMATIONS

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
that month.

DIVIDENDS

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES

TRUST INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

INVESTMENT ADVISER

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than
the advisory fee paid by other mutual funds in general, is comparable to
fees paid by other mutual funds with similar objectives and policies. Under

the investment advisory contract, which provides for the voluntary waiver of
the advisory fee by the Adviser, the Adviser may voluntarily waive some or
all of its fee. This does not include reimbursement to the Fund of any
expenses incurred by shareholders who use the transfer agent's subaccounting
facilities. The Adviser can terminate this voluntary waiver at any time in
its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain
states.

ADVISER'S BACKGROUND

Federated Management, a Delaware business trust organized on April 11, 1989,
is a registered investment adviser under the Investment Advisers Act of
1940, as amended. It is a subsidiary of Federated Investors. All of the
Class A (voting) Shares of Federated Investors are owned by a trust, the
Trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.

professionals have selected Federated funds for their clients.

Aash M. Shah has been the Fund's portfolio manager since its inception. Mr.
Shah joined Federated Investors in 1993 as an Investment Analyst and has
been an Assistant Vice President of the Fund's investment adviser since
1995. Mr. Shah was employed at Westinghouse Credit Corp. from 1990 to 1993
as an Investment Analyst. Mr. Shah received his Masters in Industrial
Administration from Carnegie Mellon University with a concentration in
finance and accounting. Mr. Shah is a Chartered Financial Analyst.

James E. Grefenstette has been the Fund's portfolio manager since its
inception. Mr. Grefenstette joined Federated Investors in 1992 and has been
an Assistant Vice President of the Fund's investment adviser since October
1994. From 1992 until 1994, Mr. Grefenstette acted as an investment analyst.
Mr. Grefenstette was a credit analyst at Westinghouse Credit Corp. from 1990
until 1992, and an investment officer at Pittsburgh National Bank from 1987
until 1990. Mr. Grefenstette is a Chartered Financial Analyst and received
his M.S. in Industrial Administration from Carnegie Mellon University.

subject to review by the Board of Trustees, and could result in severe
penalties.

DISTRIBUTION OF SHARES

DISTRIBUTION PLAN AND

SHAREHOLDER SERVICES

The Distribution Plan is a compensation type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the
Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it from
the Fund, interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit

from future payments made by shares under the Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Fund may make payments up to 0.25% of the average daily net asset
value of Class A Shares, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts ("Shareholder Services"). Under the Shareholder
Services Agreement, Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon shares owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time
to time by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO
FINANCIAL INSTITUTIONS

Furthermore, with respect to Class A Shares, Class B Shares, and Class C
Shares, the distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,

educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Fund. Such assistance will be predicated upon the amount
of shares the financial institution sells or may sell, and/or upon the type
and nature of sales or marketing support furnished by the financial
institution. Any payments made by the distributor may be reimbursed by the
Fund's Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION

VOTING RIGHTS

TAX INFORMATION

FEDERAL INCOME TAX

The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code, as amended, applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies.

long-term capital gains, if any, will be taxable to shareholders as
long-term capital gains no matter how long the shareholders have held the
shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed.

STATE AND LOCAL TAXES

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for each
class of shares.

The yield of each class of shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of shares over a thirty-day period by the

maximum offering price per share of each class on the last day of the
period. This number is then annualized using semi-annual compounding. The
yield does not necessarily reflect income actually earned by each class of
shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.

The performance information reflects the effect of non-recurring charges,
such as the maximum sales load or contingent deferred sales charges, which,
if excluded, would increase the total return and yield.

ADDRESSES

Federated Small Cap Strategies Fund
Class A Shares
Class B Shares
Class C Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219

FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

COMBINED PROSPECTUS

An Open-End,
Diversified Management
Investment Company

December 31, 1996

Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-04 (12/96)

FEDERATED SMALL CAP STRATEGIES FUND

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

The Class A Shares of Federated Small Cap Strategies Fund (the "Fund")
represent interests in a diversified portfolio of Federated Equity Funds
(the "Trust"), an open-end management investment company (a mutual fund).

The investment objective of the Fund is to provide capital appreciation. Any
income received from the portfolio is entirely incidental. The Fund pursues
its investment objective by investing primarily in a portfolio of common
stocks of small capitalization companies.

THE CLASS A SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE CLASS A
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE

SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

Prospectus dated December 31, 1996

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary of Fund Expenses 1
Financial Highlights 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 3
Investment Limitations 10
Net Asset Value 11
How to Purchase Shares 11
What Shares Cost 12
Special Purchase Features 15
Exchange Privilege 15
How to Redeem Shares 16
Special Redemption Features 17
Contingent Deferred Sales Charge 17
Elimination of Contingent Deferred
Sales Charge 18
Account and Share Information 19
Trust Information 19
Management of the Trust 19
Distribution of Class A Shares 20
Administration of the Fund 22
Brokerage Transactions 22
Shareholder Information 23
Voting Rights 23
Tax Information 23
Federal Income Tax 23

State and Local Taxes 23
Performance Information 24
Other Classes of Shares 24
Addresses Inside Back Cover
</TABLE>

SUMMARY OF FUND EXPENSES

<TABLE>
<CAPTION>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

(1) Class A Shares purchased with the proceeds of a redemption of shares of
an unaffiliated investment company purchased or redeemed with a sales
charge and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1.00% for redemptions made
within one year of purchase. (See "Contingent Deferred Sales Charge.")

(3) The Class A Shares has no present intention of paying or accruing the
12b-1 fee during the period ending October 31, 1997. If Class A Shares were
paying or accruing the 12b-1 fee, the Class A Shares would be able to pay
up to 0.25% of its average daily net assets for the 12b-1 fee. See "Trust
Information."

(4) The total Class A Shares operating expenses would have been 3.05% absent
the voluntary waiver of the management fee and the voluntary reimbursement
of certain other operating expenses.

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

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period; and
(3) payment of the maximum sales charge $68 $95 $125 $208
</TABLE>

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

FINANCIAL HIGHLIGHTS -- CLASS A SHARES
FEDERATED SMALL CAP STRATEGIES FUND

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

(a) Reflects operations for the period from November 1, 1995 (date of
initial public investment) to October 31, 1996.

(b) Per share information presented is based upon the monthly average number
of shares outstanding due to large fluctuations in the number of shares
outstanding during the period.

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

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended October 31, 1996 which can be
obtained free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 17, 1984 under the name "Federated Growth

Trust." The Trust later changed its name to "Federated Equity Funds." The
Trust's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. The Declaration of Trust permits the Trust to offer separate
series of shares of beneficial interest representing interests in separate
portfolios of securities. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has established three classes of shares for the
Fund, known as Class A Shares, Class B Shares, and Class C Shares. This
prospectus relates only to the Class A Shares (the "Shares") of the Fund.

Shares of the Fund are designed for individuals and institutions seeking
capital appreciation by investing primarily in a portfolio of common stocks
of small capitalization companies.

For information on how to purchase Shares of the Fund, please refer to "How
to Purchase Shares." The minimum initial investment for Class A Shares is
$500. However, the minimum initial investment for a retirement account is
$50. Subsequent investments must be in amounts of at least $100, except for
retirement plans which must be in amounts of at least $50. In general, Class
A Shares are sold at net asset value plus an applicable sales load and are
redeemed at net asset value. However, a contingent deferred sales charge is
imposed under certain circumstances. For a more complete description, see
"How to Redeem Shares."

In addition, the Fund also pays a shareholder services fee at an annual rate
not to exceed 0.25% of average daily net assets.

The Fund's current net asset value and offering price can be found in the
mutual funds section of local newspapers under "Federated Liberty Funds."

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

The securities in which the Fund invests include, but are not limited to:

* common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the investment adviser to have potential for above-average
appreciation;

* corporate securities and convertible securities;

* securities of foreign issuers;

* restricted and illiquid securities;

* securities of other investment companies; and

* securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.

SMALL CAPITALIZATION COMPANIES

CORPORATE SECURITIES

The Fund may invest in preferred stocks, convertible securities, notes or
debentures rated investment grade, i.e., Baa or better by Moody's Investors

Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's Ratings
Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") (or, if unrated,
are deemed to be of comparable quality by the Fund's investment adviser),
and warrants of these companies. Corporate fixed income securities are
subject to market and credit risks. In addition, the prices of fixed income
securities fluctuate inversely to the direction of interest rates. It should
be noted that securities receiving the lowest investment grade rating are
considered to have some speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated
securities. In the event that a security which had an eligible rating when
purchased is downgraded below Baa or BBB, the investment adviser will
promptly reassess whether continued holding of the security is consistent
with the Fund's objective.

CONVERTIBLE SECURITIES

Convertible securities are fixed-income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common
stock at the option of the holder during a specified time period.
Accordingly, the Fund considers convertible securities to be equity
securities. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several of
these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be employed for
different investment objectives. The Fund invests in convertible securities
irrespective of their ratings. Therefore, the convertible securities in which
the Fund invests may be rated below investment grade and considered

speculative.

tends to increase as the market value of the underlying stock rises, whereas
it tends to decrease as the market value of the underlying stock declines.
While no securities investment is without some risk, investments in
convertible securities generally entail less risk than investments in the
common stock of the same issuer.

SYNTHETIC CONVERTIBLES

A "synthetic convertible" is created by combining distinct securities that
possess the two principal characteristics of a true convertible: a
fixed-income component and a convertibility component. This combination is
achieved by investing in nonconvertible fixed-income securities
(nonconvertible bonds, preferred stocks, and money market instruments) and
in warrants or call options traded on U.S. or foreign exchanges or in the
over-the-counter markets granting the holder the right to purchase a

specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.

A synthetic convertible may be more flexible than a convertible security.
For example, a synthetic convertible may offer different issuers in the
fixed-income component than are offered in the stock underlying the
convertibility component. A synthetic convertible allows the investment
adviser to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when it
determines that such a combination would better promote the Fund's
investment objective and diversification. A synthetic convertible may also
offer flexibility in that its two components may be purchased separately.
For example, the investment adviser may purchase a listed call option for
inclusion in a synthetic convertible, but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions. A holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component, will decline, causing
a decline in the value of the call option or warrant. Should the price of
the stock or the level of the index fall below the exercise price, and

remain there throughout the exercise period, the entire amount paid for the
call option or warrant would be lost. Since a synthetic convertible includes
a fixed-income component, the holder of a synthetic convertible also faces
the risk that interest rates will rise, causing a decline in the value of
the fixed-income instrument. Finally, a synthetic convertible can be
expected to have greater transaction costs than a true convertible security.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

The convertible and synthetic convertible securities in which the Fund
invests are usually not in the three highest rating categories of a
nationally recognized statistical rating organization (AAA, AA, or A for S&P
or Fitch and Aaa, Aa, or A for Moody's), but are in the lower rating
categories or are unrated, but are of comparable quality and have
speculative characteristics or are speculative. Lower-rated bonds or unrated
bonds are commonly referred to as "junk bonds." There is no minimal
acceptable rating for a security to be purchased or held in the Fund's
portfolio, and the Fund may, from time to time, purchase or hold convertible
and synthetic convertible securities rated in the lowest rating category. A
description of the rating categories is contained in the Appendix to the
Combined Statement of Additional Information.

The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each
issuer as well as by monitoring broad economic trends and corporate and
legislative developments.

SECURITIES OF FOREIGN ISSUERS

The Fund may invest in the securities of foreign issuers which are freely
traded on United States securities exchanges or in the over-the-counter
market in the form of depositary receipts ("American Depositary Receipts" or
"ADRs"). In addition, the Fund may invest in other securities of foreign
issuers. There may be certain risks associated with investing in foreign
securities. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting requirements, and
the possibility that there will be less information on such securities and
their issuers available to the public. In addition, there are restrictions
on foreign investments in other jurisdictions and there tends to be
difficulty in obtaining judgments from abroad and affecting repatriation of

capital invested abroad. Delays could occur in settlement of foreign
transactions, which could adversely affect shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be
less marketable than comparable United States securities. As a matter of
practice, the Fund will not invest in the securities of a foreign issuer if
any risk identified above appears to the investment adviser to be
substantial. The Fund will not invest more than 20% of its assets in foreign
securities.

PUT AND CALL OPTIONS

investment dealers and other financial institutions (such as commercial
banks or savings associations) deemed creditworthy by the investment
adviser.

FUTURES AND OPTIONS ON FUTURES

Stock index futures contracts are based on indexes that reflect the market
value of common stock of the firms included in the indexes. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the differences between the value of
the index at the close of the last trading day of the contract and the price
at which the index contract was originally written.

The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the
Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. When the
Fund purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
custodian (or the broker, if legally permitted) to collateralize the
position and thereby insure that the use of such futures contracts are

unleveraged. When the Fund sells futures contracts, it will either own or
have the right to receive the underlying future or security, or will make
deposits to collateralize the position as discussed above.

RISKS

When the Fund uses financial futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and
any related options to react differently than the portfolio securities to
market changes. In addition, the investment adviser could be incorrect in
its expectations about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose money on the
futures contract or option.

It is not certain that a secondary market for positions in futures contracts
or for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will
exist for any particular futures contract or option at any particular time.
The Fund's ability to establish and close out futures and options positions
depends on this secondary market.

RESTRICTED AND ILLIQUID SECURITIES

under federal securities law. However, the Fund will limit investments in
illiquid securities, including certain restricted securities not determined
by the Trustees to be liquid, non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than
seven days after notice, to 15% of its net assets.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

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

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

TEMPORARY INVESTMENTS

In such proportions as, in the judgment of its investment adviser,
prevailing market conditions warrant, the Fund may, for temporary defensive
purposes, invest in:

* short-term money market instruments;

* securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and

* repurchase agreements.

REPURCHASE AGREEMENTS

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest in the securities of other investment companies, but it
will not own more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will invest in other investment
companies primarily for the purpose of investing short-term cash which has
not yet been invested in other portfolio instruments. It should be noted
that investment companies incur certain expenses such as management fees
and, therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The investment adviser

will waive its investment advisory fee on assets invested in securities of
open-end investment companies.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the Fund may lend portfolio
securities on a short-term or a long-term basis, to broker/dealers, banks,
or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions
which the investment adviser has determined are creditworthy under
guidelines established by the Trustees and will receive collateral equal to
at least 100% of the value of the securities loaned at all times.

DERIVATIVE CONTRACTS AND SECURITIES

EQUITY INVESTMENT RISK CONSIDERATIONS

exhibiting greater volatility, the stocks of small companies may, to some
degree, fluctuate independently of the stocks of large companies. That is,
the stocks of small companies may decline in price as the prices of large
company stocks rise or vice versa. Therefore, investors should expect that
the Fund will be more volatile than, and may fluctuate independently of,
broad stock market indices such as the Standard & Poor's 500 Index.

PORTFOLIO TURNOVER

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a

percentage of its cash value with an agreement to buy it back on a set date)
or pledge securities except, under certain circumstances, the Fund may
borrow up to one-third of the value of its total assets and pledge its
assets to secure such borrowings; or

* with respect to 75% of its total assets, invest more than 5% of the value
of its total assets in securities of any one issuer (other than cash, cash
items, or securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities, and repurchase agreements collateralized by
such securities) or acquire more than 10% of the outstanding voting
securities of any one issuer.

The above investment limitations cannot be changed without shareholder
approval.

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for
shares is determined by adding the interest of Class A Shares in the market
value of all securities and other assets of the Fund, subtracting the
interest of Class A Shares in the liabilities of the Fund and those
attributable to Class A Shares, and dividing the remainder by the total
number of Class A Shares outstanding. The net asset value for Class A Shares
may differ from that of Class B Shares and Class C Shares 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.

The net asset value is determined as of the close of trading (normally 4:00

p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value
of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through
a financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500. Additional investments can be
made for as little as $100. The minimum initial and subsequent investment
for retirement plans is only $50. (Financial institutions may impose
different minimum investment requirements on their customers.)

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is

received, plus a sales charge as follows:

SALES LOAD AS DEALER
SALES LOAD AS A PERCENTAGE CONCESSION
A PERCENTAGE OF NET AS A PERCENTAGE
AMOUNT OF OF OFFERING AMOUNT OF PUBLIC
TRANSACTION PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than
$50,000 5.50% 5.82% 5.00%
$50,000 but
less than
$100,000 4.50% 4.71% 4.00%
$100,000 but
less than
$250,000 3.75% 3.90% 3.25%
$250,000 but
less than
$500,000 2.50% 2.56% 2.25%
$500,000 but
less than
$1 million 2.00% 2.04% 1.80%
$1 million or
greater 0.00% 0.00% 0.25%*
</TABLE>

*See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other fee
by the financial intermediary. Additionally, no sales charge is imposed on
shareholders designated as Liberty Life Members or on shares purchased through
"wrap accounts" or similar programs, under which clients pay a fee for
services.

DEALER CONCESSION

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

The sales charge for shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp. Federated
Securities Corp. may pay fees to banks out of the sales load in exchange for
sales and/or administrative services performed on behalf of the bank's
customers in connection with the initiation of customer accounts and
purchases of shares.

REDUCING OR ELIMINATING THE SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of shares
through:

* quantity discounts and accumulated purchases;

* concurrent purchases;

* signing a 13-month letter of intent;

* using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment
company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES

As shown in the table above, larger purchases reduce the sales load paid.
The Fund will combine purchases of shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21

when it calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.

If an additional purchase of shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$30,000 and he purchases $20,000 more at the current public offering price,
the sales load on the additional purchase according to the schedule now in
effect would be 4.50%, not 5.50%.

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

CONCURRENT PURCHASES

For purposes of qualifying for a sales charge reduction, a shareholder has
the privilege of combining concurrent purchases Class A Shares of two or
more funds for which affiliates of Federated Investors serve as investment
advisor or principal underwriter (the Federated funds"), the purchase price
of which includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in the Class A Shares of one of the other funds in the
Federated Funds with a sales charge, and $20,000 in this Fund, the sales
charge would be reduced.

To receive this sales charge reduction, Federated Securities Corp. must be

notified by the shareholder in writing or by his financial institution at
the time the concurrent purchases are made. The Fund will reduce the sales
charge after it confirms the purchases.

LETTER OF INTENT

While this letter of intent will not obligate the shareholder to purchase
shares, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class A
Shares of Federated Funds, excluding money market accounts, will be
aggregated to provide a purchase credit towards fulfillment of the letter of
intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE

If shares in the Fund have been redeemed, the shareholder has the privilege,
within 120 days, to reinvest the redemption proceeds at the next-determined
net asset value without any sales load. Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his shares in the Fund, there may be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES

Investors may purchase shares at net asset value, without a sales charge,
with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge or
commission and were not distributed by Federated Securities Corp. The
purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for shares purchased under this
program. If shares are purchased in this manner, fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of any
special offering as described above.

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION

An investor may call his financial institution (such as a bank or an
investment dealer) to place an order to purchase shares. Orders placed

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

PURCHASING SHARES BY WIRE

Once an account has been established, shares may be purchased by wire by
calling the Fund. All information needed will be taken over the telephone,
and the order is considered received when State Street Bank receives payment
by wire. Federal funds should be wired as follows: Federated Shareholder
Services Company, c/o State Street Bank and Trust Company, Boston, MA;
Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund Class); (Fund Number
- -- this number can be found on the account statement or by contacting the
Fund); Account Number; Trade Date and Order Number; Group Number or Dealer
Number; Nominee or Institution Name; and ABA Number 011000028. Questions on
wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

PURCHASING SHARES BY CHECK

Once an account has been established, shares may be purchased by sending a

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

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their
investment on a regular basis in a minimum amount of $100. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account at an Automated Clearing House ("ACH") member
and invested in the Fund at the net asset value next determined after an
order is received by the Fund, plus the sales load, if applicable.
Shareholders should contact their financial institution or the Fund to
participate in this program.

RETIREMENT PLANS

Fund Shares can be purchased as an investment for retirement plans or IRA
accounts. For further details, contact the Fund and consult a tax adviser.

EXCHANGE PRIVILEGE

Class A shareholders may exchange all or some of their shares for Class A
Shares of other Federated Funds at net asset value. Neither the Fund nor any
of the Federated Funds imposes any additional fees on exchanges.

Shareholders in certain other Federated Funds may exchange their shares for
Class A Shares.

REQUIREMENTS FOR EXCHANGE

TAX CONSEQUENCES

An exercise of the exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the circumstances, a capital gain or
loss may be realized.

MAKING AN EXCHANGE

Instructions for exchanges for Federated Funds may be given in writing or by
telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his
broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to Federated
Shareholder Services Company, 1099 Hingham Street, Rockland, Massachusetts
02370-3317.

TELEPHONE INSTRUCTIONS

Any shares held in certificate form cannot be exchanged by telephone but
must be forwarded to Federated Shareholder Services Company, P.O. Box 8600,
Boston, Massachusetts 02266-8600 and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and
will be binding upon the shareholder. Such instructions will be processed as
of 4:00 p.m. (Eastern time) and must be received by the Fund before that
time for shares to be exchanged the same day. Shareholders exchanging into a

fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.

HOW TO REDEEM SHARES

REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION

REDEEMING SHARES BY TELEPHONE

REDEEMING SHARES BY MAIL

Shares may be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, Fund Name, Fund Class, P.O. Box

8600, Boston, Massachusetts 02266-8600. If certificates have been issued,
they should be sent unendorsed with the written request by registered or
certified mail to the address noted above.

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

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM

payments in an amount directed by the shareholder.

Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares, and
the fluctuation of the net asset value of shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that shares are sold with a sales load, it is not advisable for
shareholders to continue to purchase shares while participating in this
program.

CONTINGENT DEFERRED SALES CHARGE

Shares purchased under a periodic special offering with the proceeds of a
redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge of .50% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption.

respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) shares held for more than
one full year from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will not be
subject to a contingent deferred sales charge. In computing the amount of
the applicable contingent deferred sales charge, redemptions are deemed to
have occurred in the following order: (1) shares acquired through the
reinvestment of dividends and long-term capital gains; (2) shares held for
more than one full year from the date of purchase; (3) shares held for fewer
than one full year from the date of purchase on a first-in, first-out basis.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund Shares for shares of other funds in the Liberty Family of
Funds in the same class (see "Exchange Privilege"). Any contingent deferred
sales charge imposed at the time the exchanged-for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which
he became a shareholder of the exchanged-from shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

will be imposed on redemptions of shares held by Trustees, employees and
sales representatives of the Fund, the distributor, or affiliates of the
Fund or distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the distributor; and
their immediate family members; and spouses and children under the age of 21
of the aforementioned persons. Finally, no contingent deferred sales charge
will be imposed on the redemption of shares originally purchased through a
bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940, or retirement plans where the third party
administrator has entered into certain arrangements with Federated
Securities Corp. or its affiliates, or any other financial institution, to
the extent that no payments were advanced for purchases made through such
entities. The Fund reserves the right to discontinue elimination of the
contingent deferred sales charge. Shareholders will be notified of such
elimination. Any shares purchased prior to the termination of such waiver
would have the contingent deferred sales charge eliminated as provided in
the Fund's prospectus at the time of the purchase of the shares. If a
shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to
such elimination.

ACCOUNT AND SHARE INFORMATION

CERTIFICATES AND CONFIRMATIONS

Company.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
that month.

DIVIDENDS

CAPITAL GAINS

Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem shares in any account, except retirement plans, and pay the proceeds
to the shareholder if the account balance falls below the required minimum
value of $500. This requirement does not apply, however, if the balance
falls below the required minimum value because of changes in the net asset

value of shares. Before shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase
additional shares to meet the minimum requirement.

TRUST INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

INVESTMENT ADVISER

Investment decisions for the Fund are made by the Fund's investment adviser,
Federated Management (the "Adviser"), subject to direction by the Trustees.
The Adviser continually conducts investment research and supervision for the
Fund and is responsible for the purchase or sale of portfolio instruments,
for which it receives an annual fee from the Fund. The Adviser's address is
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than

the advisory fee paid by other mutual funds in general, is comparable to
fees paid by other mutual funds with similar objectives and policies. Under
the investment advisory contract, which provides for the voluntary waiver of
the advisory fee by the Adviser, the Adviser may voluntarily waive some or
all of its fee. This does not include reimbursement to the Fund of any
expenses incurred by shareholders who use the transfer agent's subaccounting
facilities. The Adviser can terminate this voluntary waiver at any time in
its sole discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by certain
states.

ADVISER'S BACKGROUND

Federated Management, a Delaware business trust organized on April 11, 1989,
is a registered investment adviser under the Investment Advisers Act of
1940, as amended. It is a subsidiary of Federated Investors. All of the
Class A (voting) Shares of Federated Investors are owned by a trust, the
Trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher
Donahue, who is President and Trustee of Federated Investors.

company in 1955. Federated funds are presently at work in and through 4,000
financial institutions nationwide. More than 100,000 investment
professionals have selected Federated funds for their clients.

James E. Grefenstette has been the Fund's portfolio manager since December
1994. Mr. Grefenstette joined Federated Investors in 1992 as an Investment
Analyst and has been a Vice President of the Fund's investment adviser since
July 1996. From 1994 until 1996, Mr. Grefenstette acted as an Assistant Vice
President of the fund's adviser. Mr. Grefenstette was a credit analyst at
Westinghouse Credit Corp. from 1990 until 1992. Mr. Grefenstette is a
Chartered Financial Analyst and received his M.S. in Industrial Administration
from Carnegie Mellon University.

being considered for purchase or sale, by the Fund; prohibit purchasing
securities in initial public offerings; and prohibit taking profits on
securities held for less than sixty days. Violations of the codes are
subject to review by the Board of Trustees, and could result in severe
penalties.

DISTRIBUTION OF CLASS A SHARES

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES

Under a distribution plan adopted in accordance with Investment Company Act
Rule 12b-1 (the "Distribution Plan"), the distributor may be paid a fee in
an amount computed at an annual rate of up to .25% of the average daily net
assets of shares to finance any activity which is principally intended to
result in the sale of shares subject to the Distribution Plan. The Fund does
not currently make payments to the distributor or or charge a fee under the
Distribution Plan for shares, and shareholders will be notified if the Fund
intends to charge a fee under the Distribution Plan. For shares, the
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to
provide sales services or distribution related support services as agents
for their clients or customers.

The Distribution Plan is a compensation type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the
Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it from
the Fund, interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit
from future payments made by shares under the Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Fund may make payments up to 0.25% of the average daily net asset
value of shares to obtain certain personal services for shareholders and for
the maintenance of shareholder accounts ("Shareholder Services"). Under the
Shareholder Services Agreement, Federated Shareholder Services will either
perform shareholder services directly or will select financial institutions
to perform shareholder services. Financial institutions will receive fees
based upon shares owned by their clients or customers. The schedules of such
fees and the basis upon which such fees will be paid will be determined from
time to time by the Fund and Federated Shareholder Services.

In additon to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of sales services, distribution
related support services, or shareholder services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES

aggregate daily net assets of all Federated Funds as specified below:
<TABLE>
<CAPTION>

MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE DAILY NET ASSETS
FEE OF THE FEDERATED FUNDS
<C> <S>
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million

BROKERAGE TRANSACTIONS

and dealers subject to review by the Trustees.

SHAREHOLDER INFORMATION

VOTING RIGHTS

TAX INFORMATION

FEDERAL INCOME TAX

afforded to such companies.

Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions
are received in cash or as additional shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as
long-term capital gains no matter how long the shareholders have held the
Shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed.

STATE AND LOCAL TAXES

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for Class
A Shares.

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

OTHER CLASSES OF SHARES

As of the date of this prospectus, the Fund also offers two other classes of
shares called Class B Shares and Class C Shares. This prospectus relates
only to Class A Shares.

Class C Shares are sold primarily to customers of financial institutions at
net asset value with no initial sales load. Class C Shares are distributed
pursuant to a Distribution Plan adopted by the Fund whereby the distributor
is paid a fee of up to .75%, in addition to a Shareholder Services fee of
.25% of the Class C Shares' average daily net assets. In addition, Class C
Shares may be subject to certain contingent deferred sales charges.
Investments in Class C Shares are subject to a minimum initial investment of
$1,500, unless the investment is in a retirement account, in which case the
minimum investment is $50.

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

ADDRESSES
Federated Small Cap Strategies Fund
Class A Shares
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

INVESTMENT ADVISER
Federated Management
Federated Investors Tower
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
One Oxford Centre
Pittsburgh, PA 15219

FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

An Open-End,
Diversified Management
Investment Company

December 31, 1996

[Graphic]

Federated Investors
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

[Graphic]

Cusip 314172404

G01228-05 (12/96)

FEDERATED SMALL CAP STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
combined prospectus for Class A Shares, Class B Shares, and Class C
Shares, and the stand-alone prospectus for Class A Shares of Federated
Small Cap Strategies Fund (the "Fund") dated December 31, 1996. This
Statement is not a prospectus itself. To receive a copy of either
prospectus, write or call the Fund.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated December 31, 1996

[LOGO]
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.

Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-06 (12/96)

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

CORPORATE DEBT SECURITIES 1
WARRANTS 1
RESTRICTED AND ILLIQUID SECURITIES 1
FUTURES AND OPTIONS TRANSACTIONS 1
FUTURES CONTRACTS 2
`MARGIN'' IN FUTURES TRANSACTIONS 2
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS 2
STOCK INDEX OPTIONS 3
CALL OPTIONS ON FINANCIAL AND STOCK
INDEX FUTURES CONTRACTS 3
PURCHASING PUT AND CALL OPTIONS ON
PORTFOLIO SECURITIES 3
WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO
SECURITIES 4
OVER-THE-COUNTER OPTIONS 4
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 4
LENDING OF PORTFOLIO SECURITIES 4
REPURCHASE AGREEMENTS 4
REVERSE REPURCHASE AGREEMENTS 4
PORTFOLIO TURNOVER 5
INVESTMENT LIMITATIONS 5
FEDERATED EQUITY FUNDS MANAGEMENT 7

F
U

ND OWNERSHIP 11
TRUSTEES COMPENSATION 12
TRUSTEE LIABILITY 12
INVESTMENT ADVISORY SERVICES 13

ADVISER TO THE FUND 13
ADVISORY FEES 13
OTHER RELATED SERVICES 13
BROKERAGE TRANSACTIONS 13

OTHER SERVICES 14

PURCHASING SHARES 14

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT14
CONVERSION TO FEDERAL FUNDS 14
PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND
EMPLOYEES OF THE FUND 15
EXCHANGING SECURITIES FOR FUND SHARES 15
DETERMINING NET ASSET VALUE 15

DETERMINING MARKET VALUE OF SECURITIES 15
REDEEMING SHARES 16

REDEMPTION IN KIND 16
ELIMINATION OF DEFERRRED SALES CHARGE 16
MASACHUSETTS PARTNERSHIP LAW 16

EXCHANGING SECURITIES FOR SHARES 17

TAX CONSEQUENCES 17
TAX STATUS 17

THE FUND'S TAX STATUS 17
SHAREHOLDERS' TAX STATUS 17
TOTAL RETURN 17

YIELD 18

PERFORMANCE COMPARISONS 18

ABOUT FEDERATED INVESTORS 20

APPENDIX 21

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio of Federated Equity Funds (the `Trust''). The
Trust was established as a Massachusetts business trust under a Declaration
of Trust dated April 17, 1984, under the name `Federated Growth Trust.''
The Trust later changed its name to `Federated Equity Funds.'' The
Declaration of Trust permits the Trust to offer separate series and classes
of shares. Shares of the Fund are offered in three classes known as Class
A Shares, Class B Shares, and Class C Shares (individually and collectively
referred to as `Shares'' as the context may require). This Combined
Statement of Additional Information relates to all three classes of Shares.
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide capital appreciation.
Any income realized from the portfolio is entirely incidental. The Fund
pursues its investment objective by investing primarily in a portfolio of
common stocks of small capitalization companies. The investment objective
cannot be changed without approval of shareholders.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same
or a different issuer, participations based on revenues, sales, or profits,
or the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
WARRANTS
The Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the
market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to

twenty years or may be perpetual. However, most warrants have expiration
dates after which they are worthless. In addition, if the market price of
the common stock does not exceed the warrant's exercise price during the
life of the warrant, the warrant will expire as worthless. Warrants have
no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease
in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees (the `Trustees'') to determine the
liquidity of certain restricted securities is permitted under a Securities
and Exchange Commission (`SEC'') staff position set forth in the adopting
release for Rule 144A under the Securities Act of 1933, as amended (the
`Rule''). The Rule is a non-exclusive safe-harbor for certain secondary
market transactions involving registration for resales of otherwise
restricted securities to qualified institutional buyers. The Rule was
expected to further enhance the liquidity of the secondary market for
securities eligible for resale under the Rule. The Fund believes that the
staff of the SEC has left the question of determining the liquidity of all
restricted securities to the Trustees. The Trustees may consider the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.

The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933,
as amended, and treats such commercial paper as liquid. Section 4(2)
commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put and call options
on portfolio securities and put options on financial futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on its portfolio securities and covered put options to attempt
to increase its current income. The Fund will maintain its positions in
securities, option rights, and segregated cash subject to puts and calls
until the options are exercised, closed, or have expired. An option
position on financial futures contracts may be closed out over-the-counter
or on a nationally recognized exchange which provides a secondary market
for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase

and sell stock index futures to hedge against changes in prices. The Fund
will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract (`going short'') and the buyer who agrees to take delivery of the
security (`going long'') at a certain time in the future. For example, in
the fixed income securities market, prices move inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., `go
short') to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would `go long'' (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the differences between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written.
`MARGIN'' IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of `initial margin'' in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that initial margin in futures

transactions does not involve the borrowing of funds by the Fund to finance
the transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called `variation margin,'' equal to the daily
change in value of the futures contract. This process is known as `marking
to market.''Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from
market factors, such as an anticipated increase in interest rates. Unlike
entering directly into a futures contract, which requires the purchaser to
buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price.

Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in

value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included
in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss
from the purchase of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the ability of the Adviser to

predict correctly movements in the directions of the stock market generally
or of a particular industry. This requires different skills and techniques
than predicting changes in the price of individual stocks.
CALL OPTIONS ON FINANCIAL AND STOCK INDEX FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
and over-the-counter call options on financial and stock index futures
contracts (including cash-settled stock index options) to hedge its
portfolio against an increase in market interest rates or a decrease in
stock prices. When the Fund writes a call option on a futures contract, it
is undertaking the obligation of assuming a short futures position (selling
a futures contract) at the fixed strike price at any time during the life
of the option if the option is exercised. As stock prices fall or market
interest rates rise, causing the prices of futures to go down, the Fund's
obligation under a call option on a future (to sell a futures contract)
costs less to fulfill, causing the value of the Fund's call option position
to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current

market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities in its portfolio.
A put option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option. A call option gives the Fund, in return for a premium,
the right to buy the underlying securities from the seller.

WRITING COVERED PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write covered put and call options to generate income and
thereby protect against price movements in particular securities in the
Fund's portfolio. As the writer of a call option, the Fund has the
obligation upon exercise of the option during the option period to deliver
the underlying security upon payment of the exercise price. As the writer
of a put option, the Fund has the obligation to purchase a security from
the purchaser of the option upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment
of further consideration (or has segregated cash in the amount of any
additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.

OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options when options on the portfolio securities held by the Fund are not
traded on an exchange.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund`s records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The Fund does not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of more
than 20% of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
REPURCHASE AGREEMENTS

The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
In the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are found
by the Fund's investment adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future, the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able to
avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.

PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since
any turnover would be incidental to transactions undertaken in an attempt
to achieve the Fund's investment objective. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 200%.
For the fiscal year ended October 31, 1996, the portfolio turnover rate was
83%.

INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index futures
contracts, put options on stock index futures, put options on
financial futures and portfolio securities, and writing covered call
options, but may obtain such short-term credits as are necessary for
the clearance of purchases and sales of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including
the amount borrowed. The Fund will not borrow money or engage in
reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption

requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets
are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets:
margin deposits for the purchase and sale of financial futures
contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets
in any one industry, except that the Fund may invest 25% or more of
the value of its total assets in securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts,
or commodity futures contracts. However, the Fund may purchase put
options on stock index futures, put options on financial futures,
stock index futures contracts, and put options on portfolio
securities, and may write covered call options.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate

or in securities which are secured by real estate or interests in real
estate.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by the Fund's
investment objective, policies, and limitations or the Trust's
Declaration of Trust.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
The Fund will not purchase the securities of any issuer (other than
securities of the U.S. government, its agencies, or instrumentalities,
or instruments secured by securities of such issuers, such as
repurchase agreements) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of such issuer or
acquire more than 10% of any class of voting securities of any issuer.
For these purposes, the Fund takes all common stock and all preferred
stock of an issuer each as a single class, regardless of priorities,
series, designations, or other differences.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the

Trustees without shareholder approval. Shareholders will be notified before
any material changes in these limitations become effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
or acquisition of assets.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets
in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter
options, and certain restricted securities not determined by the
Trustees to be liquid.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for the purpose of
exercising control or management.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the
securities are held in the Fund's portfolio or unless the Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S.

branch of a domestic bank or savings and loan having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be
`cash items.''
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The Fund has no present intent to borrow money, pledge securities, or
invest in reverse repurchase agreements in excess of 5% of the value of its
total assets in the coming fiscal year. In addition, the Fund expects to
lend not more than 5% of its total assets in the coming fiscal year.

To comply with registration requirements in certain states, the Fund
(1) will limit the aggregate value of the assets underlying covered call
options or put options written by the Fund to not more than 25% of its net
assets, (2) will limit the premiums paid for options purchased by the Fund
to 5% of its net assets, and (3) will limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. (If state
requirements change, these restrictions may be revised without shareholder
notification.)

FEDERATED EQUITY FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Equity Funds, and principal occupations.

John F. Donahue@*
Federated Investors Tower

Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.

Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Trustee of the
Funds.

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932

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

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee

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

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated
Research Corp., Federated Global Research Corp. and Passport Research,
Ltd.; Executive Vice President and Director, Federated Securities Corp.;
Trustee, Federated Shareholder Services Company; Trustee or Director of

some of the Funds; President, Executive Vice President and Treasurer of
some of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some
of the Funds; Director or Trustee of some of the Funds.

*This Trustee is deemed to be an ``interested person'' as defined in
the Investment Company Act of 1940.

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

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Government Money Trust; Blanchard Funds;
Blanchard Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated ARMs Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated Growth Trust; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Master Trust;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated Total Return Series, Inc.; Federated U.S. Government Bond
Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 3-5 Years; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.; Fund for
U.S. Government Securities, Inc.; Government Income Securities, Inc.; High
Yield Cash Trust; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty High
Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999;
Liberty Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money

Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO Monument Funds; The
Shawmut Funds; Star Funds; The Starburst Funds; The Starburst Funds II;
Stock and Bond Fund, Inc.; Sunburst Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; Trademark Funds; Trust for Financial Institutions;
Trust For Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The Virtus Funds; and
World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 4, 1996, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: CITPAD & CO, Paducah,
Kentucky , owned approximately 90,571 shares (5.06%); Unvivest & Company,
Souderton, Pennsylvania, owned approximately 100,711 shares (5.63%); and
MLPF&S, Jacksonville, Florida for the sole benefit of its customers, owned
approximately 190,459 shares (10.64%).
As of December 4, 1996, the following shareholders of record owned 5% or
more of the outstanding Class B Shares of the Fund: MLPF&S, Jacksonville,
Florida, for the sole benefit of its customers, owned approximately 297,831
shares (11.82%).
As of December 4, 1996, the following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: MLPF&S, Jacksonville,
Florida, for the sole benefit of its customers, owned approximately 269,549
shares (64.14%).

TRUSTEES COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST* FROM FUND COMPLEX +
John F. Donahue $ 0 $0 for the Trust and
Chairman and Trustee 54 other investment companies in the Fund
Complex
Thomas G. Bigley $1,312.97 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John T. Conroy, Jr. $1,439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
William J. Copeland $1,439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
James E. Dowd $1,439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Lawrence D. Ellis, M.D. $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Edward L. Flaherty, Jr. $1,439.95 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund

Complex
Peter E. Madden $ 1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Gregor F. Meyer $ 1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
John E. Murray, Jr. $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Wesley W. Posvar $1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex
Marjorie P. Smuts$1,312.97 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund
Complex

*Information is furnished for the fiscal year ended October 31, 1996.
#The aggregate compensations is provided for the Trust which is comprised
of 3 portfolios.
+The information is provided for the last calendar year.
++Mr. Bigley servied on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be

subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Federated Management (the "Adviser"). It
is a subsidiary of Federated Investors. All the voting securities of
Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue. The Adviser shall
not be liable to the Trust, the Fund, or any shareholder of the Fund 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 Trust.

ADVISORY FEES
For its advisory services, the Adviser receives an annual investment
advisory fee as described in each prospectus. During the fiscal year ended
October 31, 1996, the Fund's Adviser earned $155,023, all of which was
waived.

including brokerage commissions, interest, taxes, and extraordinary
expenses) exceed 2-1/2% per year of the first $30 million of average
net assets, 2% per year of the next $70 million of average net assets,
and 1-1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee.
This arrangement is not part of the advisory contract and may be
amended or rescinded in the future.
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 shares of funds offered by Federated Securities
Corp.

BROKERAGE TRANSACTIONS

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its in advising the Fund and other accounts. To the extent
that receipt of these services may supplant services for which the Adviser

or its affiliates might otherwise have paid, it would tend to reduce their
expenses. The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided.
For the fiscal year ended October 31, 1996, the Fund paid total brokerage
commissions of $96,208.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be make by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of , the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee described in
each prospectus. For the fiscal year ended October 31, 1996, the
Administrators earned $184,493.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-
8600, is transfer agent for the Shares of the Fund, and dividend disbursing
agent for the Fund.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, One Oxford
Centre, Pittsburgh, Pennsylvania 15219.

PURCHASING SHARES

Except under certain circumstances described in each prospectus, Shares are
sold at their net asset value (plus a sales charge on Class A Shares only)
on days the New York Stock Exchange is open for business. The procedure for
purchasing Shares is explained in each prospectus under "How To Purchase
Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services as appropriate, to
stimulate distribution activities and to cause services to be provided to
shareholders by a representative who has knowledge of the shareholder's
particular circumstances and goals. These activities and services may
include, but are not limited to, marketing efforts; providing office space,
equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.

By adopting the Distribution Plan, the Trustees expect that the Class A
Shares, Class B Shares, and Class C Shares of the Fund will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.

For the fiscal year ended October 31, 1996, the Fund paid distribution
service fees for Class A Shares, Class B Shares, and Class C Shares in
amounts of $0, $67,923 and $13,249, respectively.
For the fiscal year ended October 31, 1996, the Fund paid shareholder
service fees for Class A Shares, Class B Shares, and Class C Shares in the
amounts of $24,619, $22,641 and $4,413, respectively.

PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES OF THE FUND
Trustees, employees, and sales representatives of the Fund, Federated
Management, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities Corp.
and their spouses and children under 21, may buy Class A Shares at net
asset value without a sales charge. Shares may also be sold without a sales
charge to trusts or pension or profit-sharing plans for these people.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange convertible securities they already own for Shares,
or they may exchange a combination of convertible securities and cash for
Shares. Any securities to be exchanged must meet the investment objective
and policies of the Fund, must have a readily ascertainable market value,
must be liquid, and must not be subject to restrictions on resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund reserves
the right to reject any security, even though it appears on the list, and
the right to amend the list of acceptable securities at any time without
notice to brokers or investors.
An investment broker acting for an investor should forward the securities
in negotiable form with an authorized letter of transmittal to Federated
Securities Corp. Federated Securities Corp. will determine that the
transmittal papers are in good order and will then forward them to the
Fund's custodian, State Street bank and Trust Company,. The Fund will
notify the broker of its acceptance and valuation of the securities within
five business days of their receipt by State Street Bank and Trust Company.

The Fund values such securities in the same manner as the Fund values its
portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities become
the property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

REDEEMING SHARES

The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus
under "How To Redeem Shares." Although the transfer agent does not charge
for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.
Class B Shares redeemed within one to six years of purchase and Class C
Shares and applicable Class A Shares redeemed within one year of purchase
may be subject to a contingent deferred sales charge. The amount of the
contingent deferred sales charge is based upon the amount of the
administrative fee paid at the time of purchase by the distributor to the
financial institution for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial institutions
elect to receive an amount less than the administrative fee that is stated
in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder
will be reduced accordingly.
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To
the extent available, such securities will be readily marketable.

The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940, as amended, under which the Fund is obligated to
redeem Shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of the respective class's net asset value during any 90-day
period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will
pay all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way as the Fund determines net asset value.
The portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them
before their maturity could receive less than the redemption value of their
securities and could incur certain transaction costs.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales
Charge may not exceed 12% annually with reference initially to the value of
the Class B Shares upon establishment of the Systematic Withdrawal Program
and then as calculated at the fiscal year end. Redemptions on a qualifying
Systematic Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%
quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the Contingent Deferred Sales
Charge. To the extent that a shareholder exchanges Shares for Class B
Shares of other Federated Funds, the time for which the exchanged-for
Shares are to be held will be added to the time for which exchanged-from
Shares were held for purposes of satisfying the 12-month holding

requirement. However, for purposes of meeting the $10,000 minimum account
value requirement, Class B Share account values will not be aggregated.

MASSACHUSETTS PARTNERSHIP LAW

EXCHANGING SECURITIES FOR SHARES

TOTAL RETURN

The Fund's Average annual total returns for Class A Shares, Class B Shares
and Class C Shares, for the period from November 1, 1995 (date of initial
public offering), to October 31, 1996, was 38.99%, 40.70% and 45.00%,
respectively.
The average annual total return for each class of Shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that
investment. The ending redeemable value is computed by multiplying the
number of Shares owned at the end of the period by the net asset value per
share at the end of the period. The number of Shares owned at the end of
the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge adjusted over the
period by any additional Shares, assuming the quarterly reinvestment of all
dividends and distributions.

Any applicable contingent deferred sales charge is deducted from the ending
value of the investment based on the lesser of the original purchase price
or the net asset value of Shares redeemed.
YIELD

The Fund's yields for Class A Shares, Class B Shares, and Class C Shares
for the Thirty-day period ended October 31, 1996 were 0.00%, 0.00%, and
0.00%, respectively.
The yield for each class of Shares of the Fund is determined by dividing
the net investment income per share (as defined by the Securities and
Exchange Commission) earned by any class of Shares over a thirty-day period
by the maximum offering price per share of the respective class on the last
day of the period. This value is annualized using semi-annual compounding.
This means that the amount of income generated during the thirty-day period
is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to the shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any
class of Shares, the performance will be reduced for those shareholders
paying those fees.

PERFORMANCE COMPARISONS

The performance of each of the classes of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;

o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's or any class of Shares' expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
o RUSSELL 2000 SMALL STOCK INDEX is a broadly diversified index
consisting of approximately 2,000 small capitalization common stocks
that can be used to compare to the total returns of funds whose
portfolios are invested primarily in small capitalization common
stocks.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P
500), a composite index of common stocks in industry, transportation,
and financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the S & P 500 assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of
these distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.

o STANDARD & POOR'S 600 SMALL CAPITALIZATION INDEX S&P Small Cap 600 is
an unmanaged index of 600 small capitalization common stocks with a
market capitalization generally ranging between $80 million and $600
million. The index, monitored by Standard & Poor's Corporation, is
cited as an indicator of small capitalization stock performance.
o LIPPER ANALYTICAL SERVICES, 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 specified period of time. From time to time,
the Fund will quote its Lipper ranking in the "small company growth
funds" category in advertising and sales literature.
o LIPPER SMALL COMPANY GROWTH FUND AVERAGE is an average of the total
returns for 312 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.
o LIPPER SMALL COMPANY GROWTH FUND INDEX is an average of the net asset-
valuated total returns for the top 30 small company growth funds
tracked by Lipper Analytical Services, Inc., an independent mutual
fund rating service.
o 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.
o WILSHIRE 5000 EQUITY INDEX consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available, and can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks.

o STRATEGIC INSIGHT SMALL COMPANY GROWTH FUNDS INDEX consists of mutual
funds that invest primarily in companies below $750 million in total
market capitalization.
o VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common
equity securities. It is based on a geometric average of relative
price changes of the component stocks and does not include income.
o VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing,
Inc., analyzes price, yield, risk, and total return for equity and
fixed income mutual funds. The highest rating is One, and ratings are
effective for two weeks.
o MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes
price, yield, risk, and total return for equity and fixed income
funds.
o FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money Magazines,
among others--provide performance statistics over specified time
periods.
o CDA MUTUAL FUND REPORT, published by CDA Investment Technologies,
Inc., analyzes price, current yield, risk, total return, and average
rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.
o STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, 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 specified period of time. From time to time,
the Fund will quote its Strategic Insight ranking in the "small
company growth funds" category in advertising and sales literature.

Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in any class of Shares based on quarterly reinvestment of
dividends over a specified period of time.
From time to time as it deems appropriate, the Fund may advertise the
performance of any class of Shares using charts, graphs, and descriptions,
compared to federally insured bank products including certificates of
deposit and time deposits and to money market funds using the Lipper
Analytical Services money market instruments average. In addition,
advertising and sales literature for the Fund may use charts and graphs to
illustrate the principles of dollar-cost averaging and may disclose the
amount of dividends paid by the Fund over certain periods of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge on Class A Shares.
Advertising and other promotional literature may include charts, graphs,
and other illustrations using the Fund's returns, or returns in general,
that demonstrate basic investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment. In addition,
the Fund can compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments, such as
bank savings accounts, certificates of deposit, and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on
these developments by the Fund portfolio managers and their views and
analysis on how such developments could affect the Funds. In addition,
advertising and sales literature may quote statistics and give general

information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute.
ABOUT FEDERATED INVESTORS

Federated Investors (`Federated'') is dedicated to meeting investor needs
which is reflected in its investment decision making--structured,
straightforward, and consistent. This has resulted in a history of
competitive performance with a range of competitive investment products
that have gained the confidence of thousands of clients and their
customers.
The company's disciplined security selection process is firmly rooted in
sound methodologies backed by fundamental and technical research.
Investment decisions are made and executed by teams of portfolio managers,
analysts, and traders dedicated to specific market sectors. These traders
handle trillions of dollars in annual trading volume.
In the equity sector, Federated has more than 25 years' experience. As of
December 31, 1995, Federated managed 22 equity funds totaling approximately
$5.4 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented
management style combines quantitative and qualitative analysis and
features a structured, computer-assisted composite modeling system that was
developed in the 1970s.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.

MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.**
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL
Federated meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.

* Source: Investment Company Institute

Investors' service to financial professionals and institutions has earned
it high rankings in several DALBAR surveys. surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F.
Getz, President, Broker/Dealer Division.
*source: Investment Company Institute

APPENDIX

STANDARD AND POOR'S RATINGS GROUP LONG TERM DEBT RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or

exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is
being paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
Ratings Group believes that such payments will be made during such grace

period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
MOODY'S INVESTORS SERVICE, INC. LONG TERM BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in AAA securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

BA--Bonds which are BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA--Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC--Bonds have certain indentifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the

obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
PRIME-1 repayment capacity will normally be evidenced by the following
characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- - Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- - Well established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory 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 RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.

A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.

FEDERATED GROWTH STRATEGIES FUND

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES

PROSPECTUS

The shares of Federated Growth Strategies Fund (the "Fund") represent
interests in a diversified portfolio of Federated Equity Funds (the
"Trust"), an open-end management investment company (a mutual fund). The
Fund seeks appreciation of capital by investing primarily in equity
securities of companies with prospects for above-average growth in earnings
and dividends.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF ANY
BANK, ARE NOT ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE

FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN CLASS A SHARES, CLASS B SHARES OR
CLASS C SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.

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

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

Prospectus dated December 31, 1996

TABLE OF CONTENTS

SUMMARY OF FUND EXPENSES 1

FINANCIAL HIGHLIGHTS 4
GENERAL INFORMATION 7
INVESTMENT INFORMATION 7
Investment Objective 7
Investment Policies 7
Investment Limitations 10
NET ASSET VALUE 11
INVESTING IN THE FUND 11
HOW TO PURCHASE SHARES 12
Investing in Class A Shares 12
Investing in Class B Shares 14
Investing in Class C Shares 15
Special Purchase Features 16
EXCHANGE PRIVILEGE 16
HOW TO REDEEM SHARES 17
Special Redemption Features 19
Contingent Deferred Sales Charge 19
Elimination of Contingent Deferred
Sales Charge 20
ACCOUNT AND SHARE INFORMATION 21
TRUST INFORMATION 21
Management of the Trust 21
Distribution of Shares 23
Administration of the Fund 24
BROKERAGE TRANSACTIONS 24
SHAREHOLDER INFORMATION 25
Voting Rights 25
TAX INFORMATION 25
Federal Income Tax 25

State and Local Taxes 25
PERFORMANCE INFORMATION 26
ADDRESSES 27

SUMMARY OF FUND EXPENSES

CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.75%
12b-1 Fee None
Total Other Expenses 0.38%
Shareholder Services Fee (after waiver)(2) 0.10%
Total Operating Expenses(3) 1.13%

(1) Class A Shares purchased with the proceeds of a redemption of shares of
an unaffiliated investment company purchased or redeemed with a sales charge
and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year full of purchase. For a more complete description see "Contingent
Deferred Sales Charge."

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

(3) The total operating expenses were 1.28% absent the voluntary waiver of a
portion of the shareholder services fee.

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS

You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and

(2) redemption at the end of each time period; and
(3) payment of the maximum sales charge $66 $89 $114 $185

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

SUMMARY OF FUND EXPENSES

CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.75%
12b-1 Fee 0.75%
Total Other Expenses 0.53%
Shareholder Services Fee 0.25%

Total Operating Expenses(2) 2.03%

(1) The contingent deferred sales charge is 5.50% in the first year
declining to 1.00% in the sixth year and 0.00% thereafter. For a more
complete description, see "Contingent Deferred Sales Charge."

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

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS

You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $77 $107 $132 $212
You would pay the following expenses on the same

investment, assuming no redemption $21 $64 $109 $212

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

SUMMARY OF FUND EXPENSES

CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.75%
12b-1 Fee 0.75%
Total Other Expenses 0.42%
Shareholder Services Fee 0.13%
Total Operating Expenses(2) 1.92%

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

(2) The total operating expenses would have been 2.04% absent the voluntary
waiver of a portion of the shareholder services fee.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS

You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $30 $60 $104 $224
You would pay the following expenses on the same

investment, assuming no redemption $20 $60 $104 $224

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

FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS A SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

YEAR ENDED
YEAR ENDED OCTOBER 31 MAY 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988(A) 1988 1987

NET ASSET VALUE,
BEGINNING OF $26.22 $21.28 $23.92 $21.16 $21.58 $16.78 $ 20.99 $17.18 $16.93 $17.67 $16.03
PERIOD
INCOME FROM

INVESTMENT
OPERATIONS
Net investment 0.04 0.24 0.21 0.20 0.33 0.57 0.75 0.59 0.09 0.25 0.28
income
Net realized and
unrealized gain
(loss)
on investments 5.01 5.64 (2.18) 2.96 0.45 5.97 (2.69) 3.80 1.08 (0.23) 2.40
Total from
investment
operations 5.05 5.88 (1.97) 3.16 0.78 6.54 (1.94) 4.39 1.17 0.02 2.68
LESS DISTRIBUTIONS
Distributions
from net
investment (0.04) (0.26) (0.19) (0.23) (0.33) (0.61) (0.79) (0.52) (0.15) (0.20) (0.26)
income
Distributions
from net
realized gain on
investment (5.39) (0.68) (0.48) (0.17) (0.87) (1.13) (1.48) (0.06) (0.77) (0.56) (0.78)
transactions
Total (5.43) (0.94) (0.67) (0.40) (1.20) (1.74) (2.27) (0.58) (0.92) (0.76) (1.04)
distributions
NET ASSET VALUE,
END OF PERIOD $25.84 $26.22 $21.28 $23.92 $21.16 $ 21.58 $ 16.78 $20.99 $17.18 $16.93 $17.67
TOTAL RETURN(B) 23.16% 29.03% (8.43%) 15.06% 3.93% 41.54% (10.41%) 25.87% 6.95% 0.50% 17.55%
RATIOS TO
AVERAGE
NET ASSETS

Expenses 1.13% 1.10% 0.99% 0.96% 1.01% 1.01% 1.01% 1.01% 1.00%* 1.00% 1.00%
Net investment 0.15% 1.05% 0.89% 0.90% 1.54% 2.88% 4.00% 2.99% 1.30%* 1.39% 1.78%
income
Expense waiver/
reimbursement(c) 0.15% 0.16% -- -- -- 0.10% 0.22% 0.14% 0.60%* 0.15% 0.18%
SUPPLEMENTAL DATA
Net assets, end
of
period (000 $307,882 249,110 $320,630 $460,811 $391,655 $275,561 $138,407 $134,735 $104,146 $102,395 $134,657
omitted)
Average
commission
rate paid $0.0566 -- -- -- -- -- -- -- -- -- --
Portfolio 89% 125% 59% 57% 46% 54% 67% 79% 24% 88% 66%
turnover

* Computed on an annualized basis.

(a) For the five months ended October 31, 1988. The Fund changed its fiscal
year end from May 31 to October 31.

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

Further information about the Fund's performance is contained in the Fund's

Annual Report, dated October 31, 1996, which can be obtained free of charge.

FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS B SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

YEAR ENDED
OCTOBER 31,
1996 1995(A)

NET ASSET VALUE, BEGINNING OF PERIOD $26.23 $25.51
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.10) (0.02)
Net realized and unrealized gain (loss) on investments 4.91 0.74
Total from investment operations 4.81 0.72
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (5.39) --

NET ASSET VALUE, END OF PERIOD $25.65 $26.23
TOTAL RETURN(B) 22.03% 2.82%
RATIOS TO AVERAGE NET ASSETS
Expenses 2.03% 2.04%*
Net operating loss (0.79%) (0.66%)*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $10,858 $1,345
Average commission rate paid $0.0566 --
Portfolio turnover 89% 125%

* Computed on an annualized basis.

(a) Reflects operations for the period from August 15, 1995 (date of initial
public offering) to October 31, 1995.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1996, which can be obtained free of charge.

FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS C SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's

independent auditors. Their report dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

YEAR ENDED
OCTOBER 31,
1996 1995(A)

NET ASSET VALUE, BEGINNING OF PERIOD $26.22 $25.51
INCOME FROM INVESTMENT OPERATIONS
Net operating loss (0.05) (0.02)
Net realized and unrealized gain (loss) on investments 4.90 0.73
Total from investment operations 4.85 0.71
LESS DISTRIBUTIONS
Distributions from net realized gain on investments (5.39) --
NET ASSET VALUE, END OF PERIOD $25.68 $26.22
TOTAL RETURN(B) 22.12% 2.78%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.92% 2.05%*
Net operating loss (0.72%) (0.71%)*
Expense waiver/reimbursement(c) 0.12% --
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $3,667 $57
Average commission rate paid $0.0566 --

Portfolio turnover 89% 125%

* Computed on an annualized basis.

(a) Reflects operations for the period from August 15, 1995 (date of initial
public offering) to October 31, 1996.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1996, which can be obtained free of charge.

GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 17, 1984, under the name "Federated Growth
Trust." The Trust later changed its name to "Federated Equity Funds." The
Trust's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. The Declaration of Trust permits the Trust to offer separate
series of shares of beneficial interest representing interests in separate
portfolios of securities. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has established three classes of shares for the
Fund, known as Class A Shares, Class B Shares, and Class C Shares

(individually and collectively as the context requires, "Shares").

Shares of the Fund are designed for individuals and institutions seeking
appreciation of capital by investing primarily in equity securities of
companies with prospects for above-average growth in earnings and dividends.
The minimum initial investment for Class A Shares is $500. The minimum
initial investment for Class B Shares and Class C Shares is $1,500. However,
the minimum initial investment for a retirement account in any class is $50.
Subsequent investments in any class must be in amounts of at least $100,
except for retirement plans which must be in amounts of at least $50.

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is appreciation of capital. The
investment objective cannot be changed without approval of shareholders.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies
described in this prospectus.

INVESTMENT POLICIES

The Fund pursues this investment objective by investing primarily in equity
securities of companies with prospects for above-average growth in earnings

and dividends. Unless indicated otherwise, the investment policies of the
Fund may be changed by the Board of Trustees without the approval of
shareholders. Shareholders will be notified before any material changes in
these policies become effective.

ACCEPTABLE INVESTMENTS. The Fund invests primarily in equity securities of
companies selected by the investment adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of each company's business. The
Fund generally invests in companies with market capitalization of
$100,000,000 or more. The Fund may invest in common and preferred stocks,
corporate bonds, debentures, notes, warrants, and put and call options on
stocks.

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

CONVERTIBLE SECURITIES. Convertible securities are fixed income securities
which may be exchanged or converted into a predetermined number of the
issuer's underlying common stock at the option of the holder during a
specified time period. Accordingly, the Fund considers convertible
securities to be equity securities. Convertible securities may take the form
of convertible preferred stock, convertible bonds or debentures, units

consisting of "usable" bonds and warrants, or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for different investment objectives. The Fund invests in
convertible securities irrespective of their ratings. Therefore, the
convertible securities in which the Fund invests may be rated below
investment grade and considered speculative.

Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted, but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a preferred
stock until the holder elects to exercise the conversion privilege. Usable
bonds are corporate bonds that can be used, in whole or in part, customarily
at full face value, in lieu of cash to purchase the issuer's common stock.
When owned as part of a unit along with warrants, which are options to buy
the common stock, they function as convertible bonds, except that the
warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and, therefore, have a claim to
assets of the corporation prior to the holders of common stock in the case
of liquidation. However, convertible securities are generally subordinated
to similar nonconvertible securities of the same company. The interest
income and dividends from convertible bonds and preferred stocks provide a
stable stream of income with generally higher yields than common stocks, but
lower than nonconvertible securities of similar quality. The Fund will
exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the
investment adviser's opinion, the investment characteristics of the

underlying common shares will assist the Fund in achieving its investment
objectives. Otherwise, the Fund will hold or trade the convertible
securities. In selecting convertible securities for the Fund, the investment
adviser evaluates the investment characteristics of the convertible security
as a fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political outlook,
the value of the security relative to other investment alternatives, trends
in the determinants of the issuer's profits, and the issuer's management
capability and practices.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may acquire securities which
are subject to legal or contractual delays, restrictions, and costs on
resale. Because of time limitations, the Fund might not be able to dispose
of these securities at reasonable prices or at times advantageous to the
Fund. The Fund intends to limit the purchase of restricted securities which
have not been determined by the Trustees to be liquid, together with other
securities considered to be illiquid, including repurchase agreements
providing for settlement in more than seven days after notice, to not more
than 15% of its net assets.

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

vary from purchase prices.

TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:

* short-term money market instruments;

* securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and

* repurchase agreements.

REPURCHASE AGREEMENTS. Certain securities in which the Fund invests may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities or other securities to the Fund
and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.

PUT AND CALL OPTIONS. The Fund may purchase put options on stocks. These
options will be used only as a hedge to attempt to protect securities which
the Fund holds against decreases in value. The Fund may purchase these put
options as long as they are listed on a recognized options exchange and the
underlying stocks are held in its portfolio.

The Fund may also write call options on securities either held in its
portfolio, or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash in the amount of any
additional consideration. The call options which the Fund writes and sells
must be listed on a recognized options exchange. Writing of calls by the
Fund is intended to generate income for the Fund and, thereby, protect
against price movements in particular securities in the Fund's portfolio.

RISKS. Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange which may or may not exist for
any particular call or put option at any specific time. The absence of a
liquid secondary market also may limit the Fund's ability to dispose of the
securities underlying an option. The inability to close options also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Fund may lend portfolio securities on a short-term or a long-term basis, up
to one-third of the value of its total assets to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines

established by the Trustees and will receive collateral equal to at least
100% of the value of the securities loaned.

EQUITY INVESTMENT RISK CONSIDERATIONS. As with other mutual funds that
invest primarily in equity securities, the Fund is subject to market risks.
That is, the possibility exists that common stocks will decline over short
or even extended periods of time, and the United States equity market tends
to be cyclical, experiencing both periods when stock prices generally
increase and periods when stock prices generally decrease.

PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Fund's rate of portfolio
turnover may exceed that of certain other mutual funds with the same
investment objective. A higher rate of portfolio turnover involves
correspondingly greater transaction expenses which must be borne directly by
the Fund and, thus, indirectly by its shareholders. In addition, a high rate
of portfolio turnover may result in the realization of larger amounts of
capital gains which, when distributed to the Fund's shareholders, are
taxable to them. (Further information is contained in the Fund's Statement
of Additional Information within the sections "Brokerage Transactions" and
"Tax Status".) Nevertheless, transactions for the Fund's portfolio will be
based only upon investment considerations and will not be limited by any
other considerations when the Adviser deems it appropriate make changes in
the Fund's portfolio.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
except, under certain circumstances, the Fund may borrow up to one-third of
the value of its net assets;

* sell securities short except, under strict limitations, the Fund may
maintain open short positions so long as not more than 10% of the value of
its net assets is held as collateral for those positions; or

* invest more than 5% of its total assets in securities of one issuer
(except cash and cash items, repurchase agreements, and U.S. government
obligations) or acquire more than 10% of any class of voting securities of
any one issuer.

The above investment limitations cannot be changed without shareholder
approval. The following limitation, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in this limitation becomes effective.

The Fund will not:

* purchase securities of other investment companies, except in open market
transactions limited to not more than 10% of its total assets, or except as
part of a merger, consolidation, or other acquisition;

NET ASSET VALUE

The net asset value of each class of shares of the Fund is determined as of
the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on: (i) days on which there
are not sufficient changes in the value of the Fund's portfolio securities
that its net asset value might be materially affected; (ii) days during
which no shares are tendered for redemption and no orders to purchase shares
are received; or (iii) the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, and Christmas Day.

INVESTING IN THE FUND

The Fund offers investors three classes of shares that carry sales charges
and contingent deferred sales charges in different forms and amounts and
which bear different levels of expenses.

CLASS A SHARES. An investor who purchases Class A Shares pays a maximum

sales charge of 5.50% at the time of purchase. Certain purchases of Class A
Shares are not subject to a sales charge. See "Investing in Class A Shares."
As a result, Class A Shares are not subject to any charges when they are
redeemed (except for special programs offered under "Purchases with Proceeds
From Redemptions of Unaffiliated Investment Companies.") Certain purchases
of Class A Shares qualify for reduced sales charges. See "Reducing or
Eliminating the Sales Charge." Class A Shares have no conversion feature.

CLASS B SHARES. Class B Shares are sold without an initial sales charge, but
are subject to a contingent deferred sales charge of up to 5.50% if redeemed
within six full years following purchase. Class B Shares also bear a 12b-1
fee while Class A Shares do not bear such a fee. Class B Shares will
automatically convert into Class A Shares, based on relative net asset
value, on or around the fifteenth of the month eight full years after the
purchase date. Class B Shares provide an investor the benefit of putting all
of the investor's dollars to work from the time the investment is made, but
(until conversion) will have a expense ratio and pay lower dividends than
Class A Shares due to the 12b-1 fee.

CLASS C SHARES. Class C Shares are sold without an initial sales charge, but
are subject to a 1.00% contingent deferred sales charge on assets redeemed
within the first 12 months following purchase. Class C Shares provide an
investor the benefit of putting all of the investor's dollars to work from
the time the investment is made, but will have a higher expense ratio and
pay lower dividends than Class A Shares due to the 12b-1 fee. Class C Shares
have no conversion feature.

HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased as described below, either through
a financial institution (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by wire or by check directly to the Fund,
with a minimum initial investment of $500 for Class A Shares and $1,500 for
Class B Shares and Class C Shares. Additional investments can be made for as
little as $100. The minimum initial and subsequent investment for retirement
plans is only $50. (Financial institutions may impose different minimum
investment requirements on their customers.)

INVESTING IN CLASS A SHARES

Class A Shares are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:

SALES CHARGE AS DEALER CONCESSION
SALES CHARGE AS A PERCENTAGE AS A PERCENTAGE
AMOUNT OF A PERCENTAGE OF NET AMOUNT OF PUBLIC
TRANSACTION OF OFFERING PRICE INVESTED OFFERING PRICE

Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*

* See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other
fee by the financial intermediary. Additionally, no sales charge is imposed
on shareholders designated as Liberty Life Members or on Class A Shares
purchased through "wrap accounts" or similar programs, under which clients
pay a fee or fees for services.

DEALER CONCESSION. For sales of Class A Shares, a dealer will normally
receive up to 90% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, the distributor may offer to pay dealers up to 100% of the sales
charge retained by it. Such payments may take the form of cash or
promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings about
the Fund or other special events at recreational-type facilities, or items
of material value. In some instances, these incentives will be made
available only to dealers whose employees have sold or may sell a

significant amount of shares. On purchases of $1 million or more, the
investor pays no sales charge; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price
over the first year following the purchase. Such payments are based on the
original purchase price of shares outstanding at each month end.

REDUCING OR ELIMINATING THE SALES CHARGE. The sales charge can be reduced or
eliminated on the purchase of Class A Shares through:

* quantity discounts and accumulated purchases;

* concurrent purchases;

* signing a 13-month letter of intent;

* using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment
company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine

purchases of Class A Shares made on the same day by the investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if applicable,
is reduced for purchases made at one time by a trustee or fiduciary for a
single trust estate or a single fiduciary account.

CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent purchases
of Class A Shares of two or more funds for which affiliates of Federated
Investors serve as investment adviser or principal underwriter (the
"Federated Funds"), the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in one of the Class
A Shares in the Federated Funds with a sales charge, and $20,000 in this
Fund, the sales charge would be reduced.

To receive this sales charge reduction, Federated Securities Corp. must be

notified by the shareholder in writing or by his financial institution at
the time the concurrent purchases are made. The Fund will reduce the sales
charge after it confirms the purchases.

LETTER OF INTENT. If a shareholder intends to purchase at least $50,000 of
Class A Shares of Federated Funds (excluding money market funds) over the
next 13 months, the sales charge may be reduced by signing a letter of
intent to that effect. This letter of intent includes a provision for a
sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the custodian to hold up to 5.50% of
the total amount intended to be purchased in escrow (in shares) until such
purchase is completed.

REINVESTMENT PRIVILEGE. If Class A Shares in the Fund have been redeemed,
the shareholder has the privilege, within 120 days, to reinvest the

redemption proceeds at the next-determined net asset value without any sales
charge. Federated Securities Corp. must be notified by the shareholder in
writing or by his financial institution of the reinvestment in order to
eliminate a sales charge. If the shareholder redeems his Class A Shares in
the Fund, there may be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES. Investors may purchase Class A Shares at net asset value, without
a sales charge, with the proceeds from the redemption of shares of an
unaffiliated investment company that were purchased or sold with a sales
charge or commission and were not distributed by Federated Securities Corp.
The purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for shares purchased under this
program. If shares are purchased in this manner, fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of any
special offering as described above.

INVESTING IN CLASS B SHARES

CONVERSION OF CLASS B SHARES. Class B Shares will automatically convert into

Class A Shares on or around the fifteenth of the month eight full years
after the purchase date, except as noted below, and may no longer be subject
to a distribution services fee (see "Distribution of Shares"). Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales charge, fee, or other charge. Class B
Shares acquired by exchange from Class B Shares of another fund in the
Federated Funds will convert into Class A Shares based on the time of the
initial purchase. For purposes of conversion to Class A Shares, shares
purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account. Each
time any Class B Shares in the shareholder's account (other than those in
the sub-account) convert to Class A Shares, an equal pro rata portion of the
Class B Shares in the sub-account will also convert to Class A Shares. The
conversion of Class B Shares to Class A Shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B Shares to Class A Shares will not
occur if such ruling or opinion is not available. In such event, Class B
Shares would continue to be subject to higher expenses than Class A Shares
for an indefinite period.

Orders for $250,000 or more of Class B Shares will automatically be invested
in Class A Shares.

INVESTING IN CLASS C SHARES

Class C Shares are sold at net asset value next determined after an order is
received. A contingent deferred sales charge of 1.00% will be charged on

assets redeemed within the first full 12 months following purchase. For a
complete description of this charge, see "Contingent Deferred Sales Charge
- -- Class C Shares."

PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION. An investor may call his
financial institution (such as a bank or an investment dealer) to place an
order to purchase shares. Orders placed through a financial institution are
considered received when the Fund is notified of the purchase order or when
payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly.
Financial institutions may charge additional fees for their services.

PURCHASING SHARES BY WIRE. Once an account has been established, shares may
be purchased by Federal Reserve wire by calling the Fund. All information

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

PURCHASING SHARES BY CHECK. Once an account has been established, shares may
be purchased by mailing a check made payable to the name of the Fund
(designate class of shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by
mail are considered received when payment by check is converted into federal
funds (normally the business day after the check is received).

SPECIAL PURCHASE FEATURES

SYSTEMATIC INVESTMENT PROGRAM. Once a Fund account has been opened,
shareholders may add to their investment on a regular basis in a minimum
amount of $100. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund at the net asset
value next determined after an order is received by the Fund, plus the sales
charge, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.

RETIREMENT PLANS. Fund Shares can be purchased as an investment for
retirement plans or IRA accounts. For further details, contact the Fund and
consult a tax adviser.

EXCHANGE PRIVILEGE

CLASS A SHARES. Class A shareholders may exchange all or some of their
shares for Class A Shares of other Federated Funds at net asset value.
Neither the Fund nor any of the Federated Funds imposes any additional fees
on exchanges. Shareholders in certain other Federated Funds may exchange
their shares for Class A Shares.

CLASS B SHARES. Class B shareholders may exchange all or some of their
shares for Class B Shares of other Federated Funds. (Not Federated Funds
currently offer Class B Shares. Contact your financial institution regarding
the availability of Class B Shares of the Federated Funds.) Exchanges are
made at net asset value without being assessed a contingent deferred sales
charge on the exchanged shares. To the extent that a shareholder exchanges
shares for Class B Shares of other Federated Funds, the time for which the
exchanged-for shares are to be held will be added to the time for which
exchanged-from shares were held for purposes of satisfying the applicable
holding period. For more information, see "Contingent Deferred Sales
Charge."

CLASS C SHARES. Class C shareholders may exchange all or some of their
shares for Class C Shares of other Federated Funds at net asset value
without a contingent deferred sales charge. (Not all Federated Funds
currently offer Class C Shares. Contact your financial institution regarding

the availability of Class C Shares of the Federated Funds.) To the extent
that a shareholder exchanges Shares for Class C Shares of other Federated
Funds, the time for which the exchanged-for shares are to be held will be
added to the time for which exchanged-from shares were held for purposes of
satisfying the applicable holding period. For more information, see
"Contingent Deferred Sales Charge."

REQUIREMENTS FOR EXCHANGE. Shareholders using this privilege must exchange
shares having a net asset value equal to the minimum investment requirements
of the fund into which the exchange is being made. Before the exchange, the
shareholder must receive a prospectus of the fund for which the exchange is
being made.

Upon receipt of proper instructions and required supporting documents,
shares submitted for exchange are redeemed and proceeds invested in the same
class of shares of the other fund. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified of the modification or
termination of the exchange privilege.

TAX CONSEQUENCES. An exercise of the exchange privilege is treated as a sale

for federal income tax purposes. Depending upon the circumstances, a capital
gain or loss may be realized.

MAKING AN EXCHANGE. Instructions for exchanges for the Federated Funds may
be given in writing or by telephone. Written instructions may require a
signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions
during times of drastic economic or market changes. If a shareholder cannot
contact his broker or financial institution by telephone, it is recommended
that an exchange request be made in writing and sent by overnight mail to
Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.

TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the investor
is on file with the Fund. If the instructions are given by a broker, a
telephone authorization form completed by the broker must be on file with
the Fund. If reasonable procedures are not followed by the Fund, it may be
liable for losses due to unauthorized or fraudulent telephone instructions.
Shares may be exchanged between two funds by telephone only if the two funds
have identical shareholder registrations.

fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.

HOW TO REDEEM SHARES

REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION. Shares of the Fund may be
redeemed by calling your financial institution to request the redemption.
Shares will be redeemed at the net asset value, less any applicable
contingent deferred sales charge next determined after the Fund receives the
redemption request from the financial institution. Redemption requests
through a registered broker/dealer must be received by the broker before
4:00 p.m. (Eastern time) and must be transmitted by the broker to the Fund
before 5:00 p.m. (Eastern time) in order for shares to be redeemed at that
day's net asset value. Redemption requests through other financial
institutions (such as banks) must be received by the financial institution
and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for
shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this service.

REDEEMING SHARES BY TELEPHONE. Shares may be redeemed in any amount by
calling the Fund provided the Fund has received a properly completed
authorization form. These forms can be obtained from Federated Securities
Corp. Proceeds will be mailed in the form of a check, to the shareholder's
address of record or by wire transfer to the shareholder's account at a
domestic commercial bank that is a member of the Federal Reserve System. The
minimum amount for a wire transfer is $1,000. Proceeds from redeemed shares
purchased by check or through ACH will not be wired until that method of
payment has cleared. Proceeds from redemption requests received on holidays
when wire transfers are restricted will be wired the following business day.
Questions about telephone redemptions on days when wire transfers are
restricted should be directed to your shareholder services representative at
the telephone number listed on your account statement.

REDEEMING SHARES BY MAIL. Shares may be redeemed in any amount by mailing a
written request to: Federated Shareholder Services Company, Fund Name, Fund
Class, P.O. Box 8600, Boston, Massachusetts 02266-8600. If share
certificates have been issued, they should be sent unendorsed with the
written request by registered or certified mail to the address noted above.

The written request should state: Fund Name and the Share Class name; the

account name as registered with the Fund; the account number; and the number
of shares to be redeemed or the dollar amount requested. All owners of the
account must sign the request exactly as the shares are registered.
Normally, a check for the proceeds is mailed within one business day, but in
no event more than seven days, after receipt of a proper written redemption
request. Dividends are paid up to and including the day that a redemption
request is processed.

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM. Shareholders who desire to receive payments
of a predetermined amount not less than $100 may take advantage of the
Systematic Withdrawal Program. Under this program, shares are redeemed to
provide for periodic withdrawal payments in an amount directed by the
shareholder.

investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that Class A Shares are sold with a sales charge, it is not advisable
for shareholders to continue to purchase Class A Shares while participating
in this program. A contingent deferred sales charge may be imposed on Class
B Shares and Class C Shares.

CONTINGENT DEFERRED SALES CHARGE

Shareholders may be subject to a contingent deferred sales charge upon
redemption of their shares under the following circumstances:

CLASS A SHARES. Class A Shares purchased under a periodic special offering
with the proceeds of a redemption of shares of an unaffiliated investment
company purchased or redeemed with a sales charge and not distributed by
Federated Securities Corp. may be charged a contingent deferred sales charge
of .50% for redemptions made within one full year of purchase. Any
applicable contingent deferred sales charge will be imposed on the lesser of
the net asset value of the redeemed shares at the time of purchase or the
net asset value of the redeemed shares at the time of redemption.

CLASS B SHARES. Shareholders redeeming Class B Shares from their Fund
accounts within six full years of the purchase date of those shares will be
charged a contingent deferred sales charge by the Fund's distributor. Any
applicable contingent deferred sales charge will be imposed on the lesser of
the net asset value of the redeemed shares at the time of purchase or the

net asset value of the redeemed shares at the time of redemption in
accordance with the following schedule:

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

CLASS C SHARES. Shareholders redeeming Class C Shares from their Fund
accounts within one full year of the purchase date of those shares will be
charged a contingent deferred sales charge by the Fund's distributor of
1.00%. Any applicable contingent deferred sales charge will be imposed on
the lesser of the net asset value of the redeemed shares at the time of
purchase or the net asset value of the redeemed shares at the time of
redemption.

CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES. The contingent deferred
sales charge will be deducted from the redemption proceeds otherwise payable
to the shareholder and will be retained by the distributor. The contingent
deferred sales charge will not be imposed with respect to: (1) Shares
acquired through the reinvestment of dividends or distributions of long-term
capital gains; and (2) Shares held for more than six full years from the
date of purchase with respect to Class B Shares and one full year from the

date of purchase with respect to Class C Shares and applicable Class A
Shares. Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent deferred
sales charge. In computing the amount of the applicable contingent deferred
sales charge, redemptions are deemed to have occurred in the following
order: (1) Shares acquired through the reinvestment of dividends and
long-term capital gains; (2) Shares held for more than six full years from
the date of purchase with respect to Class B Shares and one full year from
the date of purchase with respect to Class C Shares and applicable Class A
Shares; (3) Shares held for fewer than six years with respect to Class B
Shares and one full year from the date of purchase with respect to Class C
Shares and applicable Class A Shares on a first-in, first-out basis. A
contingent deferred sales charge is not assessed in connection with an
exchange of Fund Shares for shares of other funds in the Federated Funds in
the same class (see "Exchange Privilege"). Any contingent deferred sales
charge imposed at the time the exchanged-for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which
he became a shareholder of the exchanged-from Shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

by the Fund of shares in shareholder accounts that do not comply with the
minimum balance requirements; and (4) qualifying redemptions of Class B
Shares must be from an account: that is at least 12 months old, has all Fund
distributions reinvested in Fund Shares, and has a value of at least $10,000
when the Systematic Withdrawal Program is established. Qualifying
redemptions may not exceed 1.00% monthly of the account value as
periodically determined by the Fund. For more information regarding the
elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary or the Fund. No
contingent deferred sales charge will be imposed on redemptions of shares
held by Trustees, employees and sales representatives of the Fund, the
distributor, or affiliates of the Fund or distributor, and their immediate
family members; employees of any financial institution that sells shares of
the Fund pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of shares
originally purchased through a bank trust department, an investment adviser
registered under the Investment Advisers Act of 1940 or retirement plans
where the third party administrator has entered into certain arrangements
with Federated Securities Corp. or its affiliates, or any other financial
institution, to the extent that no payments were advanced for purchases made
through such entities. The Fund reserves the right to discontinue
elimination of the contingent deferred sales charge. Shareholders will be
notified of such elimination. Any shares purchased prior to the termination
of such waiver would have the contingent deferred sales charge eliminated as
provided in the Fund's prospectus at the time of the purchase of the shares.
If a shareholder making a redemption qualifies for an elimination of the
contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to

such elimination.

ACCOUNT AND SHARE INFORMATION

CERTIFICATES AND CONFIRMATIONS. As transfer agent for the Fund, Federated
Shareholder Services Company maintains a share account for each shareholder.
Share certificates are not issued unless requested in writing to Federated
Shareholder Services Company.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
that month.

DIVIDENDS. Dividends are declared and paid quarterly to all shareholders
invested in the Fund on the record date. Dividends and distributions are
automatically reinvested in additional Shares of the Fund on payment dates
at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by contacting
the transfer agent. All shareholders on the record date are entitled to the
dividend. If shares are redeemed or exchanged prior to the record date or
purchased after the record date, those shares are not entitled to that
quarter's dividend.

CAPITAL GAINS. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES. Due to the high cost of maintaining accounts
with low balances, the Fund may redeem shares in any account, except
retirement plans, and pay the proceeds to the shareholder if the account

balance falls below the Class A Share required minimum value of $500 or the
required minimum value of $1,500 for Class B Shares and Class C Shares. This
requirement does not apply, however, if the balance falls below the required
minimum value because of changes in the net asset value of the respective
Share Class. Before shares are redeemed to close an account, the shareholder
is notified in writing and allowed 30 days to purchase additional shares to
meet the minimum requirement.

TRUST INFORMATION

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES. The Fund is managed by a Board of Trustees. The Trustees
are responsible for managing the Trust's business affairs and for exercising
all the Trust's powers except those reserved for the shareholders. An
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.

INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser (the "Adviser"), subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to 0.75% of the Fund's average daily net assets. The fee paid by the Fund,
while higher than the advisory fee paid by other mutual funds in general, is
comparable to fees paid by other mutual funds with similar objectives and

policies. Under the investment advisory contract, which provides for the
voluntary waiver of the advisory fee by the Adviser, the Adviser may
voluntarily waive some or all of its fee. This does not include
reimbursement to the Fund of any expenses incurred by shareholders who use
the transfer agent's subaccounting facilities. The Adviser can terminate
this voluntary waiver at any time in its sole discretion.

ADVISER'S BACKGROUND. Federated Management, a Delaware business trust
organized on April 11, 1989, is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors.
All of the Class A (voting) Shares of Federated Investors are owned by a
trust, the Trustees of which are John F. Donahue, Chairman and Trustee of
Federated Investors, Mr. Donahue's wife, and Mr. Donahue's son, J.
Christopher Donahue, who is President and Trustee of Federated Investors.

James E. Grefenstette has been the Fund's portfolio manager since December,
1994. Mr. Grefenstette joined Federated Investors in 1992 as an Investment

Analyst and has been a Vice President of the Fund's investment adviser since
July 1996. From 1994 until 1996, Mr. Grefenstette acted as an Assistant Vice
President of the Fund's investment adviser. Mr. Grefenstette was a credit
analyst at Westinghouse Credit Corp. from 1990 until 1992. Mr. Grefenstette
is a Chartered Financial Analyst and received his M.S. in Industrial
Administration from Carnegie Mellon University.

Peter R. Anderson has been the Fund's portfolio manager since August 1994.
Mr. Anderson joined Federated Investors in 1972 as, and is presently, a
Senior Vice President of the Fund's investment adviser. Mr. Anderson is a
Chartered Financial Analyst and received his M.B.A. in Finance from the
University of Wisconsin.

DISTRIBUTION OF SHARES

Federated Securities Corp. is the principal distributor for shares of the

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

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES. Under a distribution plan adopted in accordance with Investment
Company Act Rule 12b-1 (the "Distribution Plan"), Class B Shares and Class C
Shares will pay a fee to the distributor in an amount computed at an annual
rate of .75% of the average daily net assets of each class of shares to
finance any activity which is principally intended to result in the sale of
shares subject to the Distribution Plan. For Class C Shares, the distributor

may select financial institutions such as banks, fiduciaries, custodians for
public funds, investment advisers, and broker/dealers to provide sales
services or distribution-related support services as agents for their
clients or customers. With respect to Class B Shares, because distribution
fees to be paid by the Fund to the distributor may not exceed an annual rate
of .75% of each class of shares' average daily net assets, it will take the
distributor a number of years to recoup the expenses it has incurred for its
sales services and distribution-related support services pursuant to the
Distribution Plan.

The Distribution Plan is a compensation type plan. As such, the Fund makes
no payments to the distributor except as described above. Therefore, the
Fund does not pay for unreimbursed expenses of the distributor, including
amounts expended by the distributor in excess of amounts received by it from
the Fund, interest, carrying or other financing charges in connection with
excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit
from future payments made by shares under the Distribution Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under
which the Fund may make payments up to 0.25% of the average daily net asset
value of Class A Shares, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts ("shareholder services"). Under the Shareholder
Services Agreement, Federated Shareholder Services will either perform
shareholder services directly or will select financial institutions to
perform shareholder services. Financial institutions will receive fees based
upon shares owned by their clients or customers. The schedules of such fees

and the basis upon which such fees will be paid will be determined from time
to time by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp.
will pay financial institutions, at the time of purchase of Class A Shares,
an amount equal to .50% of the net asset value of Class A Shares purchased
by their clients or customers under certain qualified retirement plans as
approved by Federated Securities Corp. (Such payments are subject to a
reclaim from the financial institution should the assets leave the program
within 12 months after purchase.)

Furthermore, with respect to Class A Shares, Class B Shares, and Class C
Shares, in addition to payments made pursuant to the Distribution Plan and
Shareholder Services Agreement, Federated Securities Corp. and Federated
Shareholder Services, from their own assets, may pay financial institutions
supplemental fees for the performance of sales services,
distribution-related support services, or shareholder services. The support
may include sponsoring sales, educational and training seminars for their
employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of shares the financial institution sells or may
sell, and/or upon the type and nature of sales or marketing support
furnished by the financial institution. Any payments made by the distributor
may be reimbursed by the Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services

(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:

AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF THE FEDERATED FUNDS
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million

BROKERAGE TRANSACTIONS

and dealers subject to review by the Trustees.

SHAREHOLDER INFORMATION

VOTING RIGHTS

TAX INFORMATION

FEDERAL INCOME TAX

afforded to such companies.

STATE AND LOCAL TAXES

In the opinion of Houston, Donnelly and Meck, counsel to the Trust, Trust
shares may be subject to personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania to the extent that the
portfolio securities in the Trust would be subject to such taxes if owned
directly by residents of those jurisdictions.

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for each
class of shares.

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

ADDRESSES

Federated Growth Strategies Fund
Class A Shares Federated Investors Tower
Class B Shares Pittsburgh, PA 15222-3779
Class C Shares

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, PA 15222-3779

Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, PA 15222-3779

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

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

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219

FEDERATED GROWTH STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)

CLASS A SHARES, CLASS B SHARES
CLASS C SHARES

PROSPECTUS

An Open-End, Diversified
Management Investment Company

December 31, 1996

Federated Investors

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

Cusip 314172107
Cusip 314172206
Cusip 314172305
G01228-01 (12/96)

FEDERATED GROWTH STRATEGIES FUND

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

The Class A Shares of Federated Growth Strategies Fund (the "Fund")
represent interests in a diversified portfolio of Federated Equity Funds
(the "Trust"), an open-end management investment company (a mutual fund).
The Fund seeks appreciation of capital by investing primarily in equity
securities of companies with prospects for above-average growth in earnings
and dividends.

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

prospectus. You may request a copy of the Statement of Additional
Information or a paper copy of this prospectus, if you have received your
prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet Web
site (http://www.sec.gov).

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

Prospectus dated December 31, 1996

TABLE OF CONTENTS

SUMMARY OF FUND EXPENSES 1
FINANCIAL HIGHLIGHTS 2
GENERAL INFORMATION 3
INVESTMENT INFORMATION 3
Investment Objective 3
Investment Policies 3
Investment Limitations 6
NET ASSET VALUE 7
HOW TO PURCHASE SHARES 7
What Shares Cost 7
Special Purchase Features 10
EXCHANGE PRIVILEGE 11

HOW TO REDEEM SHARES 12
Special Redemption Features 13
Contingent Deferred Sales Charge 13
Elimination of Contingent Deferred
Sales Charge 14
ACCOUNT AND SHARE INFORMATION 14
TRUST INFORMATION 15
Management of the Trust 15
Distribution of Class A Shares 16
Administration of the Fund 17
BROKERAGE TRANSACTIONS 17
SHAREHOLDER INFORMATION 17
Voting Rights 17
TAX INFORMATION 18
Federal Income Tax 18
State and Local Taxes 18
PERFORMANCE INFORMATION 18
OTHER CLASSES OF SHARES 19
ADDRESSES 20

SUMMARY OF FUND EXPENSES

CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 5.50%

Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)(1) 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 0.75%
12b-1 Fee None
Total Other Expenses 0.38%
Shareholder Services Fee (after waiver)(2) 0.10%
Total Operating Expenses(3) 1.13%

(1) Class A Shares purchased with the proceeds of a redemption of shares of
an unaffiliated investment company purchased or redeemed with a sales charge
and not distributed by Federated Securities Corp. may be charged a
contingent deferred sales charge of 0.50 of 1% for redemptions made within
one year full of purchase. For a more complete description see "Contingent
Deferred Sales Charge."

(3) The total operating expenses were 1.28% absent the voluntary waiver of a
portion of the shareholder services fee.

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS

You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period; and
(3) payment of the maximum sales charge $66 $89 $114 $185

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

FEDERATED GROWTH STRATEGIES FUND
FINANCIAL HIGHLIGHTS -- CLASS A SHARES

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's

independent auditors. Their report, dated December 16, 1996, on the Fund's
financial statements for the year ended October 31, 1996, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

YEAR ENDED
YEAR ENDED OCTOBER 31 MAY 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988(A) 1988 1987

NET ASSET VALUE,
BEGINNING OF $26.22 $21.28 $23.92 $21.16 $21.58 $16.78 $ 20.99 $17.18 $16.93 $17.67 $16.03
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
Net investment 0.04 0.24 0.21 0.20 0.33 0.57 0.75 0.59 0.09 0.25 0.28
income
Net realized and
unrealized gain
(loss)
on investments 5.01 5.64 (2.18) 2.96 0.45 5.97 (2.69) 3.80 1.08 (0.23) 2.40
Total from
investment
operations 5.05 5.88 (1.97) 3.16 0.78 6.54 (1.94) 4.39 1.17 0.02 2.68
LESS DISTRIBUTIONS
Distributions

from net
investment (0.04) (0.26) (0.19) (0.23) (0.33) (0.61) (0.79) (0.52) (0.15) (0.20) (0.26)
income
Distributions
from net
realized gain on
investment (5.39) (0.68) (0.48) (0.17) (0.87) (1.13) (1.48) (0.06) (0.77) (0.56) (0.78)
transactions
Total (5.43) (0.94) (0.67) (0.40) (1.20) (1.74) (2.27) (0.58) (0.92) (0.76) (1.04)
distributions
NET ASSET VALUE,
END OF PERIOD $25.84 $26.22 $21.28 $23.92 $21.16 $ 21.58 $ 16.78 $20.99 $17.18 $16.93 $17.67
TOTAL RETURN(B) 23.16% 29.03% (8.43%) 15.06% 3.93% 41.54% (10.41%) 25.87% 6.95% 0.50% 17.55%
RATIOS TO
AVERAGE
NET ASSETS
Expenses 1.13% 1.10% 0.99% 0.96% 1.01% 1.01% 1.01% 1.01% 1.00%* 1.00% 1.00%
Net investment 0.15% 1.05% 0.89% 0.90% 1.54% 2.88% 4.00% 2.99% 1.30%* 1.39% 1.78%
income
Expense waiver/
reimbursement(c) 0.15% 0.16% -- -- -- 0.10% 0.22% 0.14% 0.60%* 0.15% 0.18%
SUPPLEMENTAL DATA
Net assets, end
of
period (000 $307,882 249,110 $320,630 $460,811 $391,655 $275,561 $138,407 $134,735 $104,146 $102,395 $134,657
omitted)
Average
commission
rate paid $0.0566 -- -- -- -- -- -- -- -- -- --

Portfolio 89% 125% 59% 57% 46% 54% 67% 79% 24% 88% 66%
turnover

* Computed on an annualized basis.

(a) For the five months ended October 31, 1988. The Fund changed its fiscal
year end from May 31 to October 31.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1996, which can be obtained free of charge.

GENERAL INFORMATION

prospectus relates only to the Class A Shares (the "Shares") of the Fund.

Shares of the Fund are designed for individuals and institutions seeking
appreciation of capital by investing primarily in equity securities of
companies with prospects for above-average growth in earnings and dividends.
For information on how to purchase shares of the Fund, please refer to "How
to Purchase Shares." The minimum initial investment for Class A Shares is
$500. However, the minimum initial investment for a retirement account is
$50. Subsequent investments must be in amounts of at least $100, except for
retirement plans which must be in amounts of at least $50.

In general, Class A Shares are sold at net asset value plus an applicable
sales charge and are redeemed at net asset value. However, a contingent
deferred sales charge is imposed under certain circumstances. For a more
complete description, see "How to Redeem Shares."

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

INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

INVESTMENT POLICIES

The Fund pursues this investment objective by investing primarily in equity
securities of companies with prospects for above-average growth in earnings
and dividends. Unless indicated otherwise, the investment policies of the
Fund may be changed by the Board of Trustees without the approval of
shareholders. Shareholders will be notified before any material changes in
these policies become effective.

CONVERTIBLE SECURITIES. Convertible securities are fixed income securities

which may be exchanged or converted into a predetermined number of the
issuer's underlying common stock at the option of the holder during a
specified time period. Accordingly, the Fund considers convertible
securities to be equity securities. Convertible securities may take the form
of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants, or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to be
employed for different investment objectives. The Fund invests in
convertible securities irrespective of their ratings. Therefore, the
convertible securities in which the Fund invests may be rated below
investment grade and considered speculative.

stable stream of income with generally higher yields than common stocks, but
lower than nonconvertible securities of similar quality. The Fund will
exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the
investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objectives. Otherwise, the Fund will hold or trade the convertible
securities. In selecting convertible securities for the Fund, the investment
adviser evaluates the investment characteristics of the convertible security
as a fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the investment adviser
considers numerous factors, including the economic and political outlook,
the value of the security relative to other investment alternatives, trends
in the determinants of the issuer's profits, and the issuer's management
capability and practices.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions

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

TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:

* short-term money market instruments;

* securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or instrumentalities; and

* repurchase agreements.

and agree at the time of sale to repurchase them at a mutually agreed upon
time and price. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the

Fund may lend portfolio securities on a short-term or a long-term basis, up
to one-third of the value of its total assets to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will only enter into
loan arrangements with broker/dealers, banks, or other institutions which
the investment adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral equal to at least
100% of the value of the securities loaned.

PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the
purpose of seeking short-term profits, securities in its portfolio will be
sold whenever the Adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Fund's rate of portfolio
turnover may exceed that of certain other mutual funds with the same
investment objective. A higher rate of portfolio turnover involves
correspondingly greater transaction expenses which must be borne directly by
the Fund and, thus, indirectly by its shareholders. In addition, a high rate
of portfolio turnover may result in the realization of larger amounts of
capital gains which, when distributed to the Fund's shareholders, are
taxable to them. (Further information is contained in the Fund's Statement
of Additional Information within the sections "Brokerage Transactions" and
"Tax Status"). Nevertheless, transactions for the Fund's portfolio will be

based only upon investment considerations and will not be limited by any
other considerations when the Adviser deems it appropriate make changes in
the Fund's portfolio.

INVESTMENT LIMITATIONS

The Fund will not:

* borrow money directly or through reverse repurchase agreements
(arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date)
except, under certain circumstances, the Fund may borrow up to one-third of
the value of its net assets;

The Fund will not:

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for
shares is determined by adding the interest of Class A Shares in the market
value of all securities and other assets of the Fund, subtracting the
interest of Class A Shares in the liabilities of the Fund and those
attributable to Class A Shares, and dividing the remainder by the total
number of Class A Shares outstanding. The net asset value for Class A Shares
may differ from that of Class B Shares and Class C Shares 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.

The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value
of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

HOW TO PURCHASE SHARES

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received, plus a sales charge as follows:

SALES CHARGE AS DEALER CONCESSION
SALES CHARGE AS A PERCENTAGE AS A PERCENTAGE
AMOUNT OF A PERCENTAGE OF NET AMOUNT OF PUBLIC
TRANSACTION OF OFFERING PRICE INVESTED OFFERING PRICE

Less than $50,000 5.50% 5.82% 5.00%

$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*

* See sub-section entitled "Dealer Concession."

No sales charge is imposed for shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. However,
investors who purchase Class A Shares through a trust department, investment
adviser, or other financial intermediary may be charged a service or other
fee by the financial intermediary. Additionally, no sales charge is imposed
on shareholders designated as Liberty Life Members or on shares purchased
through "wrap accounts" or similar programs, under which clients pay a fee
or fees for services.

DEALER CONCESSION. For sales of shares, a dealer will normally receive up to
90% of the applicable sales charge. Any portion of the sales charge which is
not paid to a dealer will be retained by the distributor. However, the
distributor may offer to pay dealers up to 100% of the sales charge retained
by it. Such payments may take the form of cash or promotional incentives,
such as reimbursement of certain expenses of qualified employees and their
spouses to attend informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. In some
instances, these incentives will be made available only to dealers whose
employees have sold or may sell a significant amount of shares. On purchases
of $1 million or more, the investor pays no sales charge; however, the

distributor will make twelve monthly payments to the dealer totaling 0.25%
of the public offering price over the first year following the purchase.
Such payments are based on the original purchase price of shares outstanding
at each month end.

Effective as of the date of this prospectus, and until further notice, the
entire amount of the applicable sales charge will be reallowed to dealers.
In addition, the distributor will pay dealers additional bonus payments in
an amount equal to 0.50% of the public offering price of shares sold.

REDUCING OR ELIMINATING THE SALES CHARGE. The sales charge can be reduced or
eliminated on the purchase of shares through:

* quantity discounts and accumulated purchases;

* concurrent purchases;

* signing a 13-month letter of intent;

* using the reinvestment privilege; or

* purchases with proceeds from redemptions of unaffiliated investment

company shares.

QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine
purchases of shares made on the same day by the investor, the investor's
spouse, and the investor's children under age 21 when it calculates the
sales charge. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust
estate or a single fiduciary account.

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

Shares of one of the other Federated Funds with a sales charge, and $20,000
in this Fund, the sales charge would be reduced.

intent. Prior trade prices will not be adjusted.

REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has the privilege, within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing or
by his financial institution of the reinvestment in order to eliminate a
sales charge. If the shareholder redeems his shares in the Fund, there may
be tax consequences.

PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES. Investors may purchase shares at net asset value, without a sales
charge, with the proceeds from the redemption of shares of an unaffiliated
investment company that were purchased or sold with a sales charge or
commission and were not distributed by Federated Securities Corp. The
purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for shares purchased under this
program. If shares are purchased in this manner, fund purchases will be
subject to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of any
special offering as described above.

registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before 5:00
p.m. (Eastern time) in order for shares to be purchased at that day's price.
Purchase orders through other financial institutions must be received by the
financial institution and transmitted to the Fund before 4:00 p.m. (Eastern
time) in order for shares to be purchased at that day's price. It is the
financial institution's responsibility to transmit orders promptly.
Financial institutions may charge additional fees for their services.

PURCHASING SHARES BY WIRE. Once an account has been established, shares may
be purchased by Federal Reserve wire by calling the Fund. All information
needed will be taken over the telephone, and the order is considered
received when State Street Bank receives payment by wire. Federal funds
should be wired as follows: Federated Shareholder Services Company, c/o
State Street Bank and Trust Company, Boston, Massachusetts; Attn: EDGEWIRE;
For Credit to: (Fund Name) (Fund Class); (Fund Number -- this number can be
found on the account statement or by contacting the Fund); Account Number;
Trade Date and Order Number; Group Number or Dealer Number; Nominee or
Institution Name; and ABA Number 011000028. Shares cannot be purchased by
wire on holidays when wire transfers are restricted. Questions on wire
purchases should be directed to your shareholder services representative at
the telephone number listed on your account statement.

SPECIAL PURCHASE FEATURES

RETIREMENT PLANS. Fund Shares can be purchased as an investment for
retirement plans or IRA accounts. For further details, contact the Fund and
consult a tax adviser.

EXCHANGE PRIVILEGE

Shareholders of Class A Shares who have been designated Liberty Life Members

are exempt from sales charges on future purchases in and exchanges between
the Class A Shares of any Federated Fund, as long as they maintain a $500
balance in one of the Federated Funds.

TAX CONSEQUENCES. An exercise of the exchange privilege is treated as a sale
for federal income tax purposes. Depending upon the circumstances, a capital
gain or loss may be realized.

MAKING AN EXCHANGE. Instructions for exchanges for the Federated Funds or
certain Federated Funds may be given in writing or by telephone. Written
instructions may require a signature guarantee. Shareholders of the Fund may
have difficulty in making exchanges by telephone through brokers and other
financial institutions during times of drastic economic or market changes.
If a shareholder cannot contact his broker or financial institution by
telephone, it is recommended that an exchange request be made in writing and
sent by overnight mail to Federated Shareholder Services Company, 1099
Hingham Street, Rockland, Massachusetts 02370-3317.

HOW TO REDEEM SHARES

the telephone number listed on your account statement.

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

administered by the Federal Deposit Insurance Corporation, a member firm of
a domestic stock exchange, or any other "eligible guarantor institution," as
defined by the Securities and Exchange Act of 1934. The Fund does not accept
signatures guaranteed by a notary public.

SPECIAL REDEMPTION FEATURES

SYSTEMATIC WITHDRAWAL PROGRAM. Shareholders who desire to receive payments
of a predetermined amount not less than $100 may take advantage of the
Systematic Withdrawal Program. Under this program, Shares are redeemed to
provide for periodic withdrawal payments in an amount directed by the
shareholder.

Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares, and
the fluctuation of the net asset value of Shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must have
an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that shares are sold with a sales charge, it is not advisable for
shareholders to continue to purchase shares while participating in this
program.

CONTINGENT DEFERRED SALES CHARGE

Shares purchased under a periodic special offering with the proceeds of a

redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge of .50% for
redemptions made within one full year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset value
of the redeemed shares at the time of purchase or the net asset value of the
redeemed shares at the time of redemption.

The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) shares held for more than
one full year from the date of purchase. Redemptions will be processed in a
manner intended to maximize the amount of redemption which will not be
subject to a contingent deferred sales charge. In computing the amount of
the applicable contingent deferred sales charge, redemptions are deemed to
have occurred in the following order: (1) shares acquired through the
reinvestment of dividends and long-term capital gains; (2) shares held for
more than one full year from the date of purchase; (3) shares held for fewer
than one full year from the date of purchase on a first-in, first-out basis.
A contingent deferred sales charge is not assessed in connection with an
exchange of Fund Shares for shares of other funds in the Federated Funds in
the same class (see "Exchange Privilege"). Any contingent deferred sales
charge imposed at the time the exchanged-for shares are redeemed is
calculated as if the shareholder had held the shares from the date on which
he became a shareholder of the exchanged-from shares. Moreover, the
contingent deferred sales charge will be eliminated with respect to certain
redemptions (see "Elimination of Contingent Deferred Sales Charge").

ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions
from an Individual Retirement Account or other retirement plan to a
shareholder who has attained the age of 701o2; and (3) involuntary
redemptions by the Fund of shares in shareholder accounts that do not comply
with the minimum balance requirements. No contingent deferred sales charge
will be imposed on redemptions of Shares held by Trustees, employees and
sales representatives of the Fund, the distributor, or affiliates of the
Fund or distributor; employees of any financial institution that sells
shares of the Fund pursuant to a sales agreement with the distributor and
their immediate family members; and spouses and children under the age of 21
of the aforementioned persons. Finally, no contingent deferred sales charge
will be imposed on the redemption of shares originally purchased through a
bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party administrator
has entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no
payments were advanced for purchases made through such entities. The Fund
reserves the right to discontinue elimination of the contingent deferred
sales charge. Shareholders will be notified of such elimination. Any shares
purchased prior to the termination of such waiver would have the contingent
deferred sales charge eliminated as provided in the Fund's prospectus at the
time of the purchase of the shares. If a shareholder making a redemption
qualifies for an elimination of the contingent deferred sales charge, the

shareholder must notify Federated Securities Corp. or the transfer agent in
writing that he is entitled to such elimination.

ACCOUNT AND SHARE INFORMATION

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during
that month.

DIVIDENDS. Dividends are declared and paid quarterly to all shareholders
invested in the Fund on the record date. Dividends and distributions are
automatically reinvested in additional shares of the Fund on payment dates
at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by contacting
the transfer agent. All shareholders on the record date are entitled to the
dividend. If shares are redeemed or exchanged prior to the record date or
purchased after the record date, those shares are not entitled to that
quarter's dividend.

CAPITAL GAINS. Net long-term capital gains realized by the Fund, if any,
will be distributed at least once every twelve months.

ACCOUNTS WITH LOW BALANCES. Due to the high cost of maintaining accounts
with low balances, the Fund may redeem shares in any account, except

retirement plans, and pay the proceeds to the shareholder if the account
balance falls below the required minimum value of $500. This requirement
does not apply, however, if the balance falls below the required minimum
value because of changes in the net asset value of shares. Before shares are
redeemed to close an account, the shareholder is notified in writing and
allowed 30 days to purchase additional shares to meet the minimum
requirement.

TRUST INFORMATION

MANAGEMENT OF THE TRUST

INVESTMENT ADVISER. Investment decisions for the Fund are made by the Fund's
investment adviser, Federated Management (the "Adviser") subject to
direction by the Trustees. The Adviser continually conducts investment
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
Fund.

James E. Grefenstette has been the Fund's portfolio manager since December
1994. Mr. Grefenstette joined Federated Investors in 1992 as an Investment

DISTRIBUTION OF CLASS A SHARES

Federated Securities Corp. is the principal distributor for shares of the

SHAREHOLDER SERVICES. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to 0.25% of the average
daily net asset value of shares to obtain certain personal services for
shareholders and for the maintenance of shareholder accounts ("shareholder
services"). Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform shareholder services directly or will select
financial institutions to perform shareholder services. Financial
institutions will receive fees based upon shares owned by their clients or
customers. The schedules of such fees and the basis upon which such fees
will be paid will be determined from time to time by the Fund and Federated
Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities Corp.
will pay financial institutions, at the time of purchase, an amount equal to
.50% of the net asset value of shares purchased by their clients or
customers under certain qualified retirement plans as approved by Federated
Securities Corp. (Such payments are subject to a reclaim from the financial
institution should the assets leave the program within 12 months after
purchase.)

Furthermore, in addition to payments made pursuant to the Shareholder
Services Agreement, Federated Securities Corp. and Federated Shareholder

Services, from their own assets, may pay financial institutions supplemental
fees for the performance of substantial sales services, distribution-related
support services, or shareholder services. The support may include
sponsoring sales, educational and training seminars for their employees,
providing sales literature, and engineering computer software programs that
emphasize the attributes of the Fund. Such assistance will be predicated
upon the amount of shares the financial institution sells or may sell,
and/or upon the type and nature of sales or marketing support furnished by
the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.

ADMINISTRATION OF THE FUND

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:

AVERAGE AGGREGATE
MAXIMUM FEE DAILY NET ASSETS
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.

Federated Services Company may choose voluntarily to waive a portion of its
fee.

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION

VOTING RIGHTS

Trustees under certain circumstances.

TAX INFORMATION

FEDERAL INCOME TAX

STATE AND LOCAL TAXES.

Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

From time to time, the Fund advertises its total return and yield for Class
A Shares.

The yield of Class A Shares is calculated by dividing the net investment
income per share (as defined by the SEC) earned by Class A Shares over a
thirty-day period by the maximum offering price per share of each class on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned
by Class A Shares and, therefore, may not correlate to the dividends or
other distributions paid to shareholders.

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

OTHER CLASSES OF SHARES

As of the date of this prospectus, the Fund also offers two other classes of
shares called Class B Shares and Class C Shares. This prospectus relates
only to Class A Shares.

Class C Shares are sold primarily to customers of financial institutions at

net asset value with no initial sales charge. Class C Shares are distributed
pursuant to a Distribution Plan adopted by the Fund whereby the distributor
is paid a fee of up to .75%, in addition to a Shareholder Services fee of
.25 of 1% of the Class C Shares' average daily net assets. In addition,
Class C Shares may be subject to certain contingent deferred sales charges.
Investments in Class C Shares are subject to a minimum initial investment of
$1,500, unless the investment is in a retirement account, in which case the
minimum investment is $50.

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

ADDRESSES

Federated Growth Strategies Fund
Class A Shares Federated Investors Tower
Pittsburgh, PA 15222-3779

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, PA 15222-3779

Investment Adviser
Federated Management Federated Investors Tower

Pittsburgh, PA 15222-3779

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

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

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, PA 15219

FEDERATED GROWTH STRATEGIES FUND

(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES

PROSPECTUS

An Open-End, Diversified
Management Investment Company

December 31, 1996

Federated Investors

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.

Cusip 314172107
G01228-03 (12/96)

FEDERATED GROWTH STRATEGIES FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the combined
prospectus for Class A Shares, Class B Shares, and Class C Shares, and the
stand-alone prospectus for Class A Shares of Federated Growth Strategies
Fund (the "Fund"), a portfolio of Federated Equity Funds (the Trust") dated
December 31, 1996. This Statement is not a prospectus. You may request a

copy of a prospectus or a paper copy of this Statement, if you have received
it electronically, free of charge by calling 1-800-341-7400.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated December 31, 1996

Federated Investors
[Graphic]
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors.
[Graphic]

Cusip 314172107
Cusip 314172206
Cusip 314172305
G01228-02 (12/96)

TABLE OF CONTENTS

</TABLE>
<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1

Temporary Investments 2
When-Issued and Delayed Delivery Transactions 2
Lending of Portfolio Securities 2
Repurchase Agreements 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
FEDERATED EQUITY FUNDS MANAGEMENT 5
Fund Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 11
Other Related Services 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Fund Administration 11
Custodian 11
Transfer Agent 11
Independent Auditors 11
PURCHASING SHARES 12
Distribution Plan (Class B Shares and Class C Shares Only)
and Shareholder Services Agreement 12
Conversion to Federal Funds 12
Purchases by Sales Representatives, Trustees, and
Employees of the Fund 12
DETERMINING NET ASSET VALUE 12
Determining Market Value of Securities 13

REDEEMING SHARES 13
Redemption in Kind 13
Elimination of the Contingent
Deferred Sales Charge 13
MASSACHUSETTS PARTNERSHIP LAW 14
EXCHANGING SECURITIES FOR SHARES 14
Tax Consequences 14
TAX STATUS 14
The Fund's Tax Status 14
Shareholders' Tax Status 14
TOTAL RETURN 15
YIELD 15
PERFORMANCE COMPARISONS 15
Economic and Market Information 17
ABOUT FEDERATED INVESTORS 17
Mutual Fund Market 17
Institutional 17
Trust Organizations 17
Broker/Dealers and Bank Broker/
Dealer Subsidiaries 18
FINANCIAL STATEMENTS 18
APPENDIX 18
</TABLE>

GENERAL INFORMATION ABOUT THE FUND

Declaration of Trust permits the Trust to offer separate series and classes
of shares. Shares of the Fund are offered in three classes known as Class A
Shares, Class B Shares, and Class C Shares (individually and collectively
referred to as "Shares" as the context may require). This Statement of
Additional Information relates to all three classes of shares.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is appreciation of capital. The Fund pursues
this investment objective by investing primarily in equity securities of
companies with prospects for above-average growth in earnings and dividends.
The investment objective cannot be changed without approval of shareholders.

TYPES OF INVESTMENTS

The Fund may invest in common stocks, preferred stocks, corporate bonds,
debentures, notes, warrants, and put options on stocks.

CORPORATE DEBT SECURITIES

Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or
a different issuer, participations based on revenues, sales, or profits, or
the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).

The corporate debt securities (excluding convertible securities) in which
the Fund may invest will be rated investment grade, i.e., Baa or better by

Moody's Investors Service, Inc. ("Moody's"), or BBB or better by Standard &
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") (or,
if unrated, are deemed to be of comparable quality by the Fund's investment
adviser). It should be noted that securities receiving the lowest investment
grade rating are considered to have some speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than
higher rated securities. In the event that a security which had an eligible
rating when purchased is downgraded below Baa or BBB, the investment adviser
will promptly reassess whether continued holding of the security is
consistent with the Fund's objective.

RESTRICTED SECURITIES

The Fund expects that any restricted securities would be acquired either
from institutional investors who originally acquired the securities in
private placements or directly from the issuers of the securities in private
placements. Restricted securities and securities that are not readily
marketable may sell at a discount from the price they would bring if freely
marketable.

PUT AND CALL OPTIONS

The Fund may purchase listed put options on stocks or write covered call
options to protect against price movements in particular securities in its
portfolio and generate income. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the writer (seller) at
a specified price during the term of the option. As writer of a call option,
the Fund has the obligation upon exercise of the option during the option

period to deliver the underlying security upon payment of the exercise
price.

The Fund may only: (1) buy put options which are listed on a recognized
options exchange and which are on securities held in its portfolio; and (2)
sell listed call options either on securities held in its portfolio or on
securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any such additional
consideration). The Fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or expire. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same
series. Although the investment adviser will consider liquidity before
entering into option transactions, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option or at
any particular time. The Fund reserves the right to hedge the portfolio by
buying financial futures and put options on stock index futures and
financial futures.

However, the Fund will not engage in these transactions until (1) an
amendment to its Registration Statement is filed with the Securities and
Exchange Commission and becomes effective; and (2) ten days after a
supplement to the prospectus disclosing this change in policy has been
mailed to the shareholders.

TEMPORARY INVESTMENTS

The Fund may also invest in temporary investments from time to time for
defensive purposes.

MONEY MARKET INSTRUMENTS

The Fund may invest in the following money market instruments:

* instruments of domestic and foreign banks and savings associations if they
have capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured in full by the Bank Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund, which is administered
by the FDIC; and

* prime commercial paper (rated A-1 by S&P , Prime-1 by Moody's, or F-1 by
Fitch).

U.S. GOVERNMENT OBLIGATIONS

The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed
by:

* the full faith and credit of the U.S. Treasury;

* the issuer's right to borrow from the U.S. Treasury;

* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

* the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

* Farm Credit Banks;

* Federal Home Loan Banks;

* Federal National Mortgage Association;

* Student Loan Marketing Association; and

* Federal Home Loan Mortgage Corporation.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.

LENDING OF PORTFOLIO SECURITIES

The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends
or interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The Fund does not have the
right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment.

REPURCHASE AGREEMENTS

REVERSE REPURCHASE AGREEMENTS

The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future, the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.

When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and are maintained until the transaction is settled.

PORTFOLIO TURNOVER

The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objective. For the fiscal years ended October
31, 1996, and 1995, the portfolio turnover rates were 89%, and 125%,
respectively.

INVESTMENT LIMITATIONS

CONCENTRATION OF INVESTMENTS

The Fund will not purchase securities if, as a result of such purchase, 25%
or more of the value of its total assets would be invested in any one
industry. However, the Fund may at times invest 25% or more of the value of
its total assets in cash or cash items (not including certificates of
deposit), securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or repurchase agreements secured by such
instruments.

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities. The Fund reserves the right
to purchase financial futures and put options on stock index futures and on
financial futures.

INVESTING IN REAL ESTATE

The Fund will not purchase or sell real estate, although it may invest in
the securities of companies whose business involves the purchase or sale of
real estate, or in securities which are secured by real estate or interests
in real estate.

BUYING ON MARGIN

The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions and

may make margin payments in connection with buying financial futures, put
options on stock index futures, and put options on financial futures.

SELLING SHORT

The Fund will not sell securities short unless at all times when a short
position is open, it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to,
the securities sold short; and unless not more than 10% of the value of the
Fund's net assets (taken at current value) is held as collateral for such
sales at any one time.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may borrow money
and engage in reverse repurchase agreements only in amounts up to one-third
of the value of its net assets, including the amounts borrowed. The Fund
will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure, or to facilitate management of the portfolio by enabling the Fund
to meet redemption requests where the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. The Fund will not purchase any
securities while any such borrowings (including reverse repurchase
agreements) are outstanding.

LENDING CASH OR SECURITIES

The Fund will not lend any of its assets except portfolio securities. This
shall not prevent the purchase or holding of corporate or government bonds,
debentures, notes, certificates of indebtedness, or other debt securities of
an issuer, repurchase agreements, or other transactions which are permitted
by the Fund's investment objective and policies or Declaration of Trust.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.

INVESTING IN MINERALS

The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, although it may purchase the securities
of issuers which invest in or sponsor such programs.

DIVERSIFICATION OF INVESTMENTS

The Fund will not purchase the securities of any issuer (other than
securities of the U.S. government, its agencies, or instrumentalities, or
instruments secured by securities of such issuers, such as repurchase
agreements) if, as a result, more than 5% of the value of its total assets
would be invested in the securities of such issuer or acquire more than 10%
of any class of voting securities of any issuer. For these purposes, the
Fund takes all common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other

differences.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund will not purchase securities of other investment companies, except
by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 10% of the value of its
total assets would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition. (It should be noted that
investment companies incur certain expenses such as management fees and,
therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses.)

INVESTING IN ILLIQUID SECURITIES

The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities not determined by the Trustees to be liquid.

PLEDGING ASSETS

The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In those cases, it may pledge assets having a

market value not exceeding the lesser of the dollar amounts borrowed or 10%
of the value of total assets at the time of the borrowing.

WRITING COVERED CALL OPTIONS

The Fund will not write call options on securities unless the securities are
held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.

ACQUIRING SECURITIES

The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may invest in up to 10%
of the voting securities of any one issuer and may exercise its voting
powers consistent with the best interests of the Fund. In addition, the
Fund, other companies advised by the Fund's investment adviser, and other
affiliated companies may together buy and hold substantial amounts of voting
stock of a company and may vote together in regard to such company's
affairs. In some such cases, the Fund and its affiliates might collectively
be considered to be in control of such company. In some cases, Trustees and
other persons associated with the Fund and its affiliates might possibly
become directors of companies in which the Fund holds stock.

For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch
of a domestic bank or savings association having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment to be

"cash items."

Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in
percentage resulting from any change in value or net assets will not result
in a violation of such restriction. The Fund did not borrow money, sell
securities short, or invest in reverse repurchase agreements in excess of 5%
of the value of its total assets during the last fiscal year and has no
present intent to do so in the coming fiscal year.

FEDERATED EQUITY FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, present
positions with Federated Equity Funds, and principal occupations.

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

Birthdate: July 28, 1924

Chairman and Trustee

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA

Birthdate: February 3, 1934

Trustee

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

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

Birthdate: June 23, 1937

Trustee

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

William J. Copeland

One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918

Trustee

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

James E. Dowd
571 Hayward Mill Road
Concord, MA

Birthdate: May 18, 1922

Trustee

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

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

Birthdate: October 11, 1932

Trustee

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

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

Birthdate: June 18, 1924

Trustee

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

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

Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;

formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA

Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

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

Birthdate: December 20, 1932

Trustee

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

Wesley W. Posvar
1202 Cathedral of Learning

University of Pittsburgh
Pittsburgh, PA

Birthdate: September 14, 1925

Trustee

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Birthdate: June 21, 1935

Trustee

Public Relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.

Glen R. Johnson

Federated Investors Tower
Pittsburgh, PA

Birthdate: May 2, 1929

President

Trustee, Federated Investors; President and/or Trustee of some of the Funds;
Staff Member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA

Birthdate: April 11, 1949

Executive Vice President

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

Edward C. Gonzales

Federated Investors Tower
Pittsburgh, PA

Birthdate: October 22, 1930

Executive Vice President

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

John W. McGonigle

Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President, Secretary and Treasurer

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

of the Funds; Treasurer of some of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Birthdate: May 17, 1923

Vice President

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

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

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

GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High
Yield Trust; Federated Income Securities Trust; Federated Income Trust;
Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust;
Federated Master Trust; Federated Municipal Opportunities Fund, Inc.;
Federated Municipal Securities Fund, Inc.; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S.
Government Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years;
Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Money Market Management, Inc.; Money Market Obligations Trust;
Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;
Trust for U.S. Treasury Obligations; and World Investment Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the Fund's outstanding shares.

As of December 4, 1996, the following shareholder of record owned 5% or more
of the outstanding Class B Shares of the Fund: MLPF&S for the sole benefit
of its customers, Jacksonville, Florida, owned approximately 23,369 shares
(5.01%).

As of December 4, 1996, the following shareholders of record owned 5% or
more of the outstanding Class C Shares of the Fund: MLPF&S for the sole
benefit of its customers, Jacksonville, Florida, owned approximately 20,815
shares (14.43%); The Troy Savings Bank RPO Gorman Group, Troy, New York,
owned approximately 18,626 shares (12.91%).

TRUSTEES COMPENSATION

<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST TRUST*# FROM FUND COMPLEX+
<S> <C> <C>
John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 54 other investment companies in the Fund Complex
Thomas G. Bigley++ $865 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund Complex
John T. Conroy, Jr. $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
William J. Copeland $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
James E. Dowd $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $847 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Peter E. Madden $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Gregor F. Meyer $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
John E. Murray $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Wesley W. Posvar $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex

Marjorie P. Smuts $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
</TABLE>

* Information is furnished for the fiscal year ended October 31, 1996.

# The aggregate compensation is provided for the Trust which is comprised of
3 portfolios.

+ The information is provided for the last calendar year.

++ Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.

TRUSTEE LIABILITY

The Trust's Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, they are
not protected against any liability to which they would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

The Fund's investment adviser is Federated Management (the "Adviser"). It is
a subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue,
his wife, and his son, J. Christopher Donahue.

The Adviser shall not be liable to the Trust, the Fund, or any shareholder
of the Fund 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
Trust.

ADVISORY FEES

For its advisory services, Federated Management receives an annual
investment advisory fee as described in each prospectus. During the fiscal
years ended October 31, 1996, 1995, and 1994, the Fund's Adviser earned
$2,042,918, $1,958,826, and $3,112,641, respectively.

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 shares of funds offered by Federated Securities Corp.

BROKERAGE TRANSACTIONS

the Adviser or its in advising the Fund and other accounts. To the extent
that receipt of these services may supplant services for which the Adviser
or its affiliates might otherwise have paid, it would tend to reduce their
expenses. The Adviser and its affiliates exercise reasonable business
judgment in selecting brokers who offer brokerage and research services to
execute securities transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. For the fiscal years
ended October 31, 1996, 1995, and 1994, the Fund paid total brokerage
commissions of $532,694, $1,002,791, and $829,771, respectively.

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

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee described in

each prospectus. From March 1, 1994, to March 1, 1996, Federated
Administrative Services served as the Fund's Administrator. Prior to March
1, 1994, Federated Administrative Services, Inc. served as the Fund's
Administrator. Both former Administrators are subsidiaries of Federated
Investors. For purposes of this Statement of Additional Information,
Federated Services Company, Federated Administrative services, and Federated
Administrative Services, Inc., may hereinafter collectively be referred to
as the "Administrators." For the fiscal years ended October 31, 1996, 1995,
and 1994, the Administrators earned $205,948, $197,711, and $410,620,
respectively.

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund. Federated
Services Company, Pittsburgh, PA, provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments. The
fee paid for this service is based upon the level of the Fund's average net
assets for the period plus out-of-pocket expenses.

TRANSFER AGENT

Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records.
For its services, the transfer agent receives a fee based on the level of
the Fund's average net assets for the period plus out-of-pocket expenses.

INDEPENDENT AUDITORS

The independent auditors for the Fund are Ernst & Young LLP, One Oxford
Centre, Pittsburgh, Pennsylvania 15219.

PURCHASING SHARES

Except under certain circumstances described in the prospectus, shares are
sold at their net asset value (plus a sales charge on Class A Shares only)
on days the New York Stock Exchange is open for business. The procedure for
purchasing shares is explained in each prospectus under "How To Purchase
Shares."

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES AGREEMENT

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

By adopting the Distribution Plan (Class B Shares and Class C Shares only),
the Trustees expect that the Class B Shares and Class C Shares of the Fund

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

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

For the fiscal year ended October 31, 1996, the Fund paid shareholder
service fees for Class A Shares, Class B Shares, and Class C Shares in the
amounts of $663,320, $15,083, and $2,569, respectively, of which $397,992,
$0, and $1,203, respectively, was voluntarily waived.

For the fiscal year ended October 31, 1996, the Class B Shares and Class C
Shares of the Fund paid distribution services fees in the amounts of
$45,248, and $7,708, respectively.

CONVERSION TO FEDERAL FUNDS

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

shareholder's agent in depositing checks and converting them to federal
funds.

PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES OF THE FUND

Trustees, employees, and sales representatives of the Fund, Federated
Management, and Federated Securities Corp., or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities Corp.,
and their spouses and children under 21, may buy Class A Shares at net asset
value without a sales charge. Shares may also be sold without a sales charge
to trusts or pension or profit-sharing plans for these persons.

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

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in each prospectus.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities, other than options, are
determined as follows:

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

* in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices and for bonds and other
fixed income securities as determined by an independent pricing service
for unlisted equity securities, the latest bid prices; or

* for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or at fair value as
determined in good faith by the Trustees.

REDEEMING SHARES

The Fund redeems shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus
under "How To Redeem Shares." Although the transfer agent does not charge
for telephone redemptions, it reserves the right to charge a fee for the
cost of wire-transferred redemptions of less than $5,000.

Class B Shares redeemed within one to six years of purchase and Class C
Shares and applicable Class A Shares redeemed within one year of purchase
may be subject to a contingent deferred sales charge. The amount of the
contingent deferred sales charge is based upon the amount of the
administrative fee paid at the time of purchase by the distributor to the
financial institution for services rendered, and the length of time the
investor remains a shareholder in the Fund. Should financial institutions

elect to receive an amount less than the administrative fee that is stated
in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder
will be reduced accordingly.

REDEMPTION IN KIND

Although the Trust intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the respective Fund's portfolio. To the
extent available, such securities will be readily marketable.

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

Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay
all or a portion of the remainder of the redemption in portfolio
instruments, valued in the same way as the Fund determines net asset value.
The portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable.

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

ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE

The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales Charge
may not exceed 12.00% annually with reference initially to the value of the
Class B Shares upon establishment of the Systematic Withdrawal Program and
then as calculated at the fiscal year end. Redemptions on a qualifying
Systematic Withdrawal Program can be made at a rate of 1.00% monthly, 3.00%
quarterly, or 6.00% semi-annually with reference to the applicable account
valuation amount. Amounts that exceed the 12.00% annual limit for
redemption, as described, may be subject to the Contingent Deferred Sales
Charge. To the extent that a shareholder exchanges shares for Class B Shares
of other Federated Funds, the time for which the exchanged-for shares are to
be held will be added to the time for which exchanged-from shares were held
for purposes of satisfying the 12 month holding requirement. However, for
purposes of meeting the $10,000 minimum account value requirement, Class B
Share account values will not be aggregated.

MASSACHUSETTS PARTNERSHIP LAW

In the unlikely event a shareholder is held personally liable for the

Trust's obligations, the Trust is required to use its property to protect or
compensate the shareholder. On request, the Trust will defend any claim made
and pay any judgment against a shareholder for any act or obligation of the
Trust. Therefore, financial loss resulting from liability as a shareholder
will occur only if the Trust itself cannot meet its obligations to indemnify
shareholders and pay judgments against them.

EXCHANGING SECURITIES FOR SHARES

Investors may exchange securities they already own for shares, or they may
exchange a combination of securities and cash for shares. An investor should
forward the securities in negotiable form with an authorized letter of
transmittal to Federated Securities Corp. The Fund will notify the investor
of its acceptance and valuation of the securities within five business days
of their receipt by State Street Bank.

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

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

TAX CONSEQUENCES

Exercise of this exchange privilege is treated as a sale for federal income

tax purposes. Depending upon the cost basis of the securities exchanged for
shares, a gain or loss may be realized by the investor.

TAX STATUS

THE FUND'S TAX STATUS

The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the
Fund must, among other requirements:

* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

* derive less than 30% of its gross income from the sale of securities held
less than three months;

* invest in securities within certain statutory limits; and

* distribute to its shareholders at least 90% of its net income earned
during the year.

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends and capital
gains received as cash or additional shares. No portion of any income
dividend paid by the Fund is eligible for the dividends received deduction

available to corporations. These dividends, and any short-term capital
gains, are taxable as ordinary income.

CAPITAL GAINS

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held the
Fund Shares.

TOTAL RETURN

The Fund's average annual total returns for Class A Shares for the one-year,
five-year, and ten-year periods ended October 31, 1996, were 16.37%, 10.45%,
and 12.51%, respectively.

The Fund's average annual total returns for Class B Shares, for the one-year
period ended October 31, 1996, and for the period from August 15, 1995 (date
of initial public offering), to October 31, 1996, were 15.32% and 15.88%,
respectively.

The Fund's average annual total returns for Class C Shares, for the one-year
period ended October 31, 1996, and for the period from August 15, 1995 (date
of initial public offering), to October 31, 1995, were 20.89% and 20.72%,
respectively.

The average annual total return for each class of shares of the Fund is the
average compounded rate of return for a given period that would equate a
$1,000 initial investment to the ending redeemable value of that investment.
The ending redeemable value is computed by multiplying the number of shares

owned at the end of the period by the net asset value per share at the end
of the period. The number of shares owned at the end of the period is based
on the number of shares purchased at the beginning of the period with
$1,000, less any applicable sales charge adjusted over the period by any
additional shares, assuming the quarterly reinvestment of all dividends and
distributions. Any applicable contingent deferred sales charge is deducted
from the ending value of the investment based on the lesser of the original
purchase price or the net asset value of shares redeemed.

YIELD

The Fund's yields for Class A Shares, Class B Shares, and Class C Shares for
the thirty-day period ended October 31, 1993 were 0%, 0%, and 0%
respectively.

The yield for each class of shares of the Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by any class of shares over a thirty-day period by the
maximum offering price per share of the respective class on the last day of
the period. This value is annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the Securities
and Exchange Commission and, therefore, may not correlate to the dividends
or other distributions paid to the shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any

class of shares, the performance will be reduced for those shareholders
paying those fees.

PERFORMANCE COMPARISONS

The performance of each of the classes of shares depends upon such variables
as:

* portfolio quality;

* average portfolio maturity;

* type of instruments in which the portfolio is invested;

* changes in interest rates and market value of portfolio securities;

* changes in the Fund's or any class of shares' expenses; and

* various other factors.

The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return. Investors may use financial publications and/or indices to obtain a
more complete view of the Fund's performance. When

comparing performance, investors should consider all relevant factors such
as the composition of any index used, prevailing market conditions,
portfolio compositions of other funds, and methods used to value portfolio

securities and compute offering price. The financial publications and/or
indices which the Fund uses in advertising may include:

* LIPPER ANALYTICAL SERVICES, INC., 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
specified period of time. From time to time, the Fund will quote its
Lipper ranking in the "growth funds" category in advertising and sales
literature.

* DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is cited
as a principal indicator of market conditions.

* STANDARD & POOR'S LOW-PRICED INDEX compares a group of approximately
twenty actively traded stocks priced under $25 for one month periods and
year-to-date.

* STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P 500),
a composite index of common stocks in industry, transportation, and
financial and public utility companies, can be used to compare to the
total returns of funds whose portfolios are invested primarily in common
stocks. In addition, the S&P 500 assumes reinvestments of all dividends
paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.

* LIPPER GROWTH FUND AVERAGE is an average of the total returns for 580
growth funds tracked by Lipper Analytical Services, Inc., an independent
mutual fund rating service.

* LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.

* 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.

* VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing, Inc.,
analyzes price, yield, risk, and total return for equity and fixed income
mutual funds. The highest rating is one, and ratings are effective for two
weeks.

* CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.

* STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, 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 specified period of time. From time to time, the

Fund will quote its Strategic Insight ranking in the "growth funds"
category in advertising and sales literature.

* MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.

* VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common equity
securities. It is based on a geometric average of relative price changes
of the component stocks and does not include income.

* STRATEGIC INSIGHT GROWTH FUNDS INDEX consists of mutual funds that invest
in well-established companies primarily for long-term capital gains rather
than current income.

* FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines, among others
-- provide performance statistics over specified time periods.

Advertisements and other sales literature for any class of shares may quote
total returns which are calculated on non-standardized base periods. These
total returns also represent the historic change in the value of an
investment in any class of shares based on quarterly reinvestment of
dividends over a specified period of time.

From time to time as it deems appropriate, the Fund may advertise the
performance of any class of shares using charts, graphs, and descriptions,
compared to federally insured bank products including certificates of
deposit and time deposits and to money market funds using the Lipper
Analytical Services money market instruments average. In addition,

advertising and sales literature for the Fund may use charts and graphs to
illustrate the principles of dollar-cost averaging and may disclose the
amount of dividends paid by the Fund over certain periods of time.

Advertisements may quote performance information which does not reflect the
effect of the sales charge on Class A Shares.

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

ECONOMIC AND MARKET INFORMATION

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

ABOUT FEDERATED INVESTORS

Federated Investors is dedicated to meeting investor needs which is

reflected in its investment decision making -- structured, straightforward,
and consistent. This has resulted in a history of competitive performance
with a range of competitive investment products that have gained the
confidence of thousands of clients and their customers.

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

In the equity sector, Federated Investors has more than 25 years'
experience. As of December 31, 1995, Federated Investors managed 22 equity
funds totaling approximately $5.4 billion in assets across growth, value,
equity income, international, index and sector (i.e. utility) styles.
Federated Investors' value-oriented management style combines quantitative
and qualitative analysis and features a structured, computer-assisted
composite modeling system that was developed in the 1970s.

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

MUTUAL FUND MARKET

Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and

institutions, have entrusted over $2 trillion to the more than 5,500 funds
available.*

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

INSTITUTIONAL

Federated Investors meets the needs of more than 4,000 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for
a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.

TRUST ORGANIZATIONS

Other institutional clients include close relationships with more than 1,500
banks and trust organizations. Virtually all of the trust divisions of the
top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Federated funds are available to consumers through major brokerage firms
nationwide -- including 200 New York Stock Exchange firms -- supported by

more wholesalers than any other mutual fund distributor. Federated
Investors' service to financial professionals and institutions has earned it
high ratings in several surveys performed by DALBAR, Inc. DALBAR is
recognized as the industry benchmark for service quality measurement. The
marketing effort to these firms is headed by James F. Getz, President,
Broker/Dealer Division.

FINANCIAL STATEMENTS

The financial statements for the Federated Growth Strategies Fund for the
fiscal year ended October 31, 1996 are incorporated herein by reference to
the Annual Report to Shareholders of Federated Growth Strategies Fund dated
October 31, 1996 (File No. 811-4017) A copy of the Annual Report may be
obtained without charge by contacting the Fund.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS

AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.

AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated

categories.

BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.

NR -- NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy. S&P's may apply
a plus (+) or minus (-) to the above rating classifications to show relative
standing within the classifications.

MOODY'S INVESTORS SERVICE, INC. CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS

fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.

BAA -- Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.

NR -- Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.

FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS

events.

AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds
rated in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated 'F-1+'.

BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.

FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS

F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated

"F-1+".

STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS

A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).

A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS

P-1 -- Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of senior short-term promissory obligations.
P-1 repayment capacity 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 earnings coverage of fixed financial charges and high
internal cash generation.

Well-established access to a range of financial markets and assured sources
of alternate liquidity.

P-2 -- Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong capacity 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, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

PART C. OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:
(a) Financial Statements (1-3) The Financial Statements will be filed
by amendment.

(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant; (11)
(i) Conformed copy of Amended and Restated
Declaration of Trust(12);
(2) Copy of By-Laws of the Registrant as amended ; (11)
(i)................Copy of Amendment No. 2 to By-Laws
effective February 2, 1987 ; (11)

(ii)................Copy of Amendment No. 3 to By-Laws
effective August 25, 1988; (11)
(iii) Copy of Amended and Restated By-Laws effective August
15, 1995(12);
(3) Not applicable;
(4) (i)................Copy of Specimen Certificate for
Shares of Beneficial Interest of the Registrant
(Federated Small Cap Strategies Fund) ;(7.)
(ii)................Copy of Specimen Certificate for
Shares of Beneficial Interest of the Registrant
(Federated Growth Strategies Fund); (8.)
(iii)................Copy of Specimen Certificate for
Shares of Beneficial Interest of the Registrant
(Federated Capital Appreciation Fund); (9.)
(iv) Copy of Specimen Certificate for Shares of Beneficial
Interest of the Registrant (Federated Aggressive Growth
Fund)(+);
(5) (i)................Conformed copy of Investment Advisory
Contract on behalf of Federated Growth Trust; (6)
(ii)................Conformed copy of Investment Advisory
Contract on behalf of Federated Equity Funds, which
includes exhibits for Federated Small Cap Strategies
Fund and Federated Capital Appreciation Fund; (10.)

+ All exhibits have been filed electronically.
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 30, 1995. (File Nos. 2-91090
and 811-4017)

8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed July 17, 1995. (File Nos. 2-91090
and 811-4017)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed August 31, 1995. (File Nos. 2-
91090 and 811-4017)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-
91090 and 811-4017)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed June 11, 1996. (File Nos. 2-91090
and 811-4017)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No.30 on Form N-1A filed May 31, 1996. (File Nos. 2-91090
and 811-4017)

(iii)................Form of Investment Advisory Contract
which includes an exhibit for Federated Aggressive
Growth Fund (12);
(6) (i)................Conformed copy of Distributor's
Contract on behalf of Federated Growth Trust; (11)
(ii) Conformed copy of Distributor's Contract on behalf of
Federated Equity Funds, which includes exhibits for
Federated Small Cap Strategies Fund and Federated
Capital Appreciation Fund; (10)
(iii) Form of Distributor's Contract on behalf of Federated
Aggressive Growth Fund (12);

(iv) 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 No. 33-38550 and 811-6269).
(7) Not applicable;
(8) Conformed Copy of the Custodian Agreement of the Registrant;
(6)
(9) (i)................Conformed copy of Shareholder Services
Agreement of the Registrant; (6)
(ii)................Conformed copy of Administrative
Services Agreement of the Registrant; (6)
(iii)................Conformed Copy of Agreement for Fund
Accounting, Shareholder Recordkeeping, and Custody
Services Procurement; (6)
(iv)................The responses and exhibits described
in Item 24(6) are hereby incorporated by reference.
(10) Conformed copy of the Opinion and Consent of Counsel
regarding legality of shares being registered; (6)
(11) Not applicable;
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding; (2)
(14) Not applicable;
(15) Conformed Copy of Distribution Plan; (10.)
(i) Form of Distribution Plan incorporating
Federated Aggressive Growth Fund (12);

(16) Copy of Schedule for Computation of Fund Performance Data
for Federated Growth Trust, the predecessor to
Federated Growth Strategies Fund; (6)
(17) Copy of Financial Data Schedules; (+)
(18) Multiple Class Plan; (to be filed by amendment)
(19) Conformed copy of Power of Attorney(+);

2. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed February 28, 1985. (File Nos. 2-
91090 and 811-4017)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-
91090 and 811-4017)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-
91090 and 811-4017)
11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed June 11, 1996. (File Nos. 2-91090
and 811-4017)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No.30 on Form N-1A filed May 31, 1996. (File Nos. 2-91090
and 811-4017)

Item 25. Persons Controlled by or Under Common Control with Registrant:

None

Item 26. Number of Holders of Securities:

Number of Record Holders
Title of Class as of December 3, 1996

Shares of Beneficial Interest
(no par value)

Federated Growth Strategies Fund
Class A Shares 6,862
Class B Shares 1,412
Class C Shares 714

Federated Small Cap Strategies Fund
Class A Shares 2,481
Class B Shares 4,022
Class C Shares 671

Federated Capital Appreciation Fund
Class A Shares 943
Class B Shares 1,128
Class C Shares 376

Federated Agressive Growth Fund
Class A Shares 0
Class B Shares 0
Class C Shares 0

Item 27. Indemnification: (1.)

Item 28. Business and Other Connections of Investment Adviser:

For a description of the other business of the investment
adviser, see the section entitled "Trust Information - Management
of the Trust" 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 "Federated Equity Funds Management - Officers and
Trustees." The remaining Trustee of the investment adviser, his
position with the investment adviser, and, in parentheses, his
principal occupation is: Mark D. Olson (Partner, Wilson,
Halbrook & Bayard), 107 West Market Street, Georgetown, Delaware
19947.

1. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed July 9, 1984. (File Nos. 2-91090
and 811-4017)

The remaining Officers of the investment adviser are: William D.
Dawson, Henry A. Frantzen, J. Thomas Madden, and Mark L. Mallon,
Executive Vice Presidents; Henry J. Gailliot, Senior Vice
President-Economist; Peter R. Anderson, Drew J. Collins, Jonathan
C. Conley, and J. Alan Minteer, Senior Vice Presidents; J. Scott

Albrecht, Joseph M. Balestrino, Randall A. Bauer, David A.
Briggs, Kenneth J. Cody, Deborah A. Cunningham, Michael P.
Donnelly, Linda A. Duessel, Mark E. Durbiano, Kathleen M. Foody-
Malus, Thomas M. Franks, Edward C. Gonzales, Timothy E. Keefe,
Stephen A. Keen, Mark S. Kopinski, Jeff A. Kozemchak, Marian R.
Marinack, Susan M. Nason, Mary Jo Ochson, Robert J. Ostrowski,
Frederick L. Plautz, Jr., Charles A. Ritter, James D. Roberge,
Frank Semack, William F. Stotz, Sandra L. Weber, and Christopher
H. Wiles, Vice Presidents; Thomas R. Donahue, Treasurer; and
Stephen A. Keen, Secretary. The business address of each of the
Officers of the investment adviser is Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 or 175 Water street, New
York, New York 10038-4965, as applicable. These individuals are
also officers of a majority of the investment advisers to the
Funds listed in Part B of this Registration Statement.

Item 29. Principal Underwriters:

(a) 111 Corcoran Funds; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; BayFunds; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;

Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility
Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; High Yield
Cash Trust; Independence One Mutual Funds; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument
Funds; SouthTrust Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; The Biltmore Funds; The Biltmore Municipal Funds;
The Monitor Funds; The Planters Funds; The Starburst Funds; The Starburst
Funds II; The Virtus Funds; Tower Mutual Funds; Trust for Financial
Institutions; Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision Group of
Funds, Inc.; andWorld Investment Series, Inc.

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive ViceExec. Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

Thomas R. Donahue Director, Assistant Secretary,
Federated Investors Tower Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --

Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.

Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Dale R. Browne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --

Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --

Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.

Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Item 30. 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 Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Administrative Services
(`Administrator'')
Federated Management
(`Adviser'')

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

Disbursing Agent')

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

Item 31. Management Services: Not applicable.

Item 32. Undertakings:

Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within
four to six months from effective date of Registrant's 1933 Act
Registration Statement, Post-Effective Amendment Number 32.

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, the Registrant, FEDERATED EQUITY
FUNDS (formerly, Federated Growth Trust), has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 30th day of December, 1996.

FEDERATED EQUITY FUNDS
(formerly, Federated Growth Trust)

BY: /s/S. Elliott Cohen
S. Elliott Cohen, Assistant Secretary
Attorney in Fact for John F. Donahue
December 30, 1996

Pursuant to the requirements of the Securities Act of 1933, as amended,
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/S. Elliott Cohen Attorney In Fact December 30, 1996
S. Elliott Cohen For the Persons
ASSISTANT SECRETARY Listed Below

John F. Donahue* Chairman and Trustee
(Chief Executive Officer)

Glen R. Johnson* President

John W. McGonigle* Executive Vice President,
Treasurer and Secretary
(Prinicipal Financial and
Accounting Officer)

John T. Conroy, Jr.* Trustee

William J. Copeland* Trustee

James E. Dowd* Trustee

Lawrence D. Ellis, M.D.* Trustee

Edward L. Flaherty, Jr.* Trustee

Peter E. Madden* Trustee

Gregor F. Meyer* Trustee

John E. Murray, Jr.* Trustee

Wesley W. Posvar* Trustee

Marjorie P. Smuts* Trustee

* By Power of Attorney

Exhibit (11) under N-1A
Exhibit 23 under 601/Reg SK

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the references to our firm under the captions
`Financial Highlights'' and ``Independent Auditors'' and to the use of our
report dated December 16, 1996, in Post-Effective Amendment Number 34 to
the Registration Statement (Form N-1A
No. 2-91090) and the related Annual Reports and Prospectuses of Federated
Equity Funds (comprising respectively, Federated Growth Strategies Fund,
Federated Small Cap Strategies Fund, and Federated Capital Appreciation
Fund) dated December 31, 1996.

By: ERNST & YOUNG LLP
Ernst & Young LLP

Pittsburgh, Pennsylvania
December 23, 1996

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of FEDERATED EQUITY FUNDS
and the Deputy General Counsel of Federated Investors, and each of them,
their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and
stead, in any and all capacities, to sign any and all documents to be filed
with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, by means of the Securities and Exchange Commission's electronic
disclosure system known as EDGAR; and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to sign and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

SIGNATURES TITLE DATE

/s/John F. Donahue Chairman and TrusteeDecember 9, 1996
John F. Donahue (Chief Executive Officer)

/s/Glen R. Johnson President December 9, 1996
Glen R. Johnson

/s/John W. McGonigle Treasurer and ExecutiveDecember 9, 1996
John W. McGonigle Vice President and Secretary
(Principal Financial and
Accounting Officer)

/s/Thomas G. Bigley Trustee December 9, 1996
Thomas G. Bigley

/s/John T. Conroy, Jr. Trustee December 9, 1996
John T. Conroy, Jr.

SIGNATURES TITLE DATE

/s/William J. Copeland Trustee December 9, 1996
William J. Copeland

/s/James E. Dowd Trustee December 9, 1996
James E. Dowd

/s/Lawrence D. Ellis, M.D. Trustee December 9, 1996
Lawrence D. Ellis, M.D.

/s/Edward L. Flaherty, Jr. Trustee December 9, 1996
Edward L. Flaherty, Jr.

/s/Peter E. Madden Trustee December 9, 1996
Peter E. Madden

/s/Gregor F. Meyer Trustee December 9, 1996
Gregor F. Meyer

/s/John E. Murray, Jr. Trustee December 9, 1996
John E. Murray, Jr.

/s/Wesley W. Posvar Trustee December 9, 1996
Wesley W. Posvar

/s/Marjorie P. Smuts Trustee December 9, 1996
Marjorie P. Smuts

Sworn to and subscribed before me this 9th day of December 9, 1996.

/s/Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
Member, Pennsylvania Association of Notaries

Exhibit 4 under Form N-1A
Exhibit EX-3(c) under Item 601/Reg. S-K

FEDERATED EQUITY FUNDS

FEDERATED AGGRESSIVE GROWTH FUND
(CLASS C SHARES)

P O R T F O L I O

SEE REVERSE SIDE
ACCOUNT NO. ALPHA CODE ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS FOR CERTAIN DEFINITIONS

THIS IS TO CERTIFY THAT IS THE OWNER OF

FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST OF CUSIP
314172859
the FEDERATED AGGRESSIVE GROWTH FUND (CLASS C SHARES)
Portfolio of FEDERATED EQUITY FUNDS

hereafter called the ``Trust,'' transferable on the books of the
Trust by the owner, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed.

The shares represented hereby are issued and shall be held
subject to the provisions of the Declaration of Trust and By-Laws
of the Trust, and all amendments thereto, to all of which the
holder by acceptance hereof assents.

This Certificate is not valid unless countersigned by the
Transfer Agent.

IN WITNESS WHEREOF, the Trust has caused this Certificate to be
singed in its name by its proper officers and to be sealed with
its Seal.

Dated:

/s/ John W. McGonigle /s/ John F. Donahue
EXECUTIVE VICE PRESIDENT, TREASURER & SECRETARY CHAIRMAN

FEDERATED EQUITY FUNDS
TRUST
SEAL
MASSACHUSETTS
1984

Exhibit 4 under Form N-1A
Exhibit EX-3(c) under Item 601/Reg. S-K

FEDERATED EQUITY FUNDS

FEDERATED AGGRESSIVE GROWTH FUND
(CLASS B SHARES)

P O R T F O L I O

SEE REVERSE SIDE
ACCOUNT NO. ALPHA CODE ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS FOR CERTAIN DEFINITIONS

THIS IS TO CERTIFY THAT IS THE OWNER OF

FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST OF CUSIP
314172867
the FEDERATED AGGRESSIVE GROWTH FUND (CLASS B SHARES)
Portfolio of FEDERATED EQUITY FUNDS

hereafter called the ``Trust,'' transferable on the books of the
Trust by the owner, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed.

This Certificate is not valid unless countersigned by the
Transfer Agent.

IN WITNESS WHEREOF, the Trust has caused this Certificate to be
singed in its name by its proper officers and to be sealed with
its Seal.

Dated:

/s/ John W. McGonigle /s/ John F. Donahue
EXECUTIVE VICE PRESIDENT, TREASURER & SECRETARY CHAIRMAN

FEDERATED EQUITY FUNDS
TRUST
SEAL
MASSACHUSETTS
1984

Exhibit 4 under Form N-1A
Exhibit EX-3(c) under Item 601/Reg. S-K

FEDERATED EQUITY FUNDS

FEDERATED AGGRESSIVE GROWTH FUND
(CLASS A SHARES)

P O R T F O L I O

SEE REVERSE SIDE
ACCOUNT NO. ALPHA CODE ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS FOR CERTAIN DEFINITIONS

THIS IS TO CERTIFY THAT IS THE OWNER OF

FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST OF CUSIP
314172875
the FEDERATED AGGRESSIVE GROWTH FUND (CLASS A SHARES)
Portfolio of FEDERATED EQUITY FUNDS

hereafter called the ``Trust,'' transferable on the books of the
Trust by the owner, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed.

This Certificate is not valid unless countersigned by the
Transfer Agent.

IN WITNESS WHEREOF, the Trust has caused this Certificate to be
singed in its name by its proper officers and to be sealed with
its Seal.

Dated:

/s/ John W. McGonigle /s/ John F. Donahue
EXECUTIVE VICE PRESIDENT, TREASURER & SECRETARY CHAIRMAN

FEDERATED EQUITY FUNDS
TRUST
SEAL
MASSACHUSETTS
1984

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class A
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 1,121,562
<SHARES-COMMON-PRIOR> 1,121,204
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 108,804,293
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 178,012
<DISTRIBUTIONS-OF-GAINS> 2,209,569
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 66,891
<NUMBER-OF-SHARES-REDEEMED> 75,039
<SHARES-REINVESTED> 8,506
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 87.580
<PER-SHARE-NII> 0.240
<PER-SHARE-GAIN-APPREC> 11.350
<PER-SHARE-DIVIDEND> 0.160
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 97.010
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class B
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 65,863
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 6,369,220
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 98
<DISTRIBUTIONS-OF-GAINS> 89,485
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 67,529
<NUMBER-OF-SHARES-REDEEMED> 2,621
<SHARES-REINVESTED> 955
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 88.220
<PER-SHARE-NII> (0.250)
<PER-SHARE-GAIN-APPREC> 10.740
<PER-SHARE-DIVIDEND> 0.010
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 96.700
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class C
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 7,334
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 709,662
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 11,319
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,228
<NUMBER-OF-SHARES-REDEEMED> 7
<SHARES-REINVESTED> 113
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 88.220
<PER-SHARE-NII> (0.250)
<PER-SHARE-GAIN-APPREC> 10.800
<PER-SHARE-DIVIDEND> 0.010
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 96.760
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class A
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 1,582,917
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 23,242,444
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 9,870
<NUMBER-OF-SHARES-SOLD> 2,243,995
<NUMBER-OF-SHARES-REDEEMED> 661,204
<SHARES-REINVESTED> 126
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.050)
<PER-SHARE-GAIN-APPREC> 4.750
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.020
<PER-SHARE-NAV-END> 14.680
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class B
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 2,195,987
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 32,111,770
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,289,952
<NUMBER-OF-SHARES-REDEEMED> 93,965
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.160)
<PER-SHARE-GAIN-APPREC> 4.780
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.620
<EXPENSE-RATIO> 2.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class C
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 376,307
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 5,495,508
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 395,842
<NUMBER-OF-SHARES-REDEEMED> 19,535
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.160)
<PER-SHARE-GAIN-APPREC> 4.760
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.600
<EXPENSE-RATIO> 2.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class A Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 11,915,957
<SHARES-COMMON-PRIOR> 9,499,332
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 307,881,776
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 439,174
<DISTRIBUTIONS-OF-GAINS> 50,905,303
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,354,390
<NUMBER-OF-SHARES-REDEEMED> 5,295,894
<SHARES-REINVESTED> 1,358,129
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 2,042,918
<PER-SHARE-NAV-BEGIN> 26.220
<PER-SHARE-NII> 0.040
<PER-SHARE-GAIN-APPREC> 5.010
<PER-SHARE-DIVIDEND> 0.040
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.840
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class B Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 423,321
<SHARES-COMMON-PRIOR> 51,294
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 10,858,238
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 314,552
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 479,932
<NUMBER-OF-SHARES-REDEEMED> 120,979
<SHARES-REINVESTED> 13,074
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 272,389,067
<PER-SHARE-NAV-BEGIN> 26.230
<PER-SHARE-NII> (0.100)
<PER-SHARE-GAIN-APPREC> 4.910
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.650
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class C Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 142,807
<SHARES-COMMON-PRIOR> 2,181
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 3,667,382
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 47,135
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 153,301
<NUMBER-OF-SHARES-REDEEMED> 14,839
<SHARES-REINVESTED> 2,164
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 272,389,067
<PER-SHARE-NAV-BEGIN> 26.220
<PER-SHARE-NII> (0.050)
<PER-SHARE-GAIN-APPREC> 4.900
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.680
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>