FEDERATED EQUITY FUNDS, 497, 1996-11-26

FEDERATED EQUITY FUNDS
497, 1996-11-26

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FEDERATED AGGRESSIVE GROWTH FUND
(A PORTFOLIO OF FEDERATED EQUITY FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS

The shares of Federated Aggressive Growth 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-averge 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 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.

The Fund has also filed a Statement of Additional Information dated November 15,
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 intermediary. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated November 15, 1996

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TABLE OF CONTENTS

Summary of Fund Expenses..................................................... 1

General Information.......................................................... 4

Investment Information....................................................... 4
Investment Objective....................................................... 4
Investment Policies........................................................ 4
Investment Limitations..................................................... 9
Hub and Spoke(R) Option.................................................... 10

Net Asset Value.............................................................. 11

Investing in the Fund........................................................ 11

How to Purchase Shares....................................................... 12
Investing in Class A Shares................................................ 13
Investing in Class B Shares................................................ 15
Investing in Class C Shares................................................ 16
Special Purchase Features.................................................. 17

Exchange Privilege........................................................... 17

How to Redeem Shares......................................................... 19
Special Redemption Features................................................ 20
Contingent Deferred Sales Charge........................................... 20
Elimination of Contingent Deferred
Sales Charge............................................................ 21

Account and Share Information................................................ 22

Trust Information............................................................ 23
Management of the Trust.................................................... 23
Distribution of Shares..................................................... 24
Administration of the Fund................................................. 26
Expenses of the Fund and
Class A Shares, Class B Shares,
and Class C Shares...................................................... 26

Brokerage Transactions....................................................... 27

Shareholder Information...................................................... 28
Voting Rights.............................................................. 28

Tax Information.............................................................. 28
Federal Income Tax......................................................... 28
State and Local Tax........................................................ 28

Performance Information...................................................... 29

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SUMMARY OF FUND EXPENSES

FEDERATED AGGRESSIVE GROWTH FUND
<TABLE>
<S> <C> <C>
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
</TABLE>

ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2)........................................................... 0.65%
12b-1 Fee(3)............................................................................... 0.00%
Total Other Expenses....................................................................... 1.10%
Shareholder Services Fee...................................................... 0.25%
Total Operating Expenses(4)....................................................... 1.75%
</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% for redemptions made within one
full year of purchase. See "Contingent Deferred Sales Charge."

(2) The estimated management fee has been reduced to reflect the anticipated
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 1.00%.

(3) The Class A Shares have 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
"Trust Information."

(4) The operating expenses are estimated to be 2.10% absent the anticipated
voluntary waiver of the management fee.

* Total operating expenses in the table above are estimated based on average
expenses expected to be incurred during the period ending October 31, 1997.
During the course of this period, expenses may be more or less than the
average amount shown.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class A Shares 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
------ -------
<S> <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........ $ 72 $ 107
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR CLASS A SHARES' FISCAL YEAR ENDING
OCTOBER 31, 1997.

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

SUMMARY OF FUND EXPENSES

FEDERATED AGGRESSIVE GROWTH FUND
<TABLE>
<S> <C> <C>
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
</TABLE>

ANNUAL SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)*
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2)........................................................... 0.65%
12b-1 Fee.................................................................................. 0.75%
Total Other Expenses....................................................................... 1.10%
Shareholder Services Fee...................................................... 0.25%
Total Operating Expenses(3)(4).................................................... 2.50%
</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 operating expenses are estimated to be 2.85% absent the anticipated
voluntary waiver of the management fee.

* Total Class B Shares operating expenses in the table above are estimated based
on average expenses expected to be incurred during the period ending October
31, 1997. During the course of this period, expenses may be more or less than
the average amount shown.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of Class B Shares 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
------ -------
<S> <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........ $ 82 $ 121
You would pay the following expenses on the same investment,
assuming no redemption........................................................ $ 25 $ 78
</TABLE>

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SUMMARY OF FUND EXPENSES

FEDERATED AGGRESSIVE GROWTH FUND
<TABLE>
<S> <C> <C>
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
</TABLE>

ANNUAL OPERATING EXPENSES
(As a percentage of projected average net assets)*
<TABLE>
<S> <C> <C>
Management Fee (after waiver)(2)........................................................... 0.65%
12b-1 Fee.................................................................................. 0.75%
Total Other Expenses....................................................................... 1.10%
Shareholder Services Fee...................................................... 0.25%
Total Operating Expenses(3)....................................................... 2.50%
</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
"Contingent Deferred Sales Charge."

(3) The operating expenses are estimated to be 2.85% absent the anticipated
voluntary waiver 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 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
------ -------
<S> <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........ $ 36 $78
You would pay the following expenses on the same investment, assuming no
redemption.................................................................... $ 25 $78
</TABLE>

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GENERAL INFORMATION

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated April 17, 1984. 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 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 intermediaries seeking appreciation of capital by investing
in a diversified portfolio primarily consisting of equity securities of
companies with prospects for above-average appreciation.

The Fund's current net asset value and offering price may be found in the mutual
funds section of local newspapers under "Federated Class A, Class B, or Class
C," as appropriate.

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INVESTMENT INFORMATION

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide 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 its investment objective by investing at least 65% of its
assets in equity securities of companies with prospects for above-average
appreciation. Equity securities include common stocks, preferred stocks, and
investment grade securities (including debt securities) that are convertible
into common stocks. 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

Federated Management, the Fund's investment adviser (the "Adviser"), creates a
universe of growing companies by using proprietary software and research models
that incorporate important attributes of successful growth, such as upward
earnings estimate revisions, positive earnings surprises, accelerated sales and
earnings growth. Using fundamental research, the Adviser evaluates each
company's earnings quality and assesses the sustainability of the company's
current growth trends. Through this highly disciplined process, the Adviser
seeks to construct an

investment portfolio that possesses strong growth characteristics.

The Fund will not be restricted to specific market capitalization requirements.
Sector weightings will be restricted to no greater than 300% of the Standard and
Poor's 500 sector weightings or no more than 20% of the total portfolio,
whichever is greater. The Fund will diversify its holdings across at least 100
companies, but generally will not exceed 200 company holdings.

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

- - common stock of U.S. companies that are considered by the Adviser to have
potential for above-average appreciation;

- - other corporate securities including: corporate debt obligations, convertible
securities, and preferred stocks;

- - securities of foreign issuers; and

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

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. Additionally, many small
capitalization companies tend to have operating histories of less than three
years.

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. 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 convertible securities in which the Fund
invests may be rated below investment grade and considered speculative.

Convertible bonds and convertible preferred stocks 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 when, in the Adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. 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.

The prices of fixed income securities fluctuate inversely to the direction of
interest rates.

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

U.S. GOVERNMENT SECURITIES

The types of U.S. government securities 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 in a variety of ways
by the U.S. government or its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury.
Obligations of Federal Home Loan

Banks are backed by the discretionary authority of the U.S. government to
purchase certain obligations of agencies or instrumentalities. Obligations of
Federal Home Loan Banks, Federal Farm Credit System, including the National Bank
for Cooperatives and Banks for Cooperatives, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation, Federal
Financing Bank, Federal National Mortgage Association, and Federal Home Loan
Mortgage Corporation, National Credit Union Administration, and Student Loan
Marketing Association are backed by the credit of the agency or instrumentality
issuing the obligations.

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, 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 at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
TEMPORARY INVESTMENTS

Under normal market conditions, the Fund will be fully invested in its primary
investments. However, for temporary defensive purposes, when the Adviser
determines that market conditions warrant, the Fund may invest up to 100% of its
assets in cash and money market instruments.

Money market instruments may be:

- - money market instruments;

- - commercial paper;

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

- - 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 intermediaries 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 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 time of the
options. 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 securities are held in its portfolio.

The Fund may also write covered 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. 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 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 seek to generate income for the Fund
and, thereby, protect against price movements in particular securities in the
Fund's portfolio.

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.

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.

FINANCIAL 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.

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 if immediately thereafter
the sum of the amount of margin deposits on the Fund's existing futures
positions 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. When the Fund uses 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 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.

It is not certain that a secondary market for positions in futures
contracts will exist at all times. The Fund's ability to establish and
close out futures and depends on this secondary market.

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 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.

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 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) except, under certain
circumstances, the Fund may borrow up to one-third of the value of its net
assets and pledge up to 10% of the value of those assets to secure such
borrowings;

- - 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
- - 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.
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:

- - commit more than 5% of its total assets to premiums on open put option
positions; or

- - invest more than 5% of its net assets in warrants.

HUB AND SPOKE(R) OPTION

If the Trustees determine it to be in the best interest of the Fund and its
shareholders, the Fund may in the future seek to achieve its investment
objective by investing all of its assets in another investment company having
the same investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed in substantially the same manner as the
Fund.

The initial shareholder of the Fund (who is an affiliate of Federated Investors)
voted to vest authority to use this investment structure in the sole discretion
of the Trustees. No further approval of shareholders is required. Shareholders
will receive at least 30 days prior notice of any such investment.

In making its determination, the Trustees will consider, among other things, the
benefits to shareholders and/or the opportunity to reduce costs and achieve
operational efficiencies. Although it is expected that the Trustees will not
approve an arrangement that is likely to result in higher costs, no assurance is
given that costs will remain the same or be materially reduced if this
investment structure is implemented.

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

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, 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 intermediary (such as a bank or broker/dealer which has a sales
agreement with the distributor) or by sending a wire or a check directly to the
Fund, with a minimum initial investment of $500 for Class A Shares and $1500 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 intermediaries 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 through a financial intermediary 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 AS A DEALER
AS A PERCENTAGE CONCESSION AS
PERCENTAGE OF NET 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. No sales
charge is imposed for Class A Shares purchased through bank trust departments,
investment advisers 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
to shareholders designated as Liberty Life Members. However, investors who
purchase Class A Shares through a trust department, investment adviser, or
retirement plan may be charged an additional service fee by the financial
intermediary. Additionally, no sales charge is imposed for 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.

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 intermediary 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 ("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 intermediary 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.

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 Shares of any fund in the
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
intermediary 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 intermediary, 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, redemptions of these Shares 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
fifteenth of the month eight full years after the purchase date, except as noted
below, and may no longer be subject to a fee under the Fund's distribution plan
(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 INTERMEDIARY

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

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

PURCHASING SHARES BY WIRE

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: 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.

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 charge, if applicable. Shareholders should contact their financial
intermediary or the Fund to participate in this program.

RETIREMENT PLANS

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

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

EXCHANGE PRIVILEGE

CLASS A SHARES

Class A shareholders may exchange all or some of their Shares for Class A Shares
of other funds in the 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 all or some of their
shares for Class A Shares.

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.

CLASS B SHARES

Class B shareholders may exchange all or some of their Shares for Class B Shares
of the Federated Funds. (Not all Federated Funds currently offer Class B Shares.
Contact your financial intermediary regarding the availability of other Class B
Shares in 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 Federated Funds at net asset value without a contingent deferred

sales charge. (Not all funds in the Federated Funds currently offer Class C
Shares. Contact your financial intermediary regarding the availability of Class
C Shares in 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 intermediary 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.

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 exchanging 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 intermediaries during times of drastic economic or market changes. If
a shareholder cannot contact his broker or financial intermediary 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 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

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 INTERMEDIARY

Shares of the Fund may be redeemed by calling your financial intermediary 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 intermediary. 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
intermediaries (such as banks) must be received by the financial intermediary
and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares
to be redeemed at that day's net asset value. The financial intermediary is
responsible for promptly submitting redemption requests and providing proper
written redemption instructions. Customary fees and commissions may be charged
by the financial intermediary 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.

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 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.

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 by the Securities and Exchange Act of 1934,
as amended. The Fund does not accept signatures guaranteed by a notary public.

The Fund and its transfer agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and its transfer agent reserve the right
to amend these standards at any time without notice.

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 intermediary. 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>
CONTINGENT
YEAR OF REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
- ----------------------- --------------
<S> <C>
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</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
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

A contingent deferred sales charge will not be charged in connection with
exchanges of Shares for Class A Shares in other Federated Funds.

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, as amended, 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 intermediary 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 intermediary, to the extent that no payments were advanced
for purchases made through such entities. The Trustees reserve 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 annually 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 the 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, 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 1% 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. 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 $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1994, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 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.

Keith J. Sabol has been the Fund's portfolio manager since inception. Mr. Sabol
joined Federated Investors in 1994 and has been the Equity Research Coordinator
of the Fund's investment adviser since 1996. Mr. Sabol was an Investment Analyst
for the Fund's investment adviser from 1994 to 1996. Following his graduation
from the U.S. Military Academy, Mr. Sabol was commissioned as an officer in the
U.S. Army where he served until 1992. Mr. Sabol earned his Masters in Industrial
Administration from Carnegie Mellon University with a concentration in Finance
and Operations Research.

Aash M. Shah has been the Fund's portfolio manager since 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.

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.

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

The distributor may offer to pay financial intermediaries 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
intermediaries may elect to waive the initial payment described above; such
waiver will result in the waiver by the Fund of the otherwise applicable
contingent deferred sales charge.

The distributor will pay dealers an amount equal to 5.5% 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 intermediaries that waive all or any portion of
the advance payments.

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
intermediaries 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 Plan.

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

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
Class A Shares, Class B Shares, and Class C Shares to obtain certain personal
services for shareholders and for the maintenance of shareholder accounts
("Shareholder Services"). Under the Shareholder Services Agreement, Federated
Shareholder Services will either perform shareholder services directly or will
select financial intermediaries to perform shareholder services. Financial
intermediaries 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 INTERMEDIARIES

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 intermediaries supplemental
fees for the performance of sales services, distribution-related support
services, or shareholder services.

Federated Securities Corp. will pay financial intermediaries, 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 intermediary 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,
the distributor may offer to pay a fee from its own assets to financial
intermediaries as financial assistance for providing 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 intermediary sells or may sell, and/or upon
the type and nature of sales or marketing support furnished by the financial
intermediary. Any payments made by the distributor may be reimbursed by the
Fund's investment 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 FEE DAILY NET ASSETS
- ------------------- -------------------------
<S> <C>
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.

EXPENSES OF THE FUND AND CLASS A SHARES, CLASS B SHARES, AND CLASS C SHARES

Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Trust and portfolio expenses.

The Trust expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to: the
cost of organizing the Trust and continuing its existence; registering the Trust
with federal and state securities authorities; Trustees' fees; auditors' fees;
the cost of meetings of Trustees; legal fees of the Trust; association
membership dues; and such non-recurring and extraordinary items as may arise
from time to time.

The Fund expenses for which holders of Class A Shares, Class B Shares, and Class
C Shares pay their allocable portion include, but are not limited to:
registering the Fund and Class A Shares, Class B Shares, and Class C Shares of
the Fund; investment advisory services; taxes and commissions; custodian fees;
insurance premiums; auditors' fees; and such non-recurring and extraordinary
items as may arise from time to time.

At present, the only expenses which are allocated specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under the
Trust's Distribution Plan and fees for Shareholder Services. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Class A Shares, Class B Shares and Class C Shares as they deem appropriate
("Class Expenses"). In any case, Class Expenses would be limited to:
distribution fees; transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, and Class C Shares;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and to state
securities commissions; expenses related to administrative personnel and
services as required to support holders of Class A Shares, Class B Shares, and
Class C Shares; legal fees relating solely to Class A Shares, Class B Shares, or
Class C Shares; and Trustees' fees incurred as a result of issues related solely
to Class A Shares, Class B Shares, or Class C Shares.

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

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, as amended, applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.

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 & Donnelley, 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 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 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.

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

- --------------------------------------------------------------------------------
FEDERATED AGGRESSIVE
GROWTH FUND
(A PORTFOLIO OF FEDERATED EQUITY
FUNDS)
CLASS A SHARES, CLASS B SHARES,
CLASS C SHARES
PROSPECTUS

An Open-End, Diversified
Management Investment Company
November 15, 1996

LOGO
Cusip 314172875
Cusip 314172867
Cusip 314172859
G01925-01-ABC(11/96)

Federated Aggressive Growth 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 prospectus
for Class A Shares, Class B Shares, and Class C Shares of Federated
Aggressive Growth Fund (the "Fund") dated November 15, 1996. This Statement
is not a prospectus itself. You may request a copy of a prospectus or a
paper copy of this Statement of Additional Information, if you have
received it electronically, free of charge by calling 1-800-341-7400.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 15, 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 314172875
Cusip 314172867
Cusip 314172859
G01925-02(11/96)

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
Futures Transactions 3
Portfolio Turnover 3
Investment Limitations 3
FEDERATED EQUITY FUNDS MANAGEMENT 8

Fund Ownership 11
Trustees Compensation 12
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12

Adviser to the Fund 12
Advisory Fees 13
Other Related Services 13
BROKERAGE TRANSACTIONS 13

OTHER SERVICES 13

Fund Administration 13
Custodian 14
Transfer Agent 14
Independent Auditors 14

PURCHASING SHARES 14

Distribution Plan (Class B Shares and Class C
Shares Only) and Shareholder Services Agreement 14
Conversion to Federal Funds 14
Purchases by Sales Representatives, Trustees,
and Employees of the Fund 14
DETERMINING NET ASSET VALUE 15

Determining Market Value of Securities 15
REDEEMING SHARES 15

Redemption in Kind 15
MASSACHUSETTS PARTNERSHIP LAW 15

EXCHANGING SECURITIES FOR SHARES 16

Tax Consequences 16
TAX STATUS 16

The Fund's Tax Status 16
Shareholders' Tax Status 16
TOTAL RETURN 16

YIELD 17

PERFORMANCE COMPARISONS 17

ABOUT FEDERATED INVESTORS 18

Mutual Fund Market 19
Institutional Clients 19
Trust Organizations 18

Broker/Dealers and
Bank Broker/Dealer Subsidiaries19
APPENDIX 20

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 Statement of Additional
Information relates to all three classes of Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide appreciation of capital.
TYPES OF INVESTMENTS
The Fund may invest in common stocks, corporate securities other than
common stock, corporate debt securities, including notes and debentures,
and other corporate securities, including preferred stocks, warrants and
convertible securities.
CORPORATE SECURITIES OTHER THAN COMMON STOCK
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 normally invests 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. However, the Fund
may invest up to 5% of its assets in corporate debt obligations that
are not investment-grade bonds (excluding securities convertible into
equity securities) during the current fiscal year.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks,
warrants, and convertible securities, rated investment grade, i.e., Baa or
better by Moody's Investor Service, Inc. (`Moody's''), or BBB or better by
Standard & Poor's ratings Group (S&P) or Fitch Investor's Services, Inc.
(`Fitch'') (or, if unrated, are deemed to be of comparable quality by the
Adviser), and warrants of these companies. Corporate fixed income
securities are subject to market and credit risks. The prices of fixed
income securities fluctuate inversely to the direction of interest rates.
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.

The Fund may invest in corporate debt obligations that are not investment
grade bonds or are not rated but are determined by the Adviser to be of
comparable quality.

Securities which are rated BBB or lower by Standard & Poor's or Baa or
lower by Moody's either have speculative characteristics or are speculative
with respect to capacity to pay interest and repay principal in accordance
with the terms of the obligations. A description of the rating categories
is contained in the Appendix to the Statement of Additional Information.
There is no lower limit with respect to rating categories for securities in
which the Fund may invest.
Corporate 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. Lower-rated bonds or unrated bonds are commonly referred
to as `junk bonds.'' 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 high-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.
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.
The Trustees may consider the following criteria in determining the
liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security
and the number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace
trades.
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:
oinstruments 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
oprime 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:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
othe 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:
oFederal Home Loan Banks;
oFederal National Mortgage Association;
oStudent Loan Marketing Association; and
oFederal 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
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 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 Adviser to be creditworthy pursuant to guidelines established
by the Board of 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.
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 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.
FUTURES TRANSACTIONS
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.
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.
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
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.
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. Portfolio turnover will tend
to rise during periods of economic turbulence and decline during periods of
stable growth. A higher turnover rate (100% or more) increases transaction
costs (e.g. brokerage commissions) and increases realized gains and losses.
It is estimated the rate of portfolio turnover will, generally, not exceed
250 %.
INVESTMENT LIMITATIONS
The following limitations are fundamental, except that no investment
limitation of the Fund shall prevent the Fund from investing substantially
all of its assets (except for assets which are not considered `investment
securities''under the Investment Company Act of 1940, or assets exempted
by the Securities and Exchange Commission) in an open-end investment
company with substantially the same investment objectives:
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
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase the securities of any 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) if, as a result, more
than 5% of the value of its total assets would be invested in the
securities of such issuer and will not acquire more than 10% of the
outstanding 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, except that no investment limitation
of the Fund shall prevent the Fund from investing substantially all of its
assets (except for assets which are not considered `investment
securities''under the Investment Company Act of 1940, or assets exempted
by the Securities and Exchange Commission) in an open-end investment
company with substantially the same investment objective. Shareholders will
be notified before any material changes in these limitations become
effective.
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 certain restricted securities not
determined by the Trustees to be liquid, over-the-counter options,
and repurchase agreements providing for settlement in more than
seven days after notice.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 50% of the value of its total
assets in securities of issuers which have records of less than three
years of continuous operations, including the operation of any
predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
TRUSTEES OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if
the Officers and Trustees of the Trust or the Fund's Adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together
own more than 5% of the issuer's securities.
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.
PURCHASING PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of

the value of the Fund's total assets would be invested in premiums on
open put options.
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 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.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants.
No more than 2% of the Fund's net assets, to be included within the
overall 5% limit on investments in warrants, may be warrants which are
not listed on the New York or American Stock Exchanges. Warrants
acquired in units or attached to securities may be deemed to be
without value for purposes of this policy.

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 has no intent to borrow money
or invest in reverse repurchase agreements in excess of 5% of the value of
its total assets in the coming fiscal year.
In addition to the limitations set forth above, the Fund will not purchase
or sell real estate limited partnership interests or oil, gas, or other
mineral leases, except that the Fund may purchase or sell securities of
companies which invest in or hold the foregoing.

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

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

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.

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.; Directoror or
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.@
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
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
Seacliff
562 Bellevue Avenue
Newport, RI
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
Henny, Kochuba, Meyer and Flaherty
Two Gateway Center - Suite 674
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.

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 of
the Trust.

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.

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. and Federated Shareholder
Services.

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

*This 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 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.

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 68 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
THOMAS G. BIGLEY $0 $20,688 FOR THE TRUST AND
TRUSTEE 49 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
JOHN T. CONROY, JR. $1472 $117,202 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
WILLIAM J. COPELAND $1472 $117,202 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
JAMES E. DOWD $1472 $117,202 FOR THE TRUST AND

TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
LAWRENCE D. ELLIS, M.D. $1342 $106,460 FOR THE TRUST
AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
EDWARD L. FLAHERTY, JR. $1472 $117,202 FOR THE TRUST
AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
PETER E. MADDEN $1131 $90,563 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
GREGOR F. MEYER $1342 $106,460 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
JOHN E. MURRAY $777 $0 FOR THE TRUST AND
TRUSTEE 69 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
WESLEY W. POSVAR $1342 $106,460 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX
MARJORIE P. SMUTS $1342 $106,460 FOR THE TRUST AND
TRUSTEE 64 OTHER INVESTMENT COMPANIES IN
THE COMPLEX

*Information is furnished for the fiscal year ended October 31, 1995.
+The information is provided for the last calendar year.

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 the prospectus.
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

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research

services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of , the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in
the prospectus. Dr. Henry J. Gailliot, an officer of Federated Management,
the Adviser to the Fund, holds approximately 20% of the outstanding common
stock and serves as a director of Commercial Data Services, Inc., a company
which provides computer processing services to Federated Services Company.
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, P.O. Box 8600, Boston, Massachusetts 02266-
8600, through its registered transfer agent, Federated Shareholder
Services Company, maintains all necessary shareholder records and serves as
transfer agent for the Fund. For its services, the transfer agent receives
a fee based upon the size, type, and number of accounts and transactions
made by shareholders. Federated Services Company also maintains the Fund's
accounting records. 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.
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
objective. By identifying potential investors whose needs are served by the
Fund's objective, 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.
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:
oaccording to the last sale price on a national securities exchange,
if available;
oin 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
ofor 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.

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 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.
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:

oderive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
oderive less than 30% of its gross income from the sale of securities
held less than three months;
oinvest in securities within certain statutory limits; and
odistribute 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 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.
Cumulative total return reflects total performance over a specified period
of time. This total return assumes and is reduced by the payment of the
maximum sales charge and/or the contingent deferred sales charge, if
applicable.

YIELD

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:

oportfolio quality;
oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's or any class of Shares' expenses; and
ovarious 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:
OLIPPER 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 advertising
and sales literature.
ODOW 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.

OSTANDARD & 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.
OSTANDARD & 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.
OMORNINGSTAR, 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 one month.
OVALUE 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 one month.
OCDA 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.
OSTRATEGIC 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.
OMUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes
price, yield, risk, and total return for equity and fixed income
funds.
OVALUE 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.
OFINANCIAL 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.
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 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 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
equity management 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 $3 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 Clients
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's service to
financial professionals and institutions has earned it high rankings in
several DALBAR Surveys. The marketing effort to these firms is headed by
James F. Getz, President, Broker/Dealer Division.

*source: Investment Company Institute

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
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.
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
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.
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:
oLeading market positions in well-established industries.

oHigh rates of return on funds employed.
oConservative capitalization structure with moderate reliance on debt
and ample asset protection.
oBroad 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.