FEDERATED EQUITY FUNDS, 485APOS, 1997-10-30

FEDERATED EQUITY FUNDS
485APOS, 1997-10-30

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

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

Post-Effective Amendment No. 36 ........................... X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 30 .............................................. X

FEDERATED EQUITY FUNDS
(Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b) on _________________
pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a) (i)
X on December 31, 1997 pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

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

Copy to:

Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C. 20037

<PAGE>

CROSS-REFERENCE SHEET

This amendment to the Registration Statement of Federated Equity Funds,
which is comprised of four portfolios: (1) Federated Growth Strategies Fund
consisting of three classes of shares, (a) Class A Shares, (b) Class B Shares,
and (c) Class C Shares; (2) Federated Small Cap Strategies Fund consisting of
three classes of shares, (a) Class A Shares, (b) Class B Shares, and (c) Class C
Shares; (3) Federated Capital Appreciation Fund consisting of three classes of
shares, (a) Class A Shares, (b) Class B Shares, and (c) Class C Shares, and (4)
Federated Aggressive Growth Fund consisting of three classes of shares, (a)
Class A Shares, (b) Class B Shares, and (c) Class C Shares, is comprised of the
following:

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

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

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

<PAGE>

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

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

Item 9. Pending Legal Proceedings None.

<PAGE>

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

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

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-average 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 December 31,
1997, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

Prospectus dated December 31, 1997

<PAGE>

TABLE OF CONTENTS

Summary of Fund Expenses-- Class A 1
Summary of Fund Expenses-- Class B 2
Summary of Fund Expenses-- Class C 3
General Information 4
Investment Information 4
Investment Objective............................... 4
Investment Policies................................ 4
Investment Limitations............................. 8
Hub and Spoke(R)Option.............................. 8
Net Asset Value... 8
Investing in the Fund 9
How to Purchase Shares............................. 9
Investing in Class A Shares........................ 9
Investing in Class B Shares........................ 11
Investing in Class C Shares........................ 11
Special Purchase Features.......................... 12
Exchange Privilege................................. 12
How to Redeem Shares............................... 13
Special Redemption Features........................ 14
Contingent Deferred Sales Charge................... 15
Elimination of Contingent Deferred Sales Charge.... 15
Account and Share Information...................... 16
Trust Information.................................. 16

Management of the Trust 16
Distribution of Shares 17
Administration of the Fund 18
Expenses of the Fund and Class A Shares, Class B Shares,
and Class C Shares.............................. 19
Brokerage Transactions............................. 19
Shareholder Information 19
Voting Rights...................................... 19
Tax Information... 20
Federal Income Tax................................. 20
State and Local Tax................................ 20
Performance Information 20

<PAGE>

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 ("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.

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:

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

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

n securities of foreign issuers; and

n 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.

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:

n money market instruments;

n commercial paper;

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

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

n 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.

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 ensure 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.

Investing in Securities of Other Investment Companies
As a matter of non-fundamental investment policy, the Fund may invest its assets
in securities of other investment companies as an efficient means of carrying
out its investment policies. It should be noted that investment companies incur
certain expenses, such as management fees, and, therefore, any investment by the
Fund in shares of other investment companies may be subject to such duplicate
expenses.

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:

n 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;

n 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

n 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, securities of other investment companies and
repurchase agreements collateralized by such securities) or acquire more than
10% of the outstanding voting securities of any one issuer.

The Fund will not:

pledge 10% of the value of its assets, except to secure permitted
borrowings; commit more than 5% of its total assets to premiums on open put
option positions; or

n 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, Martin Luther King 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 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-1fee.

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:

Sales Sales Dealer
Charge Charge Concession
as a as a as a
Percentage Percentage Percentage
of of Net of Public
Offering Amount Offering
Amount of Transaction Price Invested Price
- ------------------ ---------- ---------- ----------
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but less than
$1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*

* See sub-section entitled "Dealer Concession."

No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge. No sales
charge is imposed for Class A Shares purchased through bank trust departments,
investment advisers 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 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:

n quantity discounts and accumulated purchases;

n concurrent purchases;

n signing a 13-month letter of intent; or

n using the reinvestment privilege.

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.

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.

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, other than retirement accounts subject to minimum distributions.
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 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:

Year of Redemption Contingent Deferred
After Purchase Sales Charge
- ------------------------ --------------------
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%

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

Class A Shares, Class B Shares, and Class C Shares
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
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of the last
surviving shareholder; (2) redemptions representing minimum required
distributions from an Individual Retirement Account or other retirement plan to
a shareholder who has attained the age of 70 1/2; (3) involuntary redemptions by
the Fund of Shares in shareholder accounts that do not comply with the minimum
balance requirements; and (4) qualifying redemptions of Class B Shares under a
Systematic Withdrawal Program. To qualify for elimination of the contingent
deferred sales charge through a Systematic Withdrawal Program, the redemptions
of Class B Shares must be from an account: that is at least 12 months old, has
all Fund distributions reinvested in Fund Shares, and has a value of at least
$10,000 when the Systematic Withdrawal Program is established. Qualifying
redemptions may not exceed 1.00% monthly of the account value as periodically
determined by the Fund. For more information regarding the elimination of the
contingent deferred sales charge through a Systematic Withdrawal Program contact
your financial intermediary or the Fund. No contingent deferred sales charge
will be imposed on redemptions of Shares held by Trustees, employees and sales
representatives of the Fund, the distributor, or affiliates of the Fund or
distributor, and their immediate family members; employees of any financial
institution that sells Shares of the Fund pursuant to a sales agreement with the
distributor; and spouses and children under the age of 21 of the aforementioned
persons. Finally, no contingent deferred sales charge will be imposed on the
redemption of Shares originally purchased through a bank trust department, an
investment adviser registered under the Investment Advisers Act of 1940 or
retirement plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any other
financial institution, to the extent that no payments were advanced for
purchases made through such entities. The Fund reserves the right to discontinue
or modify the elimination of the contingent deferred sales charge. Shareholders
will be notified of a discontinuation. 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 the shareholder is
entitled to such elimination."

ACCOUNT AND SHARE INFORMATION

Confirmations and Account Statements
Shareholders will receive detailed confirmations of transactions (except
systematic program transactions). In addition, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates. 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.

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 $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide. .

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 Trustees, and could
result in severe penalties.

Distribution of Shares

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

The distributor 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:

Maximum Average Aggregate
Administrative Fee Daily Net Assets
- -------------------- ----------------------------------
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

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

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

PERFORMANCE INFORMATION

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

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

The yield of each class of Shares is calculated by dividing the net investment
income per share (as defined by the 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.

<PAGE>

Federated Aggressive Growth Fund

(A Portfolio of Federated Equity Funds)

Class A Shares, Class B Shares,
Class C Shares

Prospectus
December 31, 1997
An Open-End, Diversified Management Investment Company

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
G01925-01-ABC (11/97)

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 December 31, 1997 .
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 December 31, 1997
[GRAPHIC OMITTED]

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

Cusip 314172875
Cusip 314172867
Cusip 314172859
G01925-02(11/97)

<PAGE>

Table of Contents
- --------------------------------------------------------------------------------
<PAGE>

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 Subsidiaries 19

Appendix 20

<PAGE>

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:

o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and
the number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace
trades.

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:

o instruments of domestic and foreign banks and savings associations
if they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
insured in full by the Bank Insurance Fund, which is administered by
the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund, which is administered by the FDIC; and

o prime commercial paper (rated A-1 by S&P , Prime-1 by Moody's, or F-1
by Fitch).

U.S. Government Obligations

The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed
by:

o the full faith and credit of the U.S. Treasury;

o the issuer's right to borrow from the U.S. Treasury;

o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

o the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

o Federal Home Loan Banks;

o Federal National Mortgage Association;

o Student Loan Marketing Association; and

o Federal Home Loan Mortgage Corporation.

When-Issued and Delayed Delivery Transactions

These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.

Lending of Portfolio Securities

The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.

Repurchase Agreements

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

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

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 Illiquid Securities

TheFund 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.

<PAGE>

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.; Director 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.

<PAGE>

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
</TABLE>

*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 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.

Other Related Services

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. From March 1, 1994, to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Fund's
Administrator. For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
October, 1996, December 31, 1995 and December 31, 1994, the Administrators
earned $154,165, 125,000 and $145,638, respectively.

Custodian

State Street Bank and Trust Company, Boston, MA is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments. The fee paid for this service is based upon the level of
the Fund's average net assets for the period, plus out-of-pocket expenses.

Transfer Agent

Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records 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, , Pittsburgh, PA.

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

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:

o according to the last sale price on a national securities exchange, if
available;

o in the absence of recorded sales for equity securities, according to
the mean between the last closing bid and asked prices and for bonds
and other fixed income securities as determined by an independent
pricing service for unlisted equity securities, the latest bid
prices; or

o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or at fair
value as determined in good faith by the Trustees.

Redeeming Shares

The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus under
"How To Redeem Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.

Class B Shares redeemed within one to six years of purchase and Class C Shares
and applicable Class A Shares redeemed within one year of purchase may be
subject to a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the administrative fee paid at
the time of purchase by the distributor to the financial institution for
services rendered, and the length of time the investor remains a shareholder in
the Fund. Should financial institutions elect to receive an amount less than the
administrative fee that is stated in the prospectus for servicing a particular
shareholder, the contingent deferred sales charge and/or holding period for that
particular shareholder will be reduced accordingly.

Redemption in Kind

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

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

Tax Status

The Fund's Tax Status

The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:

o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

o invest in securities within certain statutory limits; and

o distribute to its shareholders at least 90% of its net income earned
during the year.

Shareholders' Tax Status

Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.

Capital Gains

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held the Fund
Shares.

Total Return

The 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:

o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

o changes in interest rates and market value of portfolio securities;

o changes in the Fund's or any class of Shares' expenses; and

o various other factors.

The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:

o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specified period of time. From time to
time, the Fund will quote its Lipper ranking in advertising and
sales literature.

o Dow Jones Industrial Average ("DJIA") is an unmanaged index
representing share prices of major industrial corporations, public
utilities, and transportation companies. Produced by the Dow Jones &
Company, it is cited as a principal indicator of market conditions.

o Standard & Poor's Low-Priced Index compares a group of
approximately twenty actively traded stocks priced under $25 for
one month periods and year-to-date.

o Standard & Poor's Daily Stock Price Index Of 500 Common Stocks (S&P
500), a composite index of common stocks in industry,
transportation, and financial and public utility companies, can be
used to compare to the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the S&P 500
assumes reinvestments of all dividends paid by stocks listed on its
index. Taxes due on any of these distributions are not included, nor
are brokerage or other fees calculated in the Standard & Poor's
figures.

o Morningstar, Inc., an independent rating service, is the
publisher of the bi-weekly Mutual Fund Values. Mutual Fund Values
rates more than 1,000 NASDAQ-listed mutual funds of all types,
according to their risk-adjusted returns. The maximum rating is
five stars, and ratings are effective for one month.

o Value Line Mutual Fund Survey, published by Value Line
Publishing, Inc., analyzes price, yield, risk, and total return
for equity and fixed income mutual funds. The highest rating is
One, and ratings are effective for one month.

o CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc., analyzes price, current yield, risk, total return, and average
rate of return (average annual compounded growth rate) over
specified time periods for the mutual fund industry.

o Strategic Insight Mutual Fund Research And Consulting, ranks funds
in various fund categories by making comparative calculations using
total return. Total return assumes the reinvestment of all capital
gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time
to time, the Fund will quote its Strategic Insight ranking in the
"growth funds" category in advertising and sales literature.

o Mutual Fund Source Book, published by Morningstar, Inc., analyzes
price, yield, risk, and total return for equity and fixed income funds.

o Value Line Composite Index consists of approximately 1,700 common
equity securities. It is based on a geometric average of relative
price changes of the component stocks and does not include
income.

o Financial Publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money
Magazines, among others--provide performance statistics over
specified time periods.

Advertisements 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

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, andtraders dedicated to specific market sectors.
These traders handle trillions of dollars in annual trading volume. In the
equity sector, Federated Investors has more than 26 years' experience. As of
December 31, 1996, Federated managed 31 equity funds totaling approximately $7.6
billion in assets across growth, value, equity income, international, index and
sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s. J.
Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global portfolios.

Mutual Fund Market

Thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 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.

Bank Marketing

Other institutional clients include close relationships with more than 1,600
banks and trust organizations. Virtually all of the trust divisions of the top
100 bank holding companies use Federated funds in their clients' portfolios. The
marketing effort to trust clients is headed by Timothy C. Pillion, Senior Vice
President, Bank Marketing & Sales.

Broker/Dealers and Bank Broker/Dealer Subsidiaries

Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the county --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 surveys performed by DALBAR,
Inc. DALBAR is recognized as the benchmark for the service quality measurement.
The marketing effort to these firms is headed by James F. Getz, President,
Federated Securities Corp.

*source: Investment Company Institute

<PAGE>

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

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:

o Leading market positions in well-established industries.

o High rates of return on funds employed.

o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.

o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.

Well-established access to a range of financial markets and assured sources of
alternate liquidity.

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

Federated Capital Appreciation Fund

(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares,
Class C Shares

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

Theshares offered by this prospectus are not deposits or obligations
of any bank, are not endorsed or guaranteed by any bank, and are not
insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment in these
shares involves investment risk, including the possible loss of
principal.

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

The Fund has also filed a Statement of Additional Information dated December 31,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated December 31, 1997

<PAGE>

TABLE OF CONTENTS

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

<PAGE>

GENERAL INFORMATION

Federated Capital Appreciation Fund (the "Fund") is an investment portfolio of
Federated Equity Funds (the "Trust"). The Trust was established as a business
trust under the laws of the Commonwealth of Massachusetts pursuant to a
Declaration of Trust dated April 17, 1984, under the name "Federated Growth
Trust." The Trust later changed its name to "Federated Equity Funds." . The
Fund's address is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779.

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

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

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

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

INVESTMENT INFORMATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Futures and Options on Futures
The Fund may purchase and sell financial futures contracts to hedge all or a
portion of its portfolio against changes in interest rates. Financial futures
contracts call for the delivery of particular debt instruments at a certain time
in the future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.

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

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

Risks
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the Adviser to predict market conditions
based upon certain economic analysis and factors. There is a risk that the
prices of the securities subject to the futures contracts may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This may
cause the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Adviser could be
incorrect in its expectations about the direction or extent of market factors
such as interest rate movements. In these events, the Fund may lose money on the
futures contract or option.

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

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

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

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

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

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

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

o repurchase agreements; and

o other short-term instruments.

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

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

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

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

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

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

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

Investment Limitations
The Fund will not:

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

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

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

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

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

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

NET ASSET VALUE

The Fund's net asset value per share fluctuates. The net asset value for shares
is determined by adding the interest of each class of shares in the market value
of all securities and other assets of the Fund, subtracting the interest of each
class of shares in the liabilities of the Fund and those attributable to each
class of shares, and dividing the remainder by the total number of each class of
shares outstanding. The net asset value for each class of shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.

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

INVESTING IN THE FUND

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

Class A Shares
An investor who purchases Class A Shares pays a maximum sales charge of 5.50% at
the time of purchase. As a result, Class A Shares are not subject to any charges
when they are redeemed Certain purchases of Class A Shares are not subject to a
sales charge. See "Investing in Class A Shares." Certain purchases of Class A
Shares qualify for reduced sales charges. See "Reducing or Eliminating the Sales
Charge." Class A Shares have no conversion feature.

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

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

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

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

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

Sales Charge Sales Charge Dealer
as a as a Concession
Percentage Percentage as a Percentage
Amount of of Public of Net Amount of Public
Transaction Offering Price Invested Offering Price

Less than
$50,000 5.50% 5.82% 5.00%

$50,000 but
less than
$100,000 4.50% 4.71% 4.00%

$100,000 but
less than
$250,000 3.75% 3.90% 3.25%

$250,000
but less than
$500,000 2.50% 2.56% 2.25%

$500,000 but
less than
$1 million 2.00% 2.04% 1.80%

$1 million
or greater 0.00% 0.00% 0.25%*

* See sub-section entitled "Dealer Concession."

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

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

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

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

o quantity discounts and accumulated purchases;

o concurrent purchases;

o signing a 13-month letter of intent; or

o using the reinvestment privilege.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EXCHANGE PRIVILEGE

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

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

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

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

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

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

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

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

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

HOW TO REDEEM SHARES

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

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

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

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

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

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

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

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, other than retirement accounts subject to minimum distributions.
A shareholder may apply for participation in this program through his financial
institution. Due to the fact that Class A Shares are sold with a sales charge,
it is not advisable for shareholders to continue to purchase Class A Shares
while participating in this program. A contingent deferred sales charge may be
imposed on Class B Shares and Class C Shares.

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

Class 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:

Year of Redemption Contingent Deferred
After Purchase Sales Charge
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%

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

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

Elimination of Contingent
Deferred Sales Charge
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 701/2; (3) involuntary redemptions by the Fund of Shares in
shareholder accounts that do not comply with the minimum balance requirements;
and (4) qualifying redemptions of Class B Shares must be from an account: that
is at least 12 months old, has all Fund distributions reinvested in Fund Shares,
and has a value of at least $10,000 when the Systematic Withdrawal Program is
established. Qualifying redemptions may not exceed 1.00% monthly of the account
value as periodically determined by the Fund. For more information regarding the
elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary of the Fund. No
contingent deferred sales charge will be imposed on redemptions of shares held
by Trustees, employees and sales representatives of the Fund, the distributor,
or affiliates of the Fund or distributor, and their immediate family members;
employees of any financial institution that sells shares of the Fund pursuant to
a sales agreement with the distributor; and spouses and children under the age
of 21 of the aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally purchased through
a bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Fund reserves the
right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.

ACCOUNT AND SHARE INFORMATION

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

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

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

FUND INFORMATION

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

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

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

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 $110 billion invested across more than 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest investment managers in the
United States. With more than 2,000 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,500 financial institutions nationwide.

Arthur J. Barry has been the Fund's portfolio manager since March 1997. Mr.
Barry joined Federated Investors in 1994 as an Investment Analyst for the Fund's
investment Adviser. From 1990 to 1992, Mr. Barry served as a Financial Service
Specialist for AT&T - Bell Laboratories. From 1992 to 1994, Mr. Barry is a
Chartered Financial Analyst and attended Carnegie Mellon University where he
earned his M.S.I.A. with a concentration in finance and accounting.

James E. Grefenstette has been the Fund's portfolio manager since November 1997.
Mr. Grefenstette joined Federated Investors in 1992 and has been a Vice
President of the Fund's investment Adviser since 1996. From 1994 until 1996, Mr.
Grefenstette acted as an Assistant Vice President of the Fund's investment
Adviser, and served as an Investment Analyst of the investment Advisor from 1992
to 1994. Mr. Grefenstette was a credit analyst at Westinghouse Credit Corp. from
1990 until 1992. Mr. Grefenstette is a Chartered Financial Analyst; he received
his M.S. in Industrial Administration from Carnegie Mellon University.

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

Distribution of Shares

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

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

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

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

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

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

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

Maximum Average Aggregate
Administrative Daily Net Assets
Fee of the Federated Funds
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

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.

TAX INFORMATION

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

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

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

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

<PAGE>

PERFORMANCE INFORMATION

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

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

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

<PAGE>

APPENDIX

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fitch Investors Service, L.P. ,
Long-Term Debt Ratings
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

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

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

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

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

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

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

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

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

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

<PAGE>

ADDRESSES

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

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

Investment Adviser
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

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

Independent Auditors
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Capital Appreciation Fund

(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares,
Class C Shares

An Open-End,
Diversified Management
Investment Company

December 31, 1997

Cusip 314172701
Cusip 314728800
Cusip 314172883
G01489-01 (12/97)

Federated Capital Appreciation Fund

(A Portfolio of Federated Equity Funds)
Class A Shares
Class B Shares
Class C Shares

Statement of Additional Information

This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares of
Federated Capital Appreciation Fund (the "Fund") dated December 31,
1997. This Statement is not a prospectus. You may request a copy of a
prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.

Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
[GRAPHIC OMITTED]

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

Cusip 314172701
Cusip 314172800
Cusip 314172883
G01489-02 (12/97)

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Table of Contents
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1

General Information About the Fund 1

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

Investment Limitations 7

Federated Equity Funds Management 9
Fund Ownership 13
Trustees Compensation 14
Trustee Liability 14

Investment Advisory Services 15
Adviser to the Fund 15
Advisory Fees 15
Other Related Services 15

Brokerage Transactions 15

Other Services 16
Fund Administration 16
Custodian 16
Transfer Agent 16
Independent Auditors 16

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

Determining Net Asset Value 18
Determining Market Value of Securities 18

Redeeming Shares 18
Redemption in Kind 18

Massachusetts Partnership Law 19

Exchanging Securities for Shares 19
Tax Consequences 19

Tax Status 19
The Fund's Tax Status 19
Shareholders' Tax Status 19

Total Return 20

Yield 20

Performance Comparisons 21

About Federated Investors 22

Appendix 24

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

Investment Objective and Policies
The Fund's investment objective is to provide capital appreciation. The
investment objective cannot be changed without approval of shareholders.
Convertible Securities

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

Temporary Investments

The temporary investments in which the Fund may invest include, but are not
limited to:
o commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group,
Prime-1 or Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by
Fitch Investors Service, Inc., and Europaper rated A-1, A-2, Prime-1,
or Prime-2. In the case where commercial paper or Europaper has
received different ratings from different rating services, such
commercial paper or Europaper is an acceptable temporary investment so
long as at least one rating is one of the preceding high-quality
ratings and provided the Fund's investment adviser, Federated
Management (the "Adviser"), has determined that such investment
presents minimal credit risks;

o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or
if the principal amount of the instrument is insured by the Federal
Deposit Insurance Corporation. These instruments may include Eurodollar
Certificates of Deposits ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), and Eurodollar Time Deposits ("ETDs");

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

o repurchase agreements; and

o other short-term instrument which are not rated but are determined by
the Adviser to be of comparable quality to the other temporary
obligations in which the Fund may invest.

Investment Risks

ECDs, ETDs, Yankee CDs, and Europaper are subject to somewhat different
risks than domestic obligations of domestic banks or corporations.
Examples of these risks include international, economic and political
developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholding or
other taxes on interest income, difficulties in obtaining or enforcing
a judgment against the issuing entity, and the possible impact of
interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because
the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve
requirements, loan limitations, examinations, accounting, auditing and
recordkeeping, and the public availability of information. These
factors will be carefully considered by the Adviser in selecting
investments for the Fund.

Warrants

Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, most
warrants have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock. When-Issued and Delayed Delivery Transactions

The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Board of Trustees (the
"Trustees"). Futures and Options Transactions

The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and put options on financial futures contracts, and writing call options on
futures contracts. The Fund may also write covered call options on portfolio
securities to attempt to increase its current income.
Financial Futures Contracts

In the fixed-income securities market, price moves inversely to
interest rates. A rise in rates means a drop in price. Conversely, a
drop in rates means a rise in price. In order to hedge its holdings of
fixed-income securities against a rise in market interest rates, the
Fund could enter into contracts to deliver securities at a
predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long"
(agree to purchase securities in the future at a predetermined price)
to hedge against a decline in market interest rates.

Put Options on Financial Futures Contracts

The Fund may purchase listed put options on financial futures
contracts. Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set date at a
specified price, the purchase of a put option on a futures contract
entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.

The Fund would purchase put options on futures contracts to protect
portfolio securities against decreases in value resulting from an
anticipated increase in market interest rates. Generally, if the hedged
portfolio securities decrease in value during the term of an option,
the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally
close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by
the Fund for the original option plus the decrease in value of the
hedged securities.

Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract
in return for payment of the strike price. If the Fund neither closes
out nor exercises an option, the option will expire on the date
provided in the option contract, and only the premium paid for the
contract will be lost.

Call Options on Financial Futures Contracts

In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio against
an increase in market interest rates. When the Fund writes a call
option on a futures contract, it is undertaking the obligation of
assuming a short futures position (selling a futures contract) at the
fixed strike price at any time during the life of the option if the
option is exercised. As market interest rates rise, causing the prices
of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.

In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can offset the drop in value of the Fund's fixed-income
portfolio which is occurring as interest rates rise.

Prior to the expiration of a call written by the Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second
option will be less than the premium received by the Fund for the
initial option. The net premium income of the Fund will then offset the
decrease in value of the hedged securities.

The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts
to bring its open futures and options positions within this limitation.

"Margin" in Futures Transactions

The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.

Purchasing Put Options on Portfolio Securities

The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put option gives the Fund, in return for a premium, the right to sell
the underlying security to the writer (seller) at a specifies price
during the term of the option.

Writing Covered Call Options on Portfolio Securities

The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it
has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any additional consideration).

Foreign Currency Transactions

Currency Risks

The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may not convert
its holdings of foreign currencies to U.S. dollars daily. The Fund may
incur conversion costs when it converts its holdings to another
currency. Foreign exchange dealers may realize a profit on the
difference between the price at which the Fund buy and sell currencies.

The Fund will engage in foreign currency exchange transactions in
connection with their investments in the securities. The Fund will
conduct their foreign currency exchange transactions either on a spot
(i.e. cash) basis at the spot rate prevailing in the foreign currency
exchange market or through forward contracts to purchase or sell
foreign currencies.

Forward Foreign Currency Exchange Contracts

The Fund may enter into forward foreign currency exchange contracts in
order to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and a
foreign currency involved in an underlying transaction. However,
forward foreign currency exchange contracts may limit potential gains
which could result from a positive change in such currency
relationships. The Fund's investment adviser believes that it is
important to have the flexibility to enter into forward foreign
currency exchange contracts whenever it determines that it is in the
Fund's best interest to do so.
The Fund will not speculate in foreign currency exchange.

The Fund will not enter into forward foreign currency exchange
contracts or maintain a net exposure in such contracts when the Fund
would be obligated to deliver an amount of foreign currency in excess
of the value of their portfolio securities or other assets denominated
in that currency or, in the case of a "cross-hedge" denominated in a
currency or currencies that the Fund's investment adviser believes will
tend to be closely correlated with that currency with regard to price
movements. Generally, the Fund does not enter into a forward foreign
currency exchange contract with a term longer than one year.

Foreign Currency Options

A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price
on a specified date or during the option period. The owner of a call
option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the
obligation to sell the currency.

When the option is exercised, the seller (i.e., writer) of the option
is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its
position during the option period at any time prior to expiration.

A call option on foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on foreign
currency generally falls in value if the underlying currency
depreciates in value. Although purchasing a foreign currency option can
protect the Fund against an adverse movement in the value of a foreign
currency, the option will not limit the movement in the value of such
currency. For example, if the Fund were holding securities denominated
in a foreign currency that was appreciating and had purchased a foreign
currency put to hedge against a decline in the value of the currency,
the Fund would not have to exercise its put option. Likewise, if the
Fund were to enter into a contract to purchase a security denominated
in foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call options to hedge against a rise in
value of the currency, and if the value of the currency instead
depreciated between the date of purchase and the settlement date, the
Fund would not have to exercise its call. Instead, the Fund could
acquire in the spot market the amount of foreign currency needed for
settlement.

Special Risks Associated with Foreign Currency Options

Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets
in foreign currency options are relatively new, and the Fund's ability
to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Fund's investment adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options
are not greater than the risks in connection with the underlying
currency, there can be no assurance that a liquid secondary market will
exist for a particular option at any specific time.

In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.

The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits
of a foreign security. Because foreign currency transactions occurring
in the interbank market involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round
lots.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of
very large transactions in the interbank market and thus may not
reflect relatively smaller transactions (i.e. less than $1 million)
where rates may be less favorable. The interbank market in foreign
currencies is a global, around-the-clock market. To the extent that the
U.S. option markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options
markets until they reopen.

Foreign Currency Futures Transactions

By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives
as it would through the use of forward foreign currency exchange
contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions
instead of forward foreign currency exchange contracts.

Special Risks Associated with Foreign Currency Futures Contracts and
Related Options

Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition,
there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options
on foreign currencies, as described above.

Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts
is relatively new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary
market. To reduce this risk, the Fund will not purchase or write
options on foreign currency futures contracts unless and until, in the
opinion of the Fund's investment adviser, the market for such options
has developed sufficiently that the risks in connection with such
options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts. Compared to the
purchase or sale of foreign currency futures contracts, the purchase of
call or put options on futures contracts involves less potential risk
to the Fund because the maximum amount at risk is the premium paid for
the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures
contract would result in a loss, such as when there is no movement in
the price of the underlying currency or futures contract.

Restricted and Illiquid Securities

The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under an Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933, as amended, (the "Rule"). The Rule is a non-exclusive safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under Rule
144A. The Fund believes that the staff of the Securities and Exchange Commission
has left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination of the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace trades.

Lending of Portfolio Securities

The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in the Fund's portfolio will be sold
whenever the Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. Any such trading will increase the Fund's
portfolio turnover rate and transaction costs. It is not anticipated that the
portfolio trading engaged in by the Fund will result in its annual rate of
portfolio turnover exceeding 100%.

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

<PAGE>

Investment Limitations
Selling Short and Buying on Margin

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

Issuing Senior Securities and Borrowing Money

The Fund will not issue senior securities except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its total assets, including the amounts
borrowed.

The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure, or to facilitate management of the
portfolio by enabling the Fund to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while any
such borrowings are outstanding.

Pledging Assets

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 10% of the value of total assets at the time of the
borrowing. Margin deposits for the purchase and sale of financial
futures contracts and related options are not deemed to be a pledge.

Underwriting

Lending Cash or Securities

Diversification of Investments

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

Investing in Real Estate

The Fund will not buy or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate
or in securities which are secured by real estate or interests in real
estate.

The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective. Except with respect to borrowing money,
if a percentage limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction. For purposes of its
policies and limitations, the Fund considers certificates of deposit and demand
and time deposits issued by a U.S. branch of a domestic bank or savings
association having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items." The Fund has no
present intent to borrow money or sell securities short in excess of 5% of the
value of its total assets in the coming fiscal year.

<PAGE>

Federated Equity Funds Management

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

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924

Chairman and Trustee

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934

Trustee

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

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918

Trustee

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

Trustee

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

<PAGE>

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932

Trustee

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932

Trustee

President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

<PAGE>

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925

Trustee

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935

Trustee

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President

Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949

Executive Vice President

<PAGE>

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930

Executive Vice President

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President , Secretary and Treasurer

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

Vice President

* 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.

<PAGE>

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable
Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc. Fund Ownership

Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 4, 1996, the following shareholder of record owned 5% or more of
the outstanding Class A Shares of the Fund: Paulette M Boiardi, New York, NY ,
owned approximately 91,356 shares (8.03%). As of December 4, 1996, the following
shareholder of record owned 5% or more of the outstanding Class C Shares of the
Fund: MLPF&S for the sloe benefit of its customers, Jacksonville, Florida, owned
approximately 3,208 shares (36.57%); Painewebber for the sole benefit of David A
Garza & Stephanie K Garza, Austin, Texas, 1,033 shares (11.79%).

<PAGE>

Trustees Compensation

AGGREGATE

NAME , COMPENSATION

POSITION WITH FROM TOTAL COMPENSATION PAID

TRUST TRUST* FROM FUND COMPLEX +

John F. Donahue $0 $0 for the Trust and

Chairman and Trustee 54 other investment companies in the Fund Complex

Thomas G. Bigley $1,312.97 $86,331 for the Trust and

Trustee 54 other investment companies in the Fund Complex

John T. Conroy, Jr. $1439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

William J. Copeland $1439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

James E. Dowd $1439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Lawrence D. Ellis, M.D. $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Edward L. Flaherty, Jr. $1439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Peter E. Madden $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Gregor F. Meyer $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

John E. Murray, Jr. $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Wesley W. Posvar $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Marjorie P. Smuts $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

</TABLE>

*Information is furnished for the fiscal year ended October 31, 1996.
#The aggregate compensations is provided for the Trust which is comprised of 3
portfolios.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was appointed
a Trustee on 15 additional Federated Funds.

Trustee Liability

<PAGE>

Investment Advisory Services
Adviser to the Fund

Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in each prospectus.

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

Other Related Services

Affiliates of the Adviser may, from time to time, provide certain electronic
equipment and software to institutional customers in order to facilitate the
purchase of shares of funds offered by Federated Securities Corp. Brokerage
Transactions The Adviser may select brokers and dealers who offer brokerage and
research services. These services may be furnished directly to the Fund or to
the Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be used by the Adviser or its in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The Adviser and its
affiliates exercise reasonable business judgment in selecting brokers who offer
brokerage and research services to execute securities transactions. They
determine in good faith that commissions charged by such persons are reasonable
in relationship to the value of the brokerage and research services provided.

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

<PAGE>

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

Other Services
Fund Administration

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services, a subsidiary of Federated Investors, served as the Fund's
Administrator. . For purposes of this Statement of Additional Information,
Federated Services Company and Federated Administrative Services may hereinafter
collectively be referred to as the "Administrators." For the fiscal years ended
October, 1996, December 31, 1995 and December 31, 1994, the Administrators
earned $154,165, 125,000 and $145,638, respectively. Custodian

State Street Bank and Trust Company, Boston, MA, is custodian for the securities
and cash of the Fund. Federated Services Company, Pittsburgh, PA, provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments. The fee paid for this service is based upon the level of
the Fund's average net assets for the period plus out-of-pocket expenses.
Transfer Agent

Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records and
receives a fee based on the size, type, and number of accounts and transactions
made by shareholders. Independent Auditors

The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh, PA
15219.

Purchasing Shares
Except under certain circumstances described in the prospectus, Shares are sold
at their net asset value (plus a sales load on Class A Shares only) on days the
New York Stock Exchange is open for business. The procedure for purchasing
Shares is explained in each prospectus under "How To Purchase Shares."
Distribution Plan and Shareholder Services Agreement

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services as appropriate, to stimulate
distribution activities and to cause services to be provided to shareholders by
a representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses. By
adopting the Distribution Plan, the Trustees expect that the Class A Shares,
Class B Shares and Class C Shares of the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales. Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.

For the fiscal year ended October 31, 1996, the Fund paid distribution fees for
Class B Shares and Class C Shares in the amounts of $15,000 and $1,642,
respectively.

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

Conversion to Federal Funds

Trustees, employees, and sales representatives of the Fund, the Adviser, and
Federated Securities Corp., or their affiliates, or any investment dealer who
has a sales agreement with Federated Securities Corp., and their spouses and
children under 21, may buy Class A Shares at net asset value without a sales
charge. Shares may also be sold without a sales charge to trusts or pension or
profit-sharing plans for these persons. These sales are made with the
purchaser's written assurance that the purchase is for investment purposes and
that the securities will not be resold except through redemption by the Fund.
Exchanging Securities for Fund Shares

Investors may exchange convertible securities they already own for Shares, or
they may exchange a combination of convertible securities and cash for Shares.
Any securities to be exchanged must meet the investment objective and policies
of the Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The Fund will prepare a list of
securities which are eligible for acceptance and furnish this list to brokers
upon request. The Fund reserves the right to reject any security, even though it
appears on the list, and the right to amend the list of acceptable securities at
any time without notice to brokers or investors. An investment broker acting for
an investor should forward the securities in negotiable form with an authorized
letter of transmittal to Federated Securities Corp. Federated Securities Corp.
will determine that the transmittal papers are in good order and will then
forward them to the Fund's custodian, State Street bank and Trust Company,. The
Fund will notify the broker of its acceptance and valuation of the securities
within five business days of their receipt by State Street Bank and Trust
Company. The Fund values such securities in the same manner as the Fund values
its portfolio securities. The basis of the exchange will depend upon the net
asset value of Shares on the day the securities are valued. One Share will be
issued for each equivalent amount of securities accepted. Any interest earned on
the securities prior to the exchange will be considered in valuing the
securities. All interest, dividends, subscription, conversion, or other rights
attached to the securities become the property of the Fund, along with the
securities.
Tax Consequences

<PAGE>

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

Marketvalues of the Fund's portfolio securities, other than options, are
determined as follows: o according to the last sale price on a national
securities exchange, if available;

o for unlisted equity securities, the latest bid prices; or

o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or at fair
value as determined in good faith by the Board of Trustees.

Options are valued at the market values established by the exchanges at the
close of option trading unless the Trustees determine in good faith that another
method of valuing option positions is necessary. Redeeming Shares The Fund
redeems Shares at the next computed net asset value, less any applicable
contingent deferred sales charge, after the Fund receives the redemption
request. Redemption procedures are explained in each prospectus under "How To
Redeem Shares." Although the transfer agent does not charge for telephone
redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000. Class B Shares redeemed within
one to six years of purchase and Class C Shares and applicable Class A Shares
redeemed within one year of purchase may be subject to a contingent deferred
sales charge. The amount of the contingent deferred sales charge is based upon
the amount of the administrative fee paid at the time of purchase by the
distributor to the financial institution for services rendered, and the length
of time the investor remains a shareholder in the Fund. Should financial
institutions elect to receive an amount less than the administrative fee that is
stated in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder will
be reduced accordingly. Redemption in Kind

Although the Fund intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio. To the extent
available, such securities will be readily marketable. The Trust has elected to
be governed by Rule 18f-1 of the Investment Company Act of 1940, as amended,
under which the Fund is obligated to redeem Shares for any one shareholder in
cash only up to the lesser of $250,000 or 1% of the respective class's net asset
value during any 90-day period. Any redemption beyond this amount will also be
in cash unless the Trustees determine that payments should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way as the Fund determines net asset
value. The portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable. Redemption in kind is not as liquid as a cash
redemption. If redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive less than the
redemption value of their securities and could incur certain transaction costs.

<PAGE>

Elimination of the Contingent Deferred Sales Charge

The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales Charge may
not exceed 12% annually with reference initially to the value of the Class B
Shares upon establishment of the Systematic Withdrawal Program and then as
calculated at the fiscal year end. Redemptions on a qualifying Systematic
Withdrawal Program can be made at a rate of 1.00% monthly, 3.00% quarterly, or
6.00% semi-annually with reference to the applicable account valuation amount.
Amounts that exceed the 12.00% annual limit for redemption, as described, may be
subject to the Contingent Deferred Sales Charge. To the extent that a
shareholder exchanges Shares for Class B Shares of other Federated Funds, the
time for which the exchanged-for Shares are to be held will be added to the time
for which exchanged-from Shares were held for purposes of satisfying the
12-month holding requirement. However, for purposes of meeting the $10,000
minimum account value requirement, Class B Share account values will not be
aggregated. Massachusetts Partnership Law

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

Exchanging Securities for Shares
Investors may exchange securities they already own for Shares, or they may
exchange a combination of securities and cash for Shares. An investor should
forward the securities in negotiable form with an authorized letter of
transmittal to Federated Securities Corp. The Fund will notify the investor of
its acceptance and valuation of the securities within five business days of
their receipt by State Street Bank. The Fund values securities in the same
manner as the Fund values its assets. The basis of the exchange will depend upon
the net asset value of Shares on the day the securities are valued. One Share of
the Fund will be issued for each equivalent amount of securities accepted. Any
interest earned on the securities prior to the exchange will be considered in
valuing the securities. All interest, dividends, subscription, or other rights
attached to the securities become the property of the Fund, along with the
securities. Tax Consequences

o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

o invest in securities within certain statutory limits; and

o distribute to its shareholders at least 90% of its net income earned
during the year.

Shareholders' Tax Status

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held the Fund
Shares.

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

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

<PAGE>

Performance Comparisons
The performance of each of the classes of Shares depends upon such variables as:
o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

o changes in interest rates and market value of portfolio securities;

o changes in the Fund's or any class of Shares' expenses; and

o various other factors.

The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
The Fund may compare the performance of equity income funds to other types of
stock funds and indices.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all capital gains distributions and
income dividends and takes into account any change in net asset value
over a specified period of time. From time to time, the Fund will quote
its Lipper ranking in the "convertible securities" and "fixed income
funds" categories in advertising and sales literature.

o Dow Jones Industrial Average ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in the
average price of stocks in any of its categories. It also reports total
sales for each group of industries. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator
for the stock market as a whole.

o Standard & Poor's Ratings Group Daily Stock Price Index Of 500 Common
Stocks (S&P 500), is a composite index of common stocks in industry,
transportation, and financial and public utility companies, which
compares total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the S&P 500 assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.

o Lipper Growth Fund Average is an average of the total returns for 580
growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.

o Lipper Growth Fund Index is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical
Services, Inc., an independent mutual fund rating service.

o Morningstar, Inc., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk-adjusted returns. The maximum rating is five stars, and ratings
are effective for two weeks.

o Value Line Mutual Fund Survey, published by Value Line Publishing,
Inc., analyzes price, yield, risk, and total return for equity and
fixed income mutual funds. The highest rating is One, and ratings are
effective for two weeks.

o CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc., analyzes price, current yield, risk, total return, and average
rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.

o Strategic Insight Mutual Fund Research And Consulting, ranks funds in
various fund categories by making comparative calculations using total
return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specified period of time. From time to time,
the Fund will quote its Strategic Insight ranking in the "growth
funds" category in advertising and sales literature.

o Mutual Fund Source Book, published by Morningstar, Inc., analyzes
price, yield, risk, and total return for equity and fixed income
funds.

o Strategic Insight Growth Funds Index consists of mutual funds that
invest in well-established companies primarily for long-term capital gains
rather than current income.

o Financial Publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money Magazines,
among others--provide performance statistics over specified time
periods.

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

Economic and Market Information

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 has more than 26 years' experience. As of
December 31, 1996, Federated managed 31 equity funds totaling approximately $7.6
billion in assets across growth, value, equity income, international, index and
sector (i.e. utility) styles. Federated's value-oriented management style
combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

J. Thomas Madden, Executive Vice President, oversees Federated Investors' equity
and high yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated Investors' domestic fixed income management. Henry
A. Frantzen, Executive Vice President, oversees the management of Federated
Investors' international and global portfolios. Mutual Fund Market

Thirty- seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.**

Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include: Institutional
Clients

Federated meets the needs of more than 4,000 institutional clients nationwide by
managing and servicing separate accounts and mutual funds for a variety of
applications, including defined benefit and defined contribution programs, cash
management, and asset/liability management. Institutional clients include
corporations, pension funds, tax-exempt entities, foundations/endowments,
insurance companies, and investment and financial advisors. The marketing effort
to these institutional clients is headed by John B. Fisher, President,
Institutional Sales Division. Bank Marketing

Broker/Dealers and Bank Broker/Dealer Subsidiaries

Federated funds are available to consumers through major brokerage firms
nationwide--we have over 2,200 broker/dealer and bank broker/dealer
relationships across the county ---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 surveys performed by DALBAR,
Inc. DALBAR is recognized as the industry benchmark for service quality
measurement. The marketing effort to these firms is headed by James F. Getz,
President, Federated Securities Corp.

*source: Investment Company Institute

<PAGE>

Appendix
Standard and Poor's Ratings Group Commercial Paper Rating Definitions
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+). A-2--Capacity for timely
payment on issues with this designation is satisfactory. However, the relative
degree of safety is not as high as for issues designated "A-1". Moody's
Investors Service, Inc. Commercial Paper Rating Definitions P-1--Issuers (or
supporting institutions) rated Prime-1 (P-1) have a superior capacity for
repayment of senior short-term promissory obligations. P-1 repayment capacity
will often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
P-2--Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions.
Ample alternate liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Debt Ratings

F-1+-- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment. F-1--
Very Strong Credit Quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issued rated F-1+. F-2-- Good
Credit Quality. Issues carrying this rating have a satisfactory degree of
assurance for timely payment.

Federated Growth Strategies Fund

(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares,
Class C Shares

Prospectus

The shares of Federated Growth Strategies Fund (the "Fund") represent interests
in a diversified portfolio of Federated Equity Funds (the "Trust"), an open-end
management investment company (a mutual fund). The Fund seeks appreciation of
capital by investing primarily in equity securities of companies with prospects
for above-average growth in earnings and dividends.

Theshares 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 December 31,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated December 31, 1997

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TABLE OF CONTENTS

Summary of Fund Expenses 1
Financial Highlights 4
General Information 7
Investment Information 7
Investment Objective..............................7
Investment Policies...............................7
Investment Limitations...........................10
Net Asset Value...11
Investing in the Fund 11
How to Purchase Shares 12
Investing in Class A Shares......................12
Investing in Class B Shares......................14
Investing in Class C Shares......................15
Special Purchase Features........................16
Exchange Privilege 16
How to Redeem Shares 17
Special Redemption Features......................19
Contingent Deferred Sales Charge.................19
Elimination of Contingent Deferred
Sales Charge..................................20
Account and Share Information 21
Trust Information.21
Management of the Trust..........................21
Distribution of Shares...........................23
Administration of the Fund.......................24
Brokerage Transactions 24
Shareholder Information 25
Voting Rights 25
Tax Information 25
Federal Income Tax 25
State and Local Taxes 25
Performance Information 26
Addresses 27

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GENERAL INFORMATION

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

Shares of the Fund are designed for individuals and institutions seeking
appreciation of capital by investing primarily in equity securities of companies
with prospects for above-average growth in earnings and dividends. The minimum
initial investment for Class A Shares is $500. The minimum initial investment
for Class B Shares and Class C Shares is $1,500. However, the minimum initial
investment for a retirement account in any class is $50. Subsequent investments
in any class must be in amounts of at least $100, except for retirement plans
which must be in amounts of at least $50.

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

INVESTMENT INFORMATION

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

Investment Policies
The Fund pursues this investment objective by investing primarily in equity
securities of companies with prospects for above-average growth in earnings and
dividends. Unless indicated otherwise, the investment policies of the Fund may
be changed by the Trustees without the approval of shareholders. Shareholders
will be notified before any material changes in these policies become effective.

Acceptable Investments
The Fund invests primarily in equity securities of companies selected by the
investment adviser on the basis of traditional research techniques, including
assessment of earnings and dividend growth prospects and of the risk and
volatility of each company's business. The Fund generally invests in companies
with market capitalization of $100,000,000 or more. The Fund may invest in
common and preferred stocks, corporate bonds, debentures, notes, warrants, and
put and call options on stocks.

Securities of Foreign Issuers and Risk Considerations
The Fund may invest in the securities of foreign issuers which are freely traded
on United States securities exchanges or in the over-the-counter market in the
form of depository receipts. Securities of a foreign issuer may present greater
risks in the form of nationalization, confiscation, domestic marketability, or
other national or international restrictions. As a matter of practice, the Fund
will not invest in the securities of a foreign issuer if any such risk appears
to the investment adviser to be substantial.

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

Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted, but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used, in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality. The Fund
will exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stock in instances in which, in the investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objectives. Otherwise,
the Fund will hold or trade the convertible securities. In selecting convertible
securities for the Fund, the investment adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the investment adviser considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.

Restricted and Illiquid Securities
The Fund may acquire securities which are subject to legal or contractual
delays, restrictions, and costs on resale. Because of time limitations, the Fund
might not be able to dispose of these securities at reasonable prices or at
times advantageous to the Fund. The Fund intends to limit the purchase of
restricted securities which have not been determined by the Trustees to be
liquid, together with other securities considered to be illiquid, including
repurchase agreements providing for settlement in more than seven days after
notice, to not more than 15% of its net assets.

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

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

o short-term money market instruments;

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

o repurchase agreements.

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

Put and Call Options
The Fund may purchase put options on stocks. These options will be used only as
a hedge to attempt to protect securities which the Fund holds against decreases
in value. The Fund may purchase these put options as long as they are listed on
a recognized options exchange and the underlying stocks are held in its
portfolio.

The Fund may also write call options on securities either held in its portfolio,
or which it has the right to obtain without payment of further consideration, or
for which it has segregated cash in the amount of any additional consideration.
The call options which the Fund writes and sells must be listed on a recognized
options exchange. Writing of calls by the Fund is intended to generate income
for the Fund and, thereby, protect against price movements in particular
securities in the Fund's portfolio.

Risks
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a secondary
market on an exchange which may or may not exist for any particular call or put
option at any specific time. The absence of a liquid secondary market also may
limit the Fund's ability to dispose of the securities underlying an option. The
inability to close options also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio.

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

Portfolio Turnover
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, securities in its portfolio will be sold whenever the
Adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. The Fund's rate of portfolio turnover may exceed that of certain
other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses which
must be borne directly by the Fund and, thus, indirectly by its shareholders. In
addition, a high rate of portfolio turnover may result in the realization of
larger amounts of capital gains which, when distributed to the Fund's
shareholders, are taxable to them. (Further information is contained in the
Fund's Statement of Additional Information within the sections "Brokerage
Transactions" and "Tax Status".) Nevertheless, transactions for the Fund's
portfolio will be based only upon investment considerations and will not be
limited by any other considerations when the Adviser deems it appropriate make
changes in the Fund's portfolio.

Investment Limitations
The Fund will not:

o 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

o invest more than 5% of its total assets in securities of one issuer (except
cash and cash items, repurchase agreements, and U.S. government
obligations) or acquire more than 10% of any class of voting securities of
any one issuer.

The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.

The Fund will not:

o purchase securities of other investment companies, except in open market
transactions limited to not more than 10% of its total assets, or except as
part of a merger, consolidation, or other acquisition;

NET ASSET VALUE

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

HOW TO PURCHASE SHARES

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

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

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

Sales Charge as Dealer Concession
Sales Charge as a Percentage as a Percentage
Amount of a Percentage of Net Amount of Public
Transaction of Offering Price Invested Offering Price
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*
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* See sub-section entitled "Dealer Concession."

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

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

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

o quantity discounts and accumulated purchases;

o concurrent purchases;

o signing a 13-month letter of intent; or

o using the reinvestment privilege.

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

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

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

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

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

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

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

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

EXCHANGE PRIVILEGE

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

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

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

Upon receipt of proper instructions and required supporting documents, shares
submitted for exchange are redeemed and proceeds invested in the same class of
shares of the other fund. The exchange privilege may be modified or terminated
at any time. Shareholders will be notified of the modification or termination of
the exchange privilege.

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

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

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

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

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.

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

Special Redemption Features
Systematic Withdrawal Program
Shareholders who desire to receive payments of a predetermined amount not less
than $100 may take advantage of the Systematic Withdrawal Program. Under this
program, shares are redeemed to provide for periodic withdrawal payments in an
amount directed by the shareholder. Depending upon the amount of the withdrawal
payments, the amount of dividends paid and capital gains distributions with
respect to shares, and the fluctuation of the net asset value of shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. To be eligible to participate in this program, a
shareholder must have an account value of at least $10,000, other than
retirement accounts subject to required minimum distributions. A shareholder may
apply for participation in this program through his financial institution. Due
to the fact that Class A Shares are sold with a sales charge, it is not
advisable for shareholders to continue to purchase Class A Shares while
participating in this program. A contingent deferred sales charge may be imposed
on Class B Shares and Class C Shares.

Contingent Deferred Sales Charge
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their shares under the following circumstances:

Contingent
Year of Redemption Deferred
After Purchase Sales Charge
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%

Elimination of Contingent Deferred Sales Charge
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 701/2; (3) involuntary redemptions by the Fund of shares in
shareholder accounts that do not comply with the minimum balance requirements;
and (4) qualifying redemptions of Class B Shares must be from an account: that
is at least 12 months old, has all Fund distributions reinvested in Fund Shares,
and has a value of at least $10,000 when the Systematic Withdrawal Program is
established. Qualifying redemptions may not exceed 1.00% monthly of the account
value as periodically determined by the Fund. For more information regarding the
elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary or the Fund. No
contingent deferred sales charge will be imposed on redemptions of shares held
by Trustees, employees and sales representatives of the Fund, the distributor,
or affiliates of the Fund or distributor, and their immediate family members;
employees of any financial institution that sells shares of the Fund pursuant to
a sales agreement with the distributor; and spouses and children under the age
of 21 of the aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally purchased through
a bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Fund reserves the

right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.

ACCOUNT AND SHARE INFORMATION

Confirmations and Account Statements
Shareholders will receive detailed confirmations of transactions (except for
systematic program transactions). In additions, shareholders will receive
periodic statements reporting all account activity, including dividends paid.
The Fund will not issue share certificates.

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

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

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

TRUST INFORMATION

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

Advisory Fees
The Adviser receives an annual investment advisory fee equal to 0.75%
of the Fund's average daily net assets. The fee paid by the Fund, while
higher than the advisory fee paid by other mutual funds in general, is
comparable to fees paid by other mutual funds with similar objectives
and policies. Under the investment advisory contract, which provides
for the voluntary waiver of the advisory fee by the Adviser, the
Adviser may voluntarily waive some or all of its fee. This does not
include reimbursement to the Fund of any expenses incurred by
shareholders who use the transfer agent's subaccounting facilities. The
Adviser can terminate this voluntary waiver at any time in its sole
discretion.

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

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
$110 billion invested across more than 300 funds under management
and/or administration by its subsidiaries, as of December 31, 1996,
Federated Investors is one of the largest mutual fund investment
managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company
in 1955. Federated funds are presently at work in and through 4,500
financial institutions nationwide.

Salvatore Esposito has been the Fund's portfolio manager since November
1997. Mr. Esposito joined Federated Investors in 1995 as an Investment
Analyst of the Fund's Adviser and has been an Assistant Vice President of
the Fund's Adviser since October 1997. From 1987 to 1995, Mr. Esposito
served in various positions at PNC Bank, culminating in that of Vice
President/Lead Reviewer. Mr. Esposito earned his M.B.A., concentrating in
Finance, from Duquesne University."

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

Distribution of Shares

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

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

Distribution Plan (Class B Shares and Class C Shares Only) and Shareholder
Services
Under a distribution plan adopted in accordance with Investment Company Act Rule
12b-1 (the "Distribution Plan"), Class B Shares and Class C Shares will pay a
fee to the distributor in an amount computed at an annual rate of .75% of the
average daily net assets of each class of shares to finance any activity which
is principally intended to result in the sale of shares subject to the
Distribution Plan. For Class C Shares, the distributor may select financial
institutions such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers to provide sales services or distribution-related
support services as agents for their clients or customers. With respect to Class
B Shares, because distribution fees to be paid by the Fund to the distributor
may not exceed an annual rate of 0.75% of each class of shares' average daily
net assets, it will take the distributor a number of years to recoup the
expenses it has incurred for its sales services and distribution-related support
services pursuant to the Distribution Plan.

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

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

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

Average Aggregate
Maximum Daily Net Assets
Administrative Fee of the Federated Funds
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

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

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION

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.

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

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

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

PERFORMANCE INFORMATION

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

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

<PAGE>

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

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

Investment Adviser
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

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

Independent Auditors
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Growth Strategies Fund

(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares
Class C Shares

Prospectus
December 31, 1997

An Open-End, Diversified Management Investment Company

Cusip 314172107
Cusip 314172206
Cusip 314172305
G01228-01 (12/97)

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

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the prospectus for
Class A Shares, Class B Shares, and Class C Shares, of Federated Growth
Strategies Fund (the "Fund"), a portfolio of Federated Equity Funds (the Trust")
dated December 31, 1997. This Statement is not a prospectus. You may request a
copy of a prospectus or a paper copy of this Statement, if you have received it
electronically, free of charge by calling 1-800-341-7400.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated December 31, 1997

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

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

Cusip 314172107
Cusip 314172206
Cusip 314172305
G01228-02 (12/96)

TABLE OF CONTENTS

GENERAL INFORMATION ABOUT THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES 1
Types of Investments 1
Temporary Investments 2
When-Issued and Delayed Delivery Transactions 2
Lending of Portfolio Securities 2
Repurchase Agreements 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
FEDERATED EQUITY FUNDS MANAGEMENT 5
Fund Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10
Adviser to the Fund 10
Advisory Fees 11
Other Related Services 11
BROKERAGE TRANSACTIONS 11
OTHER SERVICES 11
Fund Administration 11
Custodian 11
Transfer Agent 11
Independent Auditors 11
PURCHASING SHARES 12
Distribution Plan (Class B Shares and Class C Shares Only)
and Shareholder Services Agreement 12
Conversion to Federal Funds 12
Purchases by Sales Representatives, Trustees, and
Employees of the Fund 12
DETERMINING NET ASSET VALUE 12
Determining Market Value of Securities 13
REDEEMING SHARES 13
Redemption in Kind 13
Elimination of the Contingent
Deferred Sales Charge 13
MASSACHUSETTS PARTNERSHIP LAW 14
EXCHANGING SECURITIES FOR SHARES 14
Tax Consequences 14
TAX STATUS 14
The Fund's Tax Status 14
Shareholders' Tax Status 14
TOTAL RETURN 15
YIELD 15
PERFORMANCE COMPARISONS 15
Economic and Market Information 17
ABOUT FEDERATED INVESTORS 17
Mutual Fund Market 17
Institutional 17
Trust Organizations 17
Broker/Dealers and Bank Broker/
Dealer Subsidiaries 18
FINANCIAL STATEMENTS 18
APPENDIX 18

GENERAL INFORMATION ABOUT THE FUND

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 appreciation of capital. The Fund pursues
this investment objective by investing primarily in equity securities of
companies with prospects for above-average growth in earnings and dividends. The
investment objective cannot be changed without approval of shareholders.

TYPES OF INVESTMENTS

The Fund may invest in common stocks, preferred stocks, corporate bonds,
debentures, notes, warrants, and put options on stocks.

CORPORATE DEBT SECURITIES

Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or
a different issuer, participations based on revenues, sales, or profits, or
the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).

The corporate debt securities (excluding convertible securities) in which the
Fund may invest will be rated investment grade, i.e., Baa or better by
Moody's Investors Service, Inc. ("Moody's"), or BBB or better by Standard &
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") (or,
if unrated, are deemed to be of comparable quality by the Fund's investment
adviser). It should be noted that securities receiving the lowest investment
grade rating are considered to have some speculative characteristics. Changes
in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher rated
securities. In the event that a security which had an eligible rating when
purchased is downgraded below Baa or BBB, the investment adviser will
promptly reassess whether continued holding of the security is consistent
with the Fund's objective.

RESTRICTED SECURITIES

The Fund expects that any restricted securities would be acquired either from
institutional investors who originally acquired the securities in private
placements or directly from the issuers of the securities in private
placements. Restricted securities and securities that are not readily
marketable may sell at a discount from the price they would bring if freely
marketable.

PUT AND CALL OPTIONS

The Fund may purchase listed put options on stocks or write covered call
options to protect against price movements in particular securities in its
portfolio and generate income. A put option gives the Fund, in return for a
premium, the right to sell the underlying security to the writer (seller) at
a specified price during the term of the option. As writer of a call option,
the Fund has the obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of the exercise price.

The Fund may only: (1) buy put options which are listed on a recognized
options exchange and which are on securities held in its portfolio; and (2)
sell listed call options either on securities held in its portfolio or on
securities which it has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any such additional
consideration). The Fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or expire. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
Although the investment adviser will consider liquidity before entering into
option transactions, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option or at any particular time.
The Fund reserves the right to hedge the portfolio by buying financial
futures and put options on stock index futures and financial futures.

However, the Fund will not engage in these transactions until (1) an
amendment to its Registration Statement is filed with the Securities and
Exchange Commission and becomes effective; and (2) ten days after a
supplement to the prospectus disclosing this change in policy has been mailed
to the shareholders.

TEMPORARY INVESTMENTS

The Fund may also invest in temporary investments from time to time for
defensive purposes.

MONEY MARKET INSTRUMENTS

The Fund may invest in the following money market instruments:

* instruments of domestic and foreign banks and savings associations if they
have capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured in full by the Bank Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation
("FDIC"), or the Savings Association Insurance Fund, which is administered by
the FDIC; and

* prime commercial paper (rated A-1 by S&P , Prime-1 by Moody's, or F-1 by
Fitch).

U.S. GOVERNMENT OBLIGATIONS

* the full faith and credit of the U.S. Treasury;

* the issuer's right to borrow from the U.S. Treasury;

* the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

* the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

* Farm Credit Banks;

* Federal Home Loan Banks;

* Federal National Mortgage Association;

* Student Loan Marketing Association; and

* Federal Home Loan Mortgage Corporation.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

LENDING OF PORTFOLIO SECURITIES

REPURCHASE AGREEMENTS

The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed pending
court action. The Fund believes that under the regular procedures normally in
effect for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund will only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Board of
Trustees (the "Trustees").

REVERSE REPURCHASE AGREEMENTS

PORTFOLIO TURNOVER

INVESTMENT LIMITATIONS

CONCENTRATION OF INVESTMENTS

The Fund will not purchase securities if, as a result of such purchase, 25%
or more of the value of its total assets would be invested in any one
industry. However, the Fund may at times invest 25% or more of the value of
its total assets in cash or cash items (not including certificates of
deposit), securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or repurchase agreements secured by such
instruments.

INVESTING IN COMMODITIES

The Fund will not purchase or sell commodities. The Fund reserves the right
to purchase financial futures and put options on stock index futures and on
financial futures.

INVESTING IN REAL ESTATE

The Fund will not purchase or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate, or in securities which are secured by real estate or interests in
real estate.

BUYING ON MARGIN

The Fund will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions and
may make margin payments in connection with buying financial futures, put
options on stock index futures, and put options on financial futures.

SELLING SHORT

The Fund will not sell securities short unless at all times when a short
position is open, it owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to,
the securities sold short; and unless not more than 10% of the value of the
Fund's net assets (taken at current value) is held as collateral for such
sales at any one time.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

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

LENDING CASH OR SECURITIES

The Fund will not lend any of its assets except portfolio securities. This
shall not prevent the purchase or holding of corporate or government bonds,
debentures, notes, certificates of indebtedness, or other debt securities of
an issuer, repurchase agreements, or other transactions which are permitted
by the Fund's investment objective and policies or Declaration of Trust.

UNDERWRITING

The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.

INVESTING IN MINERALS

The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, although it may purchase the securities
of issuers which invest in or sponsor such programs.

DIVERSIFICATION OF INVESTMENTS

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

INVESTING IN ILLIQUID 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.

WRITING COVERED CALL OPTIONS

The Fund will not write call options on securities unless the securities are
held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.

ACQUIRING SECURITIES

The Fund will not purchase securities of a company for the purpose of
exercising control or management. However, the Fund may invest in up to 10%
of the voting securities of any one issuer and may exercise its voting powers
consistent with the best interests of the Fund. In addition, the Fund, other
companies advised by the Fund's investment adviser, and other affiliated
companies may together buy and hold substantial amounts of voting stock of a
company and may vote together in regard to such company's affairs. In some
such cases, the Fund and its affiliates might collectively be considered to
be in control of such company. In some cases, Trustees and other persons
associated with the Fund and its affiliates might possibly become directors
of companies in which the Fund holds stock.

Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction. The Fund did not borrow money, sell securities short, or invest in
reverse repurchase agreements in excess of 5% of the value of its total assets
during the last fiscal year and has no present intent to do so in the coming
fiscal year.

FEDERATED EQUITY FUNDS MANAGEMENT

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

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA

Birthdate: July 28, 1924

Chairman and Trustee

Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA

Birthdate: February 3, 1934

Trustee

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

James E. Dowd
571 Hayward Mill Road
Concord, MA

Birthdate: May 18, 1922

Trustee

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA

Birthdate: October 11, 1932

Trustee

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA

Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL

Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA

Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.

John E. Murray, Jr.,
J.D., S.J.D. President, Duquesne University
Pittsburgh, PA

Birthdate: December 20, 1932

Trustee

President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA

Birthdate: September 14, 1925

Trustee

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA

Birthdate: June 21, 1935

Trustee

Public Relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA

Birthdate: May 2, 1929

President

Trustee, Federated Investors; President and/or Trustee of some of the Funds;
Staff Member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA

Birthdate: April 11, 1949

Executive Vice President

President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA

Birthdate: October 22, 1930

Executive Vice President

John W. McGonigle

Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President, Secretary and Treasurer

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA

Birthdate: May 17, 1923

Vice President

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

* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.

@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable
Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the Fund's outstanding shares.

As of December 4, 1996, the following shareholder of record owned 5% or more of
the outstanding Class B Shares of the Fund: MLPF&S for the sole benefit of its
customers, Jacksonville, Florida, owned approximately 23,369 shares (5.01%).

As of December 4, 1996, the following shareholders of record owned 5% or more of
the outstanding Class C Shares of the Fund: MLPF&S for the sole benefit of its
customers, Jacksonville, Florida, owned approximately 20,815 shares (14.43%);
The Troy Savings Bank RPO Gorman Group, Troy, New York, owned approximately
18,626 shares (12.91%).

TRUSTEES COMPENSATION

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

John F. Donahue $0 $0 for the Trust and
Chairman and Trustee 54 other investment companies in the Fund Complex
Thomas G. Bigley++ $865 $86,331 for the Trust and
Trustee 54 other investment companies in the Fund Complex
John T. Conroy, Jr. $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
William J. Copeland $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
James E. Dowd $947 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D. $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Edward L. Flaherty, Jr. $847 $115,760 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Peter E. Madden $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Gregor F. Meyer $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
John E. Murray $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Wesley W. Posvar $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex
Marjorie P. Smuts $865 $104,898 for the Trust and
Trustee 54 other investment companies in the Fund Complex

</TABLE>

* Information is furnished for the fiscal year ended October 31, 1996.

# The aggregate compensation is provided for the Trust which is comprised of 3
portfolios.

+ The information is provided for the last calendar year.

++ Mr. Bigley served on 39 investment companies in the Federated Funds Complex
from January 1 through September 30, 1995. On October 1, 1995, he was
appointed a Trustee on 15 additional Federated Funds.

TRUSTEE LIABILITY

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND

ADVISORY FEES

For its advisory services, Federated Management receives an annual investment
advisory fee as described in each prospectus. During the fiscal years ended
October 31, 1996, 1995, and 1994, the Fund's Adviser earned $2,042,918,
$1,958,826, and $3,112,641, respectively.

OTHER RELATED SERVICES

BROKERAGE TRANSACTIONS

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the Adviser or its in advising
the Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer brokerage
and research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the fiscal years
ended October 31, 1996, 1995, and 1994, the Fund paid total brokerage
commissions of $532,694, $1,002,791, and $829,771, respectively.

OTHER SERVICES

FUND ADMINISTRATION

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee described in each
prospectus. From March 1, 1994, to March 1, 1996, Federated Administrative
Services served as the Fund's Administrator. Prior to March 1, 1994, Federated
Administrative Services, Inc. served as the Fund's Administrator. Both former
Administrators are subsidiaries of Federated Investors. For purposes of this
Statement of Additional Information, Federated Services Company, Federated
Administrative services, and Federated Administrative Services, Inc., may
hereinafter collectively be referred to as the "Administrators." For the fiscal
years ended October 31, 1996, 1995, and 1994, the Administrators earned
$205,948, $197,711, and $410,620, respectively.

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund. Federated
Services Company, Pittsburgh, PA, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee paid for this
service is based upon the level of the Fund's average net assets for the period
plus out-of-pocket expenses.

TRANSFER AGENT

Federated Services Company, through its registered transfer agent, Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the level of the Fund's
average net assets for the period plus out-of-pocket expenses.

INDEPENDENT AUDITORS

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

PURCHASING SHARES

Except under certain circumstances described in the prospectus, shares are sold
at their net asset value (plus a sales charge on Class A Shares only) on days
the New York Stock Exchange is open for business. The procedure for purchasing
shares is explained in each prospectus under "How To Purchase Shares."

DISTRIBUTION PLAN (CLASS B SHARES AND CLASS C SHARES ONLY) AND SHAREHOLDER
SERVICES AGREEMENT

By adopting the Distribution Plan (Class B Shares and Class C Shares only), the
Trustees expect that the Class B Shares and Class C Shares of the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.

For the fiscal year ended October 31, 1996, the Fund paid shareholder service
fees for Class A Shares, Class B Shares, and Class C Shares in the amounts of
$663,320, $15,083, and $2,569, respectively, of which $397,992, $0, and $1,203,
respectively, was voluntarily waived.

For the fiscal year ended October 31, 1996, the Class B Shares and Class C
Shares of the Fund paid distribution services fees in the amounts of $45,248,
and $7,708, respectively.

CONVERSION TO FEDERAL FUNDS

PURCHASES BY SALES REPRESENTATIVES, TRUSTEES, AND EMPLOYEES OF THE FUND

These sales are made with the purchaser's written assurance that the purchase is
for investment purposes and that the securities will not be resold except
through redemption by the Fund.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in each prospectus.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities, other than options, are
determined as follows:

* according to the last sale price on a national securities exchange, if
available;

* in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices and for bonds and other
fixed income securities as determined by an independent pricing service for
unlisted equity securities, the latest bid prices; or

* for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or at fair value as
determined in good faith by the Trustees.

REDEEMING SHARES

The Fund redeems shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus under
"How To Redeem Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.

REDEMPTION IN KIND

Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio. To the extent
available, such securities will be readily marketable.

The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940, under which the Fund is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class's net asset value during any 90-day period.

ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE

The amounts that a shareholder may withdraw under a Systematic Withdrawal
Program that qualify for elimination of the Contingent Deferred Sales Charge may
not exceed 12.00% annually with reference initially to the value of the Class B
Shares upon establishment of the Systematic Withdrawal Program and then as
calculated at the fiscal year end. Redemptions on a qualifying Systematic
Withdrawal Program can be made at a rate of 1.00% monthly, 3.00% quarterly, or
6.00% semi-annually with reference to the applicable account valuation amount.
Amounts that exceed the 12.00% annual limit for redemption, as described, may be
subject to the Contingent Deferred Sales Charge. To the extent that a
shareholder exchanges shares for Class B Shares of other Federated Funds, the
time for which the exchanged-for shares are to be held will be added to the time
for which exchanged-from shares were held for purposes of satisfying the 12
month holding requirement. However, for purposes of meeting the $10,000 minimum
account value requirement, Class B Share account values will not be aggregated.

MASSACHUSETTS PARTNERSHIP LAW

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.

TAX CONSEQUENCES

Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for shares,
a gain or loss may be realized by the investor.

TAX STATUS

THE FUND'S TAX STATUS

The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986, applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:

* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

* invest in securities within certain statutory limits; and

* distribute to its shareholders at least 90% of its net income earned
during the year.

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid by
the Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.

CAPITAL GAINS

Shareholders will pay federal tax at capital gains rates on long-term capital
gains distributed to them regardless of how long they have held the Fund
Shares.

TOTAL RETURN

The Fund's average annual total returns for Class A Shares for the one-year,
five-year, and ten-year periods ended October 31, 1996, were 16.37%, 10.45%, and
12.51%, respectively.

The Fund's average annual total returns for Class B Shares, for the one-year
period ended October 31, 1996, and for the period from August 15, 1995 (date of
initial public offering), to October 31, 1996, were 15.32% and 15.88%,
respectively.

The Fund's average annual total returns for Class C Shares, for the one-year
period ended October 31, 1996, and for the period from August 15, 1995 (date of
initial public offering), to October 31, 1995, were 20.89% and 20.72%,
respectively.

The average annual total return for each class of shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge adjusted over the period by any additional shares, assuming the quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investment based
on the lesser of the original purchase price or the net asset value of shares
redeemed.

YIELD

The Fund's yields for Class A Shares, Class B Shares, and Class C Shares for the
thirty-day period ended October 31, 1993 were 0%, 0%, and 0% respectively.

The yield for each class of shares of the Fund is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by any class of shares over a thirty-day period by the
maximum offering price per share of the respective class on the last day of the
period. This value is annualized using semi-annual compounding. This means that
the amount of income generated during the thirty-day period is assumed to be
generated each month over a 12-month period and is reinvested every six months.
The yield does not necessarily reflect income actually earned by the Fund
because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to the shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of shares, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS

The performance of each of the classes of shares depends upon such variables as:

* portfolio quality;

* average portfolio maturity;

* type of instruments in which the portfolio is invested;

* changes in interest rates and market value of portfolio securities;

* changes in the Fund's or any class of shares' expenses; and

* various other factors.

The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
offering price per share are factors in the computation of yield and total
return. Investors may use financial publications and/or indices to obtain a
more complete view of the Fund's performance. When

comparing performance, investors should consider all relevant factors such as
the composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities and
compute offering price. The financial publications and/or indices which the Fund
uses in advertising may include:

* LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specified
period of time. From time to time, the Fund will quote its Lipper ranking
in the "growth funds" category in advertising and sales literature.

* DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing
share prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is cited
as a principal indicator of market conditions.

* STANDARD & POOR'S LOW-PRICED INDEX compares a group of approximately twenty
actively traded stocks priced under $25 for one month periods and
year-to-date.

* STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P 500), a
composite index of common stocks in industry, transportation, and financial
and public utility companies, can be used to compare to the total returns
of funds whose portfolios are invested primarily in common stocks. In
addition, the S&P 500 assumes reinvestments of all dividends paid by stocks
listed on its index. Taxes due on any of these distributions are not
included, nor are brokerage or other fees calculated in the Standard &
Poor's figures.

* LIPPER GROWTH FUND AVERAGE is an average of the total returns for 580
growth funds tracked by Lipper Analytical Services, Inc., an independent
mutual fund rating service.

* LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total
returns for the top 30 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.

* MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.

* VALUE LINE MUTUAL FUND SURVEY, published by Value Line Publishing, Inc.,
analyzes price, yield, risk, and total return for equity and fixed income
mutual funds. The highest rating is one, and ratings are effective for two
weeks.

* CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.

* STRATEGIC INSIGHT MUTUAL FUND RESEARCH AND CONSULTING, ranks funds in
various fund categories by making comparative calculations using total
return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change in net
asset value over a specified period of time. From time to time, the Fund
will quote its Strategic Insight ranking in the "growth funds" category in
advertising and sales literature.

* MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.

* VALUE LINE COMPOSITE INDEX consists of approximately 1,700 common equity
securities. It is based on a geometric average of relative price changes of
the component stocks and does not include income.

* STRATEGIC INSIGHT GROWTH FUNDS INDEX consists of mutual funds that invest
in well-established companies primarily for long-term capital gains rather
than current income.

* FINANCIAL PUBLICATIONS: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines, among others
-- provide performance statistics over specified time periods.

Advertisements and other sales literature for any class of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of shares based on quarterly reinvestment of dividends over a specified
period of time.

From time to time as it deems appropriate, the Fund may advertise the
performance of any class of shares using charts, graphs, and descriptions,
compared to federally insured bank products including certificates of deposit
and time deposits and to money market funds using the Lipper Analytical Services
money market instruments average. In addition, advertising and sales literature
for the Fund may use charts and graphs to illustrate the principles of
dollar-cost averaging and may disclose the amount of dividends paid by the Fund
over certain periods of time.

Advertisements may quote performance information which does not reflect the
effect of the sales charge on Class A Shares.

Advertising and other promotional literature may include charts, graphs, and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills.

ECONOMIC AND MARKET INFORMATION

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.

In the equity sector, Federated Investors has more than 25 years' experience. As
of December 31, 1995, Federated Investors managed 22 equity funds totaling
approximately $5.4 billion in assets across growth, value, equity income,
international, index and sector (i.e. utility) styles. Federated Investors'
value-oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system that was
developed in the 1970s.

MUTUAL FUND MARKET

Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:

INSTITUTIONAL

TRUST ORGANIZATIONS

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

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

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

FINANCIAL STATEMENTS

The financial statements for the Federated Growth Strategies Fund for the fiscal
year ended October 31, 1996 are incorporated herein by reference to the Annual
Report to Shareholders of Federated Growth Strategies Fund dated October 31,
1996 (File No. 811-4017) A copy of the Annual Report may be obtained without
charge by contacting the Fund.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS

AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

NR -- NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P's may apply a plus (+)
or minus (-) to the above rating classifications to show relative standing
within the classifications.

MOODY'S INVESTORS SERVICE, INC. CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS

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

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:

* Leading market positions in well-established industries.

* High rates of return on funds employed.

* Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

* Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

Well-established access to a range of financial markets and assured sources of
alternate liquidity.

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

Federated Small Cap Strategies Fund

(A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares,
Class C Shares

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

Theshares offered by this prospectus are not deposits or obligations
of any bank, are not endorsed or guaranteed by any bank, and are not
insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other government agency. Investment in these
shares involves investment 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 December 31,
1997, with the Securities and Exchange Commission ("SEC"). The information
contained in the Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Statement of
Additional Information or a paper copy of this prospectus, if you have received
your prospectus electronically, free of charge by calling 1-800-341-7400. To
obtain other information or to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information regarding
the Fund is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).

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

Prospectus dated December 31, 1997

<PAGE>

TABLE OF CONTENTS

Summary of Fund Expenses 1
Financial Highlights 4
General Information 7
Investment Information 7
Investment Objective............................... 7
Investment Policies................................ 7
Investment Limitations............................. 14
Net Asset Value... 15
Investing in the Fund 15
How to Purchase Shares 16
Investing in Class A Shares........................ 16
Investing in Class B Shares........................ 18
Investing in Class C Shares........................ 19
Special Purchase Features.......................... 20
Exchange Privilege 20
How to Redeem Shares 22
Special Redemption Features........................ 23
Contingent Deferred Sales Charge................... 23
Elimination of Contingent Deferred
Sales Charge.................................... 24
Account and Share Information 25
Trust Information. 26
Management of the Trust............................ 26
Distribution of Shares............................. 27
Administration of the Fund......................... 29
Brokerage Transactions 29
Shareholder Information 30
Voting Rights...................................... 30
Tax Information... 30
Federal Income Tax................................. 30
State and Local Taxes.............................. 30
Performance Information 31
Addresses......... 32

<PAGE>

GENERAL INFORMATION

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

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

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

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

INVESTMENT INFORMATION

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

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

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

o common stock of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are considered
by the Adviser to have potential for above-average appreciation; o corporate
securities and convertible securities; o securities of foreign issuers; o
restricted and illiquid securities; o securities of other investment companies;
and o securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.

Small Capitalization Companies
Under normal market conditions, the Fund invests in small capitalization
companies that fall within the capitalization parameters of the S&P SmallCap 600
Index at the time of purchase. As of 10/31/97, the S&P SmallCap 600 Index
parameters ranged from $40 million to $2.8 billion, respectively. . Small
capitalization companies are positioned for rapid growth in revenues or earnings
and assets, characteristics which may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. Smaller companies often have limited product
lines, markets, or financial resources, and they may be dependent upon one or a
few key people for management. (See "Equity Investment Risk Considerations.")
Many small capitalization companies tend to have operating histories of less
than three years.

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

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

Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality.In general,
the market value of a convertible security is at least the higher of its
"investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e. its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying common stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

o short-term money market instruments;
o securities issued and/or guaranteed as to payment of principal and interest
by the U.S. government, its agencies or instrumentalities; and
o repurchase agreements.
Repurchase Agreements
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities.

Investing in Securities of Other Investment Companies
The Fund may invest its assets in securities of other investment companies as an
efficient means of carrying out its investment policies. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses. Lending of Portfolio Securities In
order to generate additional income, the Fund may lend portfolio securities on a
short-term or a long-term basis, to broker/dealers, banks, or other
institutional borrowers of securities. The Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Trustees and
will receive collateral equal to at
least 100% of the value of the securities loaned at all times.

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

Equity Investment Risk Considerations
As with other mutual funds that invest primarily in equity securities, the Fund
is subject to market risks. That is, the possibility exists that common stocks
will decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
because the Fund invests primarily in small capitalization stocks, there are
some additional risk factors associated with investments in the Fund. In
particular, stocks in the small capitalization sector of the United States
equity market have historically been more volatile in price than larger
capitalization stocks, such as those included in the Standard & Poor's 500
Composite Stock Price Index ("Standard & Poor's 500 Index"). This is because,
among other things, small companies have less certain growth prospects than
larger companies; have a lower degree of liquidity in the equity market; and
tend to have a greater sensitivity to changing economic conditions. Further, in
addition to exhibiting greater volatility, the stocks of small companies may, to
some degree, fluctuate independently of the stocks of large companies. That is,
the stocks of small companies may decline in price as the prices of large
company stocks rise or vice versa. Therefore, investors should expect that the
Fund will be more volatile than, and may fluctuate independently of, broad stock
market indices such as the Standard & Poor's 500 Index.

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

Investment Limitations
The Fund will not:

o borrow money directly or through reverse repurchase agreements (arrangements
in which the Fund sells a portfolio instrument for a percentage of its cash
value with an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, the Fund may borrow up to one-third of the
value of its total assets and pledge its assets to secure such borrowings; or o
with respect to 75% of its total assets, invest more than 5% of the value of its
total assets in securities of any one issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government and its agencies or
instrumentalities, and repurchase agreements collateralized by such securities)
or acquire more than 10% of the outstanding voting securities of any one issuer.

THE ABOVE INVESTMENT LIMITATIONS CANNOT BE CHANGED WITHOUT SHAREHOLDER
APPROVAL. NET ASSET VALUE

The 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, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

INVESTING IN THE FUND

The Fund offers investors three classes of shares that carry sales loads and
contingent deferred sales charges in different forms and amounts and which bear
different levels of expenses. Class A Shares An investor who purchases Class A
Shares pays a maximum sales charge of 5.50% at the time of purchase. Certain
purchases of Class A Shares are not subject to a sales charge. See "Investing in
Class A Shares." As a result, Class A Shares are not subject to any charges when
they are redeemed. Certain purchases of Class A Shares qualify for reduced sales
charge. See "Reducing or Eliminating the Sales Charge." Class A Shares
have no conversion feature.
Class B Shares
Class B Shares are sold without an initial sales charge, but are subject to a
contingent deferred sales charge of up to 5.50% if redeemed within six full
years following purchase. Class B Shares also bear a higher 12b-1 fee than Class
A Shares. Class B Shares will automatically convert into Class A Shares, based
on relative net asset value, on or around the fifteenth of the month eight full
years after the purchase date. Class B Shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made, but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee. Class C Shares Class
C Shares are sold without an initial sales charge, but are subject to a 1.00%
contingent deferred sales charge on assets redeemed within the first 12 months
following purchase. Class C Shares provide an investor the benefit of putting
all of the investor's dollars to work from the time the investment is made, but
will have a higher expense ratio and pay lower dividends than Class A Shares due
to the higher 12b-1 fee. Class C Shares have no conversion feature.

HOW TO PURCHASE SHARES

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

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

Sales Load as Dealer
Sales Load as a Percentage Concession
a Percentage of Net as a Percentage
Amount of of Offering Amount of Public
Transaction Price Invested Offering Price

Less than
$50,000 5.50% 5.82% 5.00%

$50,000 but
less than
$100,000 4.50% 4.71% 4.00%

$100,000 but
less than
$250,000 3.75% 3.90% 3.25%

$250,000 but
less than
$500,000 2.50% 2.56% 2.25%

$500,000 but
less than
$1 million 2.00% 2.04% 1.80%

$1 million or
greater 0.00% 0.00% 0.25%*

*See sub-section entitled "Dealer Concession."

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

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

o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent; or
o. using the reinvestment privilege.
Quantity Discounts and Accumulated Purchase
As shown in the table above, larger purchases reduce the sales charge paid. The
Fund will combine purchases of Class A Shares made on the same day by the
investor, the investor's spouse, and the investor's children under age 21 when
it calculates the sales charge. In addition, the sales charge, if applicable, is
reduced for purchases made at one time by a trustee or fiduciary for a single
trust estate or a single fiduciary account.

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

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

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

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

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

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

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

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

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

EXCHANGE PRIVILEGE

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

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

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

HOW TO REDEEM SHARES

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

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

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

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

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

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, other than retirement accounts subject to required minimum
distributions. A shareholder may apply for participation in this program through
his financial institution. Due to the fact that Class A Shares are sold with a
sales load, it is not advisable for shareholders to continue to purchase Class A
Shares while participating in this program. A contingent deferred sales charge
may be imposed on Class B Shares and Class C Shares.

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

Year of Contingent
Redemption Deferred
After Purchase Sales Charge
First 5.50%
Second 4.75%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%CLASS C SHARES

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

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

Elimination of Contingent Deferred Sales Charge
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability, as
defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions from an
Individual Retirement Account or other retirement plan to a shareholder who has
attained the age of 701/2; (3) involuntary redemptions by the Fund of Shares in
shareholder accounts that do not comply with the minimum balance requirements;
and (4) qualifying redemptions of Class B Shares must be from an account: that
is at least 12 months old, has all Fund distributions reinvested in Fund Shares,
and has a value of at least $10,000 when the Systematic Withdrawal Program is
established. Qualifying redemptions may not exceed 1.00% monthly of the account
value as periodically determined by the Fund. For more information regarding the
elimination of the contingent deferred sales charge through a Systematic
Withdrawal Program contact your financial intermediary of the Fund. No
contingent deferred sales charge will be imposed on redemptions of shares held
by Trustees, employees and sales representatives of the Fund, the distributor,
or affiliates of the Fund or distributor, and their immediate family members;
employees of any financial institution that sells shares of the Fund pursuant to
a sales agreement with the distributor; and spouses and children under the age
of 21 of the aforementioned persons. Finally, no contingent deferred sales
charge will be imposed on the redemption of shares originally purchased through
a bank trust department, an investment adviser registered under the Investment
Advisers Act of 1940 or retirement plans where the third party administrator has
entered into certain arrangements with Federated Securities Corp. or its
affiliates, or any other financial institution, to the extent that no payments
were advanced for purchases made through such entities. The Fund reserves the
right to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any shares purchased prior to
the termination of such waiver would have the contingent deferred sales charge
eliminated as provided in the Fund's prospectus at the time of the purchase of
the shares. If a shareholder making a redemption qualifies for an elimination of
the contingent deferred sales charge, the shareholder must notify Federated
Securities Corp. or the transfer agent in writing that he is entitled to such
elimination.

ACCOUNT AND SHARE INFORMATION

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

TRUST INFORMATION

Advisory Fees
The Adviser receives an annual investment advisory fee equal to 0.75% of the
Fund's average daily net assets. The fee paid by the Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by other mutual funds with similar objectives and policies. Under the investment
advisory contract, which provides for the voluntary waiver of the advisory fee
by the Adviser, the Adviser may voluntarily waive some or all of its fee. This
does not include reimbursement to the Fund of any expenses incurred by
shareholders who use the transfer agent's subaccounting facilities. The Adviser
can terminate this voluntary waiver at any time in its sole discretion.

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

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

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

Distribution of Shares

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

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

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

Furthermore, with respect to Class A Shares, Class B Shares, and Class C Shares,
the distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial marketing and
sales support. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes of the
Fund. Such assistance will be predicated upon the amount of shares the financial
institution sells or may sell, and/or upon the type and nature of sales or
marketing support furnished by the financial institution. Any payments made by
the distributor may be reimbursed by the Fund's Adviser or its affiliates.

BROKERAGE TRANSACTIONS

SHAREHOLDER INFORMATION

TAX INFORMATION

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.

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

PERFORMANCE INFORMATION

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

The yield of each class of shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by each class of shares over a thirty-day period by the maximum offering price
per share of each class on the last day of the period. This number is then
annualized using semi-annual compounding. The yield does not necessarily reflect
income actually earned by each class of shares and, therefore, may not correlate
to the dividends or other distributions paid to shareholders. The performance
information reflects the effect of non-recurring charges, such as the maximum
sales load or contingent deferred sales charges, which, if excluded, would
increase the total return and yield.

<PAGE>

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

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

Investment Adviser
Federated Management
Federated Investors Tower
Pittsburgh, PA 15222-3779

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

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

Independent Auditors

ERNST & YOUNG LLP
ONE OXFORD CENTRE
PITTSBURGH, PA 15219

FEDERATED SMALL CAP STRATEGIES FUND (A Portfolio of Federated Equity Funds)
Class A Shares, Class B Shares, Class C Shares
An Open-End,
Diversified Management
Investment Company
December 31, 1997
Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-04 (12/97)

Federated Small Cap Strategies Fund

(A Portfolio of Federated Equity Funds)
Class A Shares
Class B Shares
Class C Shares

Statement of Additional Information

This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares (the
"Fund") dated December 31, 1997. This Statement is not a prospectus
itself. To receive a copy of either prospectus, write or call the Fund.

Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Statement dated December 31, 1997

[GRAPHIC OMITTED]

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

Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-06 (12/97)

<PAGE>

Table of Contents
- --------------------------------------------------------------------------------
1

General Information About the Fund 1

Investment Objective and Policies 1
Corporate Debt Securities 1
Warrants 1
Restricted and Illiquid Securities 1
Futures and Options Transactions 1
Futures Contracts 2
"Margin" in Futures Transactions 2
Put Options on Financial Futures Contracts 2
Stock Index Options 3
Call Options on Financial and Stock
Index Futures Contracts 3
Purchasing Put and Call Options on Portfolio Securities3
Writing Covered Put and Call Options on Portfolio
Securities 4
Over-the-Counter Options 4
When-Issued and Delayed Delivery Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Portfolio Turnover 5
Investment Limitations 5

Federated Equity Funds Management 7
Fund Ownership 11
Trustees Compensation 12
Trustee Liability 12

Investment Advisory Services 13
Adviser to the Fund 13
Advisory Fees 13
Other Related Services 13

Brokerage Transactions 13

Other Services 14

Purchasing Shares 14
Distribution Plan and Shareholder Services Agreement 14
Conversion to Federal Funds 14
Purchases by Sales Representatives, Trustees,
and Employees of the Fund 15
Exchanging Securities for Fund Shares 15

Determining Net Asset Value 15
Determining Market Value of Securities 15

Redeeming Shares 16
Redemption in Kind 16
Elimination of Deferred Sales Charge 16

Massachusetts Partnership Law 16

Exchanging Securities for Shares 17
Tax Consequences 17

Tax Status 17
The Fund's Tax Status 17
Shareholders' Tax Status 17

Total Return 17

Yield 18

Performance Comparisons 18

About Federated Investors 20

Appendix 21

<PAGE>

General Information About the Fund
The Fund is a portfolio of Federated Equity Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
April 17, 1984, under the name "Federated Growth Trust." The Trust later changed
its name to "Federated Equity Funds." The Declaration of Trust permits the Trust
to offer separate series and classes of shares. Shares of the Fund are offered
in three classes known as Class A Shares, Class B Shares, and Class C Shares
(individually and collectively referred to as "Shares" as the context may
require). This Combined Statement of Additional Information relates to all three
classes of Shares. Investment Objective and Policies The investment objective of
the Fund is to provide capital appreciation. Any income realized from the
portfolio is entirely incidental. The Fund pursues its investment objective by
investing primarily in a portfolio
of common stocks of small capitalization companies.
The investment objective cannot be changed without approval of shareholders.
Corporate Debt Securities

Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or a
different issuer, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit). Warrants

The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which they are
worthless. In addition, if the market price of the common stock does not exceed
the warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and have
no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock. Restricted and Illiquid Securities

The ability of the Board of Trustees (the "Trustees") to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933, as amended (the "Rule"). The Rule is a
non-exclusive safe-harbor for certain secondary market transactions involving
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The Fund
believes that the staff of the SEC has left the question of determining the
liquidity of all restricted securities to the Trustees. The Trustees may
consider the following criteria in determining the liquidity of certain
restricted securities:
o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace trades.

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

As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by buying
and selling financial futures contracts, buying put and call options on
portfolio securities and put options on financial futures contracts, and writing
call options on futures contracts. The Fund may also write covered call options
on its portfolio securities and covered put options to attempt to increase its
current income. The Fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial futures
contracts may be closed out over-the-counter or on a nationally recognized
exchange which provides a secondary market for options of the same series.
Futures Contracts

The Fund may purchase and sell financial futures contracts to hedge against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily buying or
selling the securities. The Fund also may purchase and sell stock index futures
to hedge against changes in prices. The Fund will not engage in futures
transactions for speculative purposes. A futures contract is a firm commitment
by two parties: the seller who agrees to make delivery of the specific type of
security called for in the contract ("going short") and the buyer who agrees to
take delivery of the security ("going long") at a certain time in the future.
For example, in the fixed income securities market, prices move inversely to
interest rates. A rise in rates means a drop in price. Conversely, a drop in
rates means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter into
contracts to deliver securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Fund's anticipated holding period. The Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates. Stock index futures
contracts are based on indices that reflect the market value of common stock of
the firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the differences between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. "Margin" in Futures Transactions

Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. A futures contract held by the Fund
is valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This process is
known as "marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker of
the amount one would owe the other if the futures contract expired. In computing
its daily net asset value, the Fund will mark to market its open futures
positions. The Fund is also required to deposit and maintain margin when it
writes call options on futures contracts. Put Options on Financial Futures
Contracts

The Fund may purchase listed put options on financial futures contracts to
protect portfolio securities against decreases in value resulting from market
factors, such as an anticipated increase in interest rates. Unlike entering
directly into a futures contract, which requires the purchaser to buy a
financial instrument on a set date at a specified price, the purchase of a put
option on a futures contract entitles (but does not obligate) its purchaser to
decide on or before a future date whether to assume a short position at the
specified price.

<PAGE>

Generally, if the hedged portfolio securities decrease in value during the term
of an option, the related futures contracts will also decrease in value and the
option will increase in value. In such an event, the Fund will normally close
out its option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original option plus
the decrease in value of the hedged securities. Alternatively, the Fund may
exercise its put option to close out the position. To do so, it would
simultaneously enter into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and exercise the option.
The Fund would then deliver the futures contract in return for payment of the
strike price. If the Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and only the premium
paid for the contract will be lost. Stock Index Options

The Fund may purchase put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the index. The
effectiveness of purchasing stock index options will depend upon the extent to
which price movements in the Fund's portfolio correlate with price movements of
the stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase of options on an
index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject to the
ability of the Adviser to predict correctly movements in the directions of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Call Options on Financial and Stock Index Futures Contracts

In addition to purchasing put options on futures, the Fund may write listed and
over-the-counter call options on financial and stock index futures contracts
(including cash-settled stock index options) to hedge its portfolio against an
increase in market interest rates or a decrease in stock prices. When the Fund
writes a call option on a futures contract, it is undertaking the obligation of
assuming a short futures position (selling a futures contract) at the fixed
strike price at any time during the life of the option if the option is
exercised. As stock prices fall or market interest rates rise, causing the
prices of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the value of
the Fund's call option position to increase. In other words, as the underlying
futures price goes down below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the premium received for the
option. This premium can substantially offset the drop in value of the Fund's
portfolio securities. Prior to the expiration of a call written by the Fund, or
exercise of it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then substantially offset the decrease in value
of the hedged securities. The Fund will not maintain open positions in futures
contracts it has sold or call options it has written on futures contracts if, in
the aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation. Purchasing Put and Call Options on Portfolio Securities

The Fund may purchase put and call options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. A call option gives the Fund, in return for a premium, the right to buy
the underlying securities from the seller.

<PAGE>

Writing Covered Put and Call Options on Portfolio Securities

The Fund may also write covered put and call options to generate income and
thereby protect against price movements in particular securities in the Fund's
portfolio. As the writer of a call option, the Fund has the obligation upon
exercise of the option during the option period to deliver the underlying
security upon payment of the exercise price. As the writer of a put option, the
Fund has the obligation to purchase a security from the purchaser of the option
upon the exercise of the option. The Fund may only write call options either on
securities held in its portfolio or on securities which it has the right to
obtain without payment of further consideration (or has segregated cash in the
amount of any additional consideration). In the case of put options, the Fund
will segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities. Over-the-Counter
Options

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

Portfolio Turnover

The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of portfolio
turnover exceeding 200%.
For the fiscal year ended October 31, 1996, the portfolio turnover rate was 83%.

Investment Limitations

Selling Short and Buying on Margin

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

Issuing Senior Securities and Borrowing Money

The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amount borrowed. The Fund will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding.

Pledging Assets

The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: margin
deposits for the purchase and sale of financial futures contracts and
related options, and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.

Concentration of Investments

The Fund will not invest 25% or more of the value of its total assets
in any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities.

Investing in Commodities

The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options
on stock index futures, put options on financial futures, stock index
futures contracts, and put options on portfolio securities, and may
write covered call options.

Investing in Real Estate

Lending Cash or Securities

The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S.
government obligations, money market instruments, variable rate demand
notes, bonds, debentures, notes, certificates of indebtedness, or other
debt securities, entering into repurchase agreements, or engaging in
other transactions where permitted by the Fund's investment objective,
policies, and limitations or the Trust's Declaration of Trust.

Underwriting

Diversification of Investments

The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter options,
and certain restricted securities not determined by the Trustees to be
liquid.
Purchasing Securities to Exercise Control

The Fund will not purchase securities of a company for the purpose of
exercising control or management.

Writing Covered Call Options

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items." Except with respect
to borrowing money, if a percentage limitation is adhered to at the time of
investment, a later increase or decrease in percentage resulting from any change
in value or net assets will not result in a violation of such restriction. The
Fund has no present intent to borrow money, pledge securities, or invest in
reverse repurchase agreements in excess of 5% of the value of its total assets
in the coming fiscal year. In addition, the Fund expects to lend not more than
5% of its total assets in the coming fiscal year.

Federated Equity Funds Management

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

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924

Chairman and Trustee

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934

Trustee

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

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918

Trustee

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

Trustee

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

<PAGE>

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932

Trustee

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924

Trustee

Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942

Trustee

Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926

Trustee

Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932

Trustee

President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

<PAGE>

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925

Trustee

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935

Trustee

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President

Trustee, Federated Investors; President and/or Trustee of some of the Funds;
staff member, Federated Securities Corp.

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949

Executive Vice President

<PAGE>

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930

Executive Vice President

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938

Executive Vice President , Secretary and Treasurer

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

Vice President

* 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.

<PAGE>

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: American Leaders Fund, Inc.; Annuity Management Series;
Arrow Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG
Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs
Fund; Federated Exchange Fund, Ltd.; Federated GNMA Trust; Federated Government
Trust; Federated Growth Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S. Government
Securities Fund: 1-3 Years; Federated U.S. Government Securities Fund: 3-5
Years; First Priority Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate U.S. Government Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress
Utility Fund, Inc.; Fund for U.S. Government Securities, Inc.; Government Income
Securities, Inc.; High Yield Cash Trust; Insurance Management Series;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Equity Income Fund, Inc.; Liberty
High Income Bond Fund, Inc.; Liberty Municipal Securities Fund, Inc.; Liberty
U.S. Government Money Market Trust; Liberty Term Trust, Inc. - 1999; Liberty
Utility Fund, Inc.; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust; Municipal
Securities Income Trust; Newpoint Funds; 111 Corcoran Funds; Peachtree Funds;
The Planters Funds; RIMCO Monument Funds; The Shawmut Funds; Star Funds; The
Starburst Funds; The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; Trademark Funds;
Trust for Financial Institutions; Trust For Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; The
Virtus Funds; and World Investment Series, Inc. Fund Ownership

Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of December 4, 1996, the following shareholders of record owned 5% or more of
the outstanding Class A Shares of the Fund: CITPAD & CO, Paducah, Kentucky ,
owned approximately 90,571 shares (5.06%); Unvivest & Company, Souderton,
Pennsylvania, owned approximately 100,711 shares (5.63%); and MLPF&S,
Jacksonville, Florida for the sole benefit of its customers, owned approximately
190,459 shares (10.64%). As of December 4, 1996, the following shareholders of
record owned 5% or more of the outstanding Class B Shares of the Fund: MLPF&S,
Jacksonville, Florida, for the sole benefit of its customers, owned
approximately 297,831 shares (11.82%). As of December 4, 1996, the following
shareholders of record owned 5% or more of the outstanding Class C Shares of the
Fund: MLPF&S, Jacksonville, Florida, for the sole benefit of its customers,
owned approximately 269,549 shares (64.14%).

<PAGE>

Trustees Compensation

<TABLE>

AGGREGATE

NAME , COMPENSATION

POSITION WITH FROM TOTAL COMPENSATION PAID

TRUST TRUST* FROM FUND COMPLEX +

John F. Donahue $ 0 $0 for the Trust and

Chairman and Trustee 54 other investment companies in the Fund Complex

Thomas G. Bigley $1,312.97 $86,331 for the Trust and

Trustee 54 other investment companies in the Fund Complex

John T. Conroy, Jr. $1,439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

William J. Copeland $1,439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

James E. Dowd $1,439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Lawrence D. Ellis, M.D. $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Edward L. Flaherty, Jr. $1,439.95 $115,760 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Peter E. Madden $ 1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Gregor F. Meyer $ 1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

John E. Murray, Jr. $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Wesley W. Posvar $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

Marjorie P. Smuts $1,312.97 $104,898 for the Trust and

Trustee 54 other investment companies in the Fund Complex

</TABLE>

<PAGE>

Investment Advisory Services
Adviser to the Fund

The Fund's investment adviser is Federated Management (the "Adviser"). It is a
subsidiary of Federated Investors. All the voting securities of Federated
Investors are owned by a trust, the trustees of which are John F. Donahue, his
wife, and his son, J. Christopher Donahue. The Adviser shall not be liable to
the Trust, the Fund, or any shareholder of the Fund for any losses that may be
sustained in the purchase, holding, or sale of any security or for anything done
or omitted by it, except acts or omissions involving willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.

Advisory Fees

For its advisory services, the Adviser receives an annual investment advisory
fee as described in each prospectus. During the fiscal year ended October 31,
1996, the Fund's Adviser earned $155,023, all of which was waived.

Other Related Services

Brokerage Transactions
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include: advice as to the advisability of investing in securities;
security analysis and reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the Adviser or its in advising
the Fund and other accounts. To the extent that receipt of these services may
supplant services for which the Adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses. The Adviser and its affiliates
exercise reasonable business judgment in selecting brokers who offer brokerage
and research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided. For the fiscal year
ended October 31, 1996, the Fund paid total brokerage commissions of $96,208.
Although investment decisions for the Fund are made independently from those of
the other accounts managed by the Adviser, investments of the type the Fund may
make may also be make by those other accounts. When the Fund and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of , the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or disposed of by the Fund. In
other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund. Other
Services Fund Administration

Federated Services Company, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee described in each
prospectus. For the fiscal year ended October 31, 1996, the
Administrators earned $184,493.
Custodian

State Street Bank and Trust Company, P.O. Box 8600, Boston, Massachusetts
02266-8600, is custodian for the securities and cash of the Fund.
Transfer Agent and Dividend Disbursing Agent

Federated Services Company, P.O. Box 8600, Boston, Massachusetts 02266-8600, is
transfer agent for the Shares of the Fund, and dividend disbursing agent for the
Fund.
Independent Auditors

The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh, PA
15219.

Purchasing Shares
Except under certain circumstances described in each prospectus, Shares are sold
at their net asset value (plus a sales charge on Class A Shares only) on days
the New York Stock Exchange is open for business. The procedure for purchasing
Shares is explained in each prospectus under "How To Purchase Shares."
Distribution Plan and Shareholder Services Agreement

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services as appropriate, to stimulate
distribution activities and to cause services to be provided to shareholders by
a representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses. By
adopting the Distribution Plan, the Trustees expect that the Class A Shares,
Class B Shares, and Class C Shares of the Fund will be able to achieve a more
predictable flow of cash for investment purposes and to meet redemptions. This
will facilitate more efficient portfolio management and assist the Fund in
pursuing its investment objectives. By identifying potential investors whose
needs are served by the Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of redemptions
and sales. Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.

For the fiscal year ended October 31, 1996, the Fund paid distribution service
fees for Class A Shares, Class B Shares, and Class C Shares in amounts of $0,
$67,923 and $13,249, respectively. For the fiscal year ended October 31, 1996,
the Fund paid shareholder service fees for Class A Shares, Class B Shares, and
Class C Shares in the amounts of $24,619, $22,641 and $4,413, respectively.

Conversion to Federal Funds

Trustees, employees, and sales representatives of the Fund, Federated
Management, and Federated Securities Corp. or their affiliates, or any
investment dealer who has a sales agreement with Federated Securities Corp. and
their spouses and children under 21, may buy Class A Shares at net asset value
without a sales charge. Shares may also be sold without a sales charge to trusts
or pension or profit-sharing plans for these people. These sales are made with
the purchaser's written assurance that the purchase is for investment purposes
and that the securities will not be resold except through redemption by the
Fund. Exchanging Securities for Fund Shares

Exercise of this exchange privilege is treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Shares,
a gain or loss may be realized by the investor.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in each prospectus.
Determining Market Value of Securities

~ Market values of the Fund's portfolio securities, other than options, are
determined as follows:

o according to the last sale price on a national securities exchange, if
available;

o for unlisted equity securities, the latest bid prices; or

o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or at fair
value as determined in good faith by the Board of Trustees.

<PAGE>

Redeeming Shares
The Fund redeems Shares at the next computed net asset value, less any
applicable contingent deferred sales charge, after the Fund receives the
redemption request. Redemption procedures are explained in each prospectus under
"How To Redeem Shares." Although the transfer agent does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000. Class B Shares redeemed within
one to six years of purchase and Class C Shares and applicable Class A Shares
redeemed within one year of purchase may be subject to a contingent deferred
sales charge. The amount of the contingent deferred sales charge is based upon
the amount of the administrative fee paid at the time of purchase by the
distributor to the financial institution for services rendered, and the length
of time the investor remains a shareholder in the Fund. Should financial
institutions elect to receive an amount less than the administrative fee that is
stated in the prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular shareholder will
be reduced accordingly. Redemption in Kind

Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio. To the extent
available, such securities will be readily marketable. The Trust has elected to
be governed by Rule 18f-1 of the Investment Company Act of 1940, as amended,
under which the Fund is obligated to redeem Shares for any one shareholder in
cash only up to the lesser of $250,000 or 1% of the respective class's net asset
value during any 90-day period. Any redemption beyond this amount will also be
in cash unless the Trustees determine that payments should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio instruments, valued in the same way as the Fund determines net asset
value. The portfolio instruments will be selected in a manner that the Trustees
deem fair and equitable. Redemption in kind is not as liquid as a cash
redemption. If redemption is made in kind, shareholders receiving their
securities and selling them before their maturity could receive less than the
redemption value of their securities and could incur certain transaction costs.
Elimination of the Contingent Deferred Sales Charge

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.

<PAGE>

o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

o invest in securities within certain statutory limits; and

o distribute to its shareholders at least 90% of its net income earned
during the year.

Shareholders' Tax Status

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held the Fund
Shares.

Total Return
The Fund's Average annual total returns for Class A Shares, Class B Shares and
Class C Shares, for the period from November 1, 1995 (date of initial public
offering), to October 31, 1996, was 38.99%, 40.70% and 45.00%, respectively. The
average annual total return for each class of Shares of the Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
charge adjusted over the period by any additional Shares, assuming the quarterly
reinvestment of all dividends and distributions. Any applicable contingent
deferred sales charge is deducted from the ending value of the investment based
on the lesser of the original purchase price or the net asset value of Shares
redeemed. Yield The Fund's yields for Class A Shares, Class B Shares, and Class
C Shares for the Thirty-day period ended October 31, 1996 were 0.00%, 0.00%, and
0.00%, respectively. The yield for each class of Shares of the Fund is
determined by dividing the net investment income per share (as defined by the
Securities and Exchange Commission) earned by any class of Shares over a
thirty-day period by the maximum offering price per share of the respective
class on the last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to the shareholders. To the extent that
financial institutions and broker/dealers charge fees in connection with
services provided in conjunction with an investment in any class of Shares, the
performance will be reduced for those shareholders paying those fees.

Performance Comparisons
The performance of each of the classes of Shares depends upon such variables as:
o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

o changes in interest rates and market value of portfolio securities;

o changes in the Fund's or any class of Shares' expenses; and

o various other factors.

The Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:

o Russell 2000 Small Stock Index is a broadly diversified index
consisting of approximately 2,000 small capitalization common stocks
that can be used to compare to the total returns of funds whose
portfolios are invested primarily in small capitalization common
stocks.

o Standard & Poor's Daily Stock Price Index of 500 Common Stocks (S&P
500), a composite index of common stocks in industry, transportation,
and financial and public utility companies, can be used to compare to
the total returns of funds whose portfolios are invested primarily in
common stocks. In addition, the S & P 500 assumes reinvestments of all
dividends paid by stocks listed on its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees
calculated in the Standard & Poor's figures.

o Standard & Poor's 600 Small Capitalization Index S&P Small Cap 600 is
an unmanaged index of 600 small capitalization common stocks with a
market capitalization generally ranging between $80 million and $600
million. The index, monitored by Standard & Poor's Corporation, is
cited as an indicator of small capitalization stock performance.

o Lipper Analytical Services, Inc., ranks funds in various fund
categories by making comparative calculations using total return. Total
return assumes the reinvestment of all capital gains distributions and
income dividends and takes into account any change in net asset value
over a specified period of time. From time to time, the Fund will quote
its Lipper ranking in the "small company growth funds" category in
advertising and sales literature.

o Lipper Small Company Growth Fund Average is an average of the total
returns for 312 growth funds tracked by Lipper Analytical Services,
Inc., an independent mutual fund rating service.

o Lipper Small Company Growth Fund Index is an average of the net
asset-valuated total returns for the top 30 small company growth funds
tracked by Lipper Analytical Services, Inc., an independent mutual
fund rating service.

o Morningstar, Inc. , an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk-adjusted returns. The maximum rating is five stars, and ratings
are effective for two weeks.

o Wilshire 5000 Equity Index consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available, and can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks.

o Strategic Insight Small Company Growth Funds Index consists of mutual
funds that invest primarily in companies below $750 million in total
market capitalization.

o Value Line Mutual Fund Survey, published by Value Line Publishing,
Inc., analyzes price, yield, risk, and total return for equity and
fixed income mutual funds. The highest rating is One, and ratings are
effective for two weeks.

o Mutual Fund Source Book, published by Morningstar, Inc., analyzes price,
yield, risk, and total return for equity and fixed income funds.

o Financial publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money Magazines,
among others--provide performance statistics over specified time
periods.

o CDA Mutual Fund Report, published by CDA Investment Technologies,
Inc., analyzes price, current yield, risk, total return, and average
rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.

o Strategic Insight Mutual Fund Research and Consulting, ranks funds in
various fund categories by making comparative calculations using total
return. Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change in
net asset value over a specified period of time. From time to time, the
Fund will quote its Strategic Insight ranking in the "small company
growth funds" category in advertising and sales literature.

Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on quarterly reinvestment of dividends over a specified
period of time. From time to time as it deems appropriate, the Fund may
advertise the performance of any class of Shares using charts, graphs, and
descriptions, compared to federally insured bank products including certificates
of deposit and time deposits and to money market funds using the Lipper
Analytical Services money market instruments average. In addition, advertising
and sales literature for the Fund may use charts and graphs to illustrate the
principles of dollar-cost averaging and may disclose the amount of dividends
paid by the Fund over certain periods of time. Advertisements may quote
performance information which does not reflect the effect of the sales charge on
Class A Shares. Advertising and other promotional literature may include charts,
graphs, and other illustrations using the Fund's returns, or returns in general,
that demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, the Fund can
compare its performance, or performance for the types of securities in which it
invests, to a variety of other investments, such as bank savings accounts,
certificates of deposit, and Treasury bills. Economic and Market Information

Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Fund portfolio managers and their views and analysis on how
such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute. About Federated Investors Federated Investors is
dedicated to meeting investor needs which is reflected in its investment
decision making--structured, straightforward, and consistent. This has resulted
in a history of competitive performance with a range of competitive investment
products that have gained the confidence of thousands of clients and their
customers. The company's disciplined security selection process is firmly rooted
in sound methodologies backed by fundamental and technical research. Investment
decisions are made and executed by teams of portfolio managers, analysts, and
traders dedicated to specific market sectors. These traders handle trillions of
dollars in annual trading volume. In the equity sector, Federated has more than
25 years' experience. As of December 31, 1995, Federated managed 22 equity funds
totaling approximately $5.4 billion in assets across growth, value, equity
income, international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitative and qualitative analysis
and features a structured, computer-assisted composite modeling system that was
developed in the 1970s. J. Thomas Madden, Executive Vice President, oversees
Federated's equity and high yield corporate bond management while William D.
Dawson, Executive Vice President, oversees Federated's domestic fixed income
management. Henry A. Frantzen, Executive Vice President, oversees the management
of Federated's international portfolios. Mutual Fund Market

Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $2 trillion to the more than 5,500 funds available.**
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include: Institutional
Clients

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 Timothy C. Pillion, Vice
President, Bank Marketing & Sales.

Broker/Dealers and Bank Broker/Dealer Subsidiaries

Federated mutual funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. Federated Investors' service
to financial professionals and institutions has earned it high rankings in
several DALBAR surveys. surveys performed by DALBAR, Inc. DALBAR is recognized
as the industry benchmark for service quality measurement. The marketing effort
to these firms is headed by James F. Getz, President, Federated Securities Corp.
*source: Investment Company Institute

<PAGE>

Appendix
Standard and Poor's Ratings Group Long Term Debt Rating Definitions

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories. BB--Debt rated BB has
less near-term vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial,
or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB- rating.
B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating. CCC--Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating. CC--The rating CC typically is applied to debt
subordinated to senior debt that is assigned an actual or implied CCC debt
rating. C--The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued. CI--The rating CI is reserved for income bonds
on which no interest is being paid. D--Debt rated D is in payment default. The D
rating category is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has not expired, unless
Standard & Poor's Ratings Group believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. Moody's Investors
Service, Inc. Long Term Bond Rating Definitions

Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa--Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group, they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities. A--Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Baa--Bonds which are rated Baa are considered
as medium grade obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba--Bonds which are Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class. B--Bonds which are rated B
generally lack characteristics of a desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Caa--Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca--Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. C--Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Fitch Investors Service, Inc. Long-Term Debt Rating Definitions

AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+. A--Bonds considered to
be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. BBB--Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings. BB--Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements. B--Bonds
are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue. CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment. CC--Bonds are minimally
protected. Default in payment of interest and/or principal seems probable over
time. C--Bonds are in imminent default in payment of interest or principal. DDD,
DD, and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.

<PAGE>

Moody's Investors Service, Inc. Commercial Paper Ratings

Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection. - Broad margins in earning coverage of fixed financial charges
and high internal cash generation. - Well established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Standard and Poor's Ratings Group Commercial Paper Ratings

A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-2--Capacity for
timely payment on issues with this designation is satisfactory. However, the
relative degree of safety is not as high as for issues designated A-1. Fitch
Investors Service, Inc. Commercial Paper Rating Definitions

FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment. FITCH-2--(Very Good
Grade) Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than the strongest issues.

PART C. OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:
(a) Financial Statements (1-4) To be filed by amendment.
(b) Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant; (11)
(i) Conformed copy of Amended and Restated Declaration of Trust; (12)
(2) Copy of By-Laws of the Registrant as amended ; (11)
(i) Copy of Amendment No. 2 to By-Laws effective February 2, 1987; (11)
(ii) Copy of Amendment No. 3 to By-Laws effective August 25, 1988; (11)
(iii) Copy of Amended and Restated By-Laws effective August 15, 1995; (12)
(3) Not applicable;
(4) (i) Copy of Specimen Certificate for Shares of Beneficial Interest of the Registrant
(Federated Small Cap Strategies Fund);(7)
(ii) Copy of Specimen Certificate for Shares of Beneficial Interest of the Registrant
(Federated Growth Strategies Fund); (8)
(iii) Copy of Specimen Certificate for Shares of
Beneficial Interest of the Registrant (Federated
Capital Appreciation Fund); (9) (iv) Copy of
Specimen Certificate for Shares of Beneficial
Interest of the Registrant (Federated Aggressive
Growth Fund); (13)
(5) (i) Conformed copy of Investment Advisory Contract on behalf of the Registrant; (6)
(ii) Conformed copy of Investment Advisory Contract on behalf of the Registrant, which
includes

</TABLE>

.........
+ All exhibits have been filed electronically.

6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-91090
and 811-4017)

7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 30, 1995. (File Nos. 2-91090 and
811-4017)

8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed July 17, 1995. (File Nos. 2-91090 and
811-4017)

9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed August 31, 1995. (File Nos. 2-91090 and
811-4017)

11. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed June 11, 1996. (File Nos. 2-91090 and
811-4017)

12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 30 on Form N-1A filed May 31, 1996. (File Nos. 2-91090 and
811-4017)

13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 34 on Form N-1A filed December 30, 1996. (File Nos. 2-91090
and 811-4017)

<PAGE>

Exhibits A and B for Federated Small Cap
Strategies Fund and Federated Capital Appreciation Fund,
respectively; (10) (iii) Conformed copy of Exhibit C to the
Investment Advisory Contract for Federated Aggressive Growth
Fund; (14)
(6) Conformed copy of Distributor's Contract; (10)
(i) Conformed copy of Exhibit A to the
Distributor's Contract for Federated Small Cap Strategies
Fund, Class A Shares; (10) (ii) Conformed copy of Exhibit B
to the Distributor's Contract for Federated Small Cap
Strategies Fund, Class B Shares; (10)
(iii) Conformed copy of Exhibit C to the
Distributor's Contract for Federated Small Cap
Strategies Fund, Class C Shares; (10) (iv) Conformed
copy of Exhibit D to the Distributor's Contract for
Federated Growth Strategies Fund, Class A Shares;
(10)
(v) Conformed copy of Exhibit E to the Distributor's
Contract for Federated Growth Strategies Fund, Class
B Shares; (10) (vi) Conformed copy of Exhibit F to
the Distributor's Contract for Federated Growth
Strategies Fund, Class C Shares; (10)
(vii) Conformed copy of Exhibit G to the
Distributor's Contract for Federated Capital Appreciation Fund,
Class A Shares; (10) (viii) Conformed copy of Exhibit H to the
Distributor's Contract for Federated Capital Appreciation Fund,
Class B Shares; (10)
(ix) Conformed copy of Exhibit I to the Distributor's
Contract for Federated Capital Appreciation Fund, Class C
Shares; (10) (x) Conformed copy of Exhibit J to the
Distributor's Contract for Federated Aggressive Growth Fund,
Class A Shares; (14)
(xi) Conformed copy of Exhibit K to the Distributor's
Contract for Federated Aggressive Growth Fund, Class B Shares;
(14) (xii) Conformed copy of Exhibit L to the Distributor's
Contract for Federated Aggressive Growth Fund, Class C Shares;
(14)
(xiii) The Registrant hereby incorporates the
conformed copy of the specimen Mutual Funds
Sales and Service Agreement; Mutual Funds
Service Agreement; and Plan Trustee/Mutual
Funds Service Agreement from Item 24(b)(6)
of the Cash Trust Series II Registration
Statement on Form N-1A, filed with the
Commission on July 24, 1995. (File No.
33-38550 and 811-6269).
(7) Not applicable;
(8) (i) Conformed Copy of the Custodian Agreement of the
Registrant; (6) (ii) Conformed copy of Custodian Fee
Schedule
(9) (i) Conformed copy of Amended and Restated Shareholder
Services Agreement; +

+ All exhibits have been filed electronically.
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-
91090 and 811-4017)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-
91090 and 811-4017)
14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 29 on Form N-1A filed May 29, 1997. (File Nos. 2-
910090 and 811-4017)

<PAGE>

(ii) Conformed Copy of Agreement for Fund Accounting Services, Administrative
Services, Transfer Agency Services, and Custody Services Procurement; +
(iii) The Registrant hereby incorporates by reference the conformed copy of the
Shareholder Services Sub-Contract between Fidelity and
Federated ..Shareholder Services from Item 24(b)(9)(iii) of the Federated
GNMA Trust Registration
Statement on Form N-1A, filed with the ....Commission on March 25, 1996
(File Nos. 2-75670 and 811-3375).
(iv)The responses and exhibits described in Item
24(b)(6) are hereby incorporated by reference.
(10) Conformed copy of the Opinion and Consent of Counsel
regarding legality of shares being registered; (6)
(11) Conformed Copy of Consent of Independent Auditors; (13)
(12) Not applicable;
(13) Conformed copy of Initial Capital Understanding; (2)
(14) Not applicable;
(15) Conformed Copy of Distribution Plan; (10)
(i) Conformed copy of Exhibit A to the Distribution
Plan for Federated Small Cap Strategies Fund, Class A Shares;
(10) (ii) Conformed copy of Exhibit B to the Distribution
Plan for Federated Small Cap Strategies Fund, Class B Shares;
(10)
(iii) Conformed copy of Exhibit C to the Distribution
Plan for Federated Small Cap Strategies Fund, Class
C Shares; (10) (iv) Conformed copy of Exhibit D to
the Distribution Plan for Federated Growth
Strategies Fund, Class B Shares; (10)
(v) Conformed copy of Exhibit E to the Distribution Plan for
Federated Growth Strategies Fund, Class C Shares;
(10)
(vi) Conformed copy of Exhibit F to the Distribution
Plan for Federated Capital Appreciation Fund, Class A Shares;
(10) (vii) Conformed copy of Exhibit I to the Distribution
Plan for Federated Aggressive Growth Fund, Class A Shares;
(14)
(viii) Conformed copy of Exhibit J to the Distribution
Plan for Federated Aggressive Growth Fund, Class B
Shares;(14) (ix) Conformed copy of Exhibit K to the
Distribution Plan for Federated Aggressive Growth
Fund, Class C Shares; (14)
(x) The responses described in Item 24(b)(xiii) are
hereby incorporated by reference.
+ All exhibits have been filed electronically.

2. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed February 28, 1985. (File Nos. 2-91090
and 811-4017)

6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-91090
and 811-4017)

10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 26 on Form N-1A filed September 12, 1995. (File Nos. 2-91090
and 811-4017)

13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 34 on Form N-1A filed December 30, 1996. (File Nos. 2-91090
and 811-4017)

14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 29 on Form N-1A filed May 29, 1997. (File Nos. 2- 910090 and
811-4017)

(16) (i) Copy of Schedule for Computation of Fund Performance
Data for Federated Growth Strategies Fund; (6)
(ii) Copy of Schedule for Computation of Fund Performance
Data for the Federated Aggressive Growth Fund; (14) (17) Copy
of Financial Data Schedules; + (18) The Registrant hereby
incorporates the conformed copy of the specimen Multiple Class
Plan from Item 24(b)(18) of the World Investment Series, Inc.
Registration Statement on Form N-1A, filed with the
Commission on January 26, 1996. (File Nos. 33-52149 and 811-07141)
(19) Conformed copy of Power of Attorney. (13)

Item 25. Persons Controlled by or Under Common Control with Registrant:

None

Item 26. Number of Holders of Securities:

Number of Record Holders
Title of Class as of October 15, 1997

Shares of Beneficial Interest
(no par value)

Federated Growth Strategies Fund
Class A Shares 17,103
Class B Shares 3,466
Class C Shares 637

Federated Small Cap Strategies Fund
Class A Shares 7,464
Class B Shares 16,825
Class C Shares 1,725

Federated Capital Appreciation Fund.........
Class A Shares 1,907
Class B Shares 2,088
Class C Shares 517

Federated Aggressive Growth Fund
Class A Shares 1,538
Class B Shares 1,608
Class C Shares 1,099

Item 27. Indemnification: (1)

+ All exhibits have been filed electronically.

1. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed July 9, 1984. (File Nos. 2-91090 and
811-4017)

6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994. (File Nos. 2-91090
and 811-4017)

13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 34 on Form N-1A filed December 30, 1996. (File Nos. 2-91090
and 811-4017)

14. Response is incorporated by reference to Registrant's Post Effective
Amendment No. 29 on Form N-1A filed May 29, 1997. (File Nos. 2- 910090 and
811-4017)

<PAGE>

Item 28. Business and Other Connections of Investment Adviser:

(a) For a description of the other business of the investment adviser,
see the section entitled "Trust Information - Management of the
Trust" in Part A. The affiliations with the Registrant of four of
the Trustees and one of the Officers of the investment adviser are
included in Part B of this Registration Statement under "Federated
Equity Funds Management." The remaining Trustee of the investment
adviser, his position with the investment adviser, and, in
parentheses, his principal occupation is: Mark D. Olson (Partner,
Wilson, Halbrook & Bayard), 107 W. Market Street, Georgetown,
Delaware 19947.

The remaining Officers of the investment adviser are:

Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden

Senior Vice Presidents: Peter R. Anderson
Drew J. Collins
Jonathan C. Conley
Deborah A. Cunningham
Mark E. Durbiano
J. Alan Minteer
Susan M. Nason
Mary Jo Ochson

Vice Presidents: J. Scott Albrecht
Joseph M. Balestrino
Randall S. Bauer
David F. Belton
David A. Briggs
Kenneth J. Cody
Alexandre de Bethmann
Michael P. Donnelly
Linda A. Duessel
Donald T. Ellenberger
Kathleen M. Foody-Malus
Thomas M. Franks
Edward C. Gonzales
James E. Grefenstette
Susan R. Hill
Stephen A. Keen
Robert K. Kinsey
Robert M. Kowit
Jeff A. Kozemchak
Marian R. Marinack
Sandra L. McInerney
Robert J. Ostrowski
Charles A. Ritter
Scott B. Schermerhorn
Frank Semack
Aash M. Shah
William F. Stotz
Tracy P. Stouffer
Edward J. Tiedge
Paige M. Wilhelm
Jolanta M. Wysocka

<PAGE>

Assistant Vice Presidents: Todd A. Abraham
Stefanie L. Bachhuber
Arthur J. Barry
Micheal W. Casey
Robert E. Cauley
Donna M. Fabiano
John T. Gentry
William R. Jamison
Constantine Kartsonsas
Robert M. Marsh
Joseph M. Natoli
Keith J. Sabol
Michael W. Sirianni
Gregg S. Tenser

Secretary: Stephen A. Keen

Treasurer: Thomas R. Donahue

Assistant Secretaries: Thomas R. Donahue
Richard B. Fisher
Christine I. McGonigle

Assistant Treasurer: Richard B. Fisher

The business address of each of the Officers of the investment
adviser is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of a majority of
the investment advisers to the Funds listed in Part B of this
Registration Statement.

Item 29. Principal Underwriters:

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

111 Corcoran Funds; Arrow Funds; Automated Government Money Trust; Blanchard
Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash
Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.; Federated
Government Trust; Federated High Income Bond Fund, Inc.; Federated High Yield
Trust; Federated Income Securities Trust; Federated Income Trust; Federated
Index Trust; Federated Institutional Trust; Federated Insurance Series;
Federated Investment Portfolios; Federated Investment Trust; Federated Master
Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Independence One Mutual Funds; Intermediate
Municipal Trust; International Series, Inc.; Investment Series Funds, Inc.;
Investment Series Trust; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Marshall Funds, Inc.; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree
Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds; Targeted
Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The Virtus
Funds; The Wachovia Funds; The Wachovia Municipal Funds; Tower Mutual Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations;
Vision Group of Funds, Inc.; and World Investment Series, Inc.

Federated Securities Corp. also acts as principal underwriter for the following
closed-end investment company: Liberty Term Trust, Inc.- 1999.
<TABLE>
<CAPTION>

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant

Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive Vice Executive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

Thomas R. Donahue Director, Assistant Secretary
Federated Investors Tower and Assistant Treasurer
Pittsburgh, PA 15222-3779 Federated Securities Corp

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Executive Vice President --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Teresa M. Antoszyk Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Leonard Corton, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Doyle Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

<PAGE>

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John K. Goettlicher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bruce E. Hastings Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Beth A. Hetzel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James E. Hickey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Brian G. Kelly Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joseph Kennedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas A. Peters III Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard A. Recker Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

George D. Riedel Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John Rogers Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Brian S. Ronayne Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas S. Schinabeck Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward L. Smith Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John A. Staley Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard Suder Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Miles J. Wallace Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

<PAGE>

John F. Wallin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward J. Wojnarowski Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Edward R. Bozek Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Terri E. Bush Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

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

Leslie K. Platt Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
</TABLE>

Item 30. Location of Accounts and Records:

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

Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Federated Management Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779

Federated Shareholder Services Company Federated Investors Tower
("Transfer Agent and Dividend Pittsburgh, PA 15222-3779
Disbursing Agent")

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

Item 31. Management Services: Not applicable.

<PAGE>

Item 32. Undertakings:

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of Trustees and the
calling of special shareholder meetings by shareholders.

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, FEDERATED EQUITY FUNDS, has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 29th day of October, 1997.

FEDERATED EQUITY FUNDS

BY: /s/ Matthew S. Hardin
Matthew S. Hardin, Assistant Secretary
Attorney in Fact for John F. Donahue
October 29, 1997

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

NAME TITLE DATE

By: /s/ Matthew S. Hardin Attorney In Fact October 29, 1997
Matthew S. Hardin For the Persons
ASSISTANT SECRETARY Listed Below

John F. Donahue* Chairman and Trustee
(Chief Executive Officer)

Glen R. Johnson* President

John W. McGonigle* Executive Vice President, Treasurer and Secretary
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

William J. Copeland* Trustee

James E. Dowd* Trustee

Lawrence D. Ellis, M.D.* Trustee

Edward L. Flaherty, Jr.* Trustee

Peter E. Madden* Trustee

Gregor F. Meyer* Trustee

John E. Murray, Jr.* Trustee

Wesley W. Posvar* Trustee

Marjorie P. Smuts* Trustee

* By Power of Attorney

Exhibit 8(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K

STATE STREET
DOMESTIC CUSTODY

FEE SCHEDULE

Federated Funds

I. Custody Services

Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make cash
disbursements and report cash transactions. Monitor corporate actions.

ANNUAL FEES

ASSET

Per Fund .25 Basis Points

Wire Fees $3.00 per wire

Settlements:

oEach DTC Transaction $5.00
oEach Federal Reserve Book Entry Transaction $3.75
oEach Repo Transaction (All Repo) $3.75
oEach Physical Transaction (NY/Boston, Private Placement) $15.00
oEach Option Written/Exercised/Expired $18.75
Each Book Entry Muni (Sub-custody) Transaction $15.00
oGovernment Paydowns $5.00
oMaturity Collections $8.00
oPTC Transactions $6.00

II. Special Services

Fees for activities of a non-recurring nature such as fund consolidation
or reorganization, extraordinary security shipments and the preparation of
special reports will be subject to negotiation.

III. Balance Credit

Municipal Funds

A balance credit equal to 75% of the average demand deposit account balance in
the custodian account for the month billed times the 30 day T-Bill Rate on the
last Monday of the month billed, will be applied against the month's custodian
bill.

Transfer Agent
A balance credit equal to 100% of the average balance in the transfer
agent demand deposit accounts, less the reserve requirement and applicable
related expenses, times 75% of the 30 average Fed Funds Rate.

IV. Payment

The above fees will be charged against the funds' custodian checking account
thirty (30) days after the invoice is mailed to the funds' offices.

V. Term of Contract

The parties agree that this fee schedule shall become effective January
1, 1997.

FEDERATED SERVICES COMPANY STATE STREET

BY: /s/ Douglas L. Hein BY: /s/ Michael E. Hagerty

TITLE: Senior Vice President TITLE: Vice President

DATE: April 15, 1997 DATE: April 8, 1997

Exhibit 9(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K

AGREEMENT
for
FUND ACCOUNTING SERVICES,
ADMINISTRATIVE SERVICES,
TRANSFER AGENCY SERVICES
and
CUSTODY SERVICES PROCUREMENT

AGREEMENT made as of March 1, 1996, by and between those investment
companies listed on Exhibit 1 as may be amended from time to time, having their
principal office and place of business at Federated Investors Tower, Pittsburgh,
PA 15222-3779 (the "Investment Company"), on behalf of the portfolios
(individually referred to herein as a "Fund" and collectively as "Funds") of the
Investment Company, and FEDERATED SERVICES COMPANY, a Pennsylvania corporation,
having its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 on behalf of itself and its subsidiaries
(the "Company").

WHEREAS, the Investment Company is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), with authorized and issued shares of capital stock or beneficial
interest ("Shares");

WHEREAS, the Investment Company may desire to retain the Company as fund
accountant to provide fund accounting services (as herein defined) including
certain pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes") if so indicated
on Exhibit 1, and the Company desires to accept such appointment;

WHEREAS, the Investment Company may desire to appoint the Company as its
administrator to provide it with administrative services (as herein defined), if
so indicated on Exhibit, and the Company desires to accept such appointment;

WHEREAS, the Investment Company may desire to appoint the Company as its
transfer agent and dividend disbursing agent to provide it with transfer agency
services (as herein defined) if so indicated on Exhibit 1, and agent in
connection with certain other activities, and the Company desires to accept such
appointment; and

WHEREAS, the Investment Company may desire to appoint the Company as its
agent to select, negotiate and subcontract for custodian services from an
approved list of qualified banks if so indicated on Exhibit 1, and the Company
desires to accept such appointment; and

NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:

SECTION ONE: Fund Accounting.

Article 1. Appointment.
The Investment Company hereby appoints the Company to provide certain
pricing and accounting services to the Funds, and/or the Classes, for the period
and on the terms set forth in this Agreement. The Company accepts such
appointment and agrees to furnish the services herein set forth in return for
the compensation as provided in Article 3 of this Section.

Article 2. The Company's Duties.
Subject to the supervision and control of the Investment Company's Board of
Trustees or Directors ("Board"), the Company will assist the Investment Company
with regard to fund accounting for the Investment Company, and/or the Funds,
and/or the Classes, and in connection therewith undertakes to perform the
following specific services;

A. Value the assets of the Funds using: primarily, market quotations,
including the use of matrix pricing, supplied by the independent pricing
services selected by the Company in consultation with the adviser, or
sources selected by the adviser, and reviewed by the board; secondarily, if
a designated pricing service does not provide a price for a security which
the Company believes should be available by market quotation, the Company
may obtain a price by calling brokers designated by the investment adviser
of the fund holding the security, or if the adviser does not supply the
names of such brokers, the Company will attempt on its own to find brokers
to price those securities; thirdly, for securities for which no market
price is available, the Pricing Committee of the Board will determine a
fair value in good faith. Consistent with Rule 2a-4 of the 40 Act,
estimates may be used where necessary or appropriate. The Company's
obligations with regard to the prices received from outside pricing
services and designated brokers or other outside sources, is to exercise
reasonable care in the supervision of the pricing agent. The Company is not
the guarantor of the securities prices received from such agents and the
Company is not liable to the Fund for potential errors in valuing a Fund's
assets or calculating the net asset value per share of such Fund or Class
when the calculations are based upon such prices. All of the above sources
of prices used as described are deemed by the Company to be authorized
sources of security prices. The Company provides daily to the adviser the
securities prices used in calculating the net asset value of the fund, for
its use in preparing exception reports for those prices on which the
adviser has comment. Further, upon receipt of the exception reports
generated by the adviser, the Company diligently pursues communication
regarding exception reports with the designated pricing agents;

B. Determine the net asset value per share of each Fund and/or Class, at the
time and in the manner from time to time determined by the Board and as set
forth in the Prospectus and Statement of Additional Information
("Prospectus") of each Fund;

C. Calculate the net income of each of the Funds, if any;

D. Calculate realized capital gains or losses of each of the Funds
resulting from sale or disposition of assets, if any;

E. Maintain the general ledger and other accounts, books and financial records
of the Investment Company, including for each Fund, and/or Class, as
required under Section 31(a) of the 1940 Act and the Rules thereunder in
connection with the services provided by the Company;

F. Preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
the records to be maintained by Rule 31a-1 under the 1940 Act in
connection with the services provided by the Company. The Company
further agrees that all such records it maintains for the Investment
Company are the property of the Investment Company and further agrees
to surrender promptly to the Investment Company such records upon the
Investment Company's request;

G. At the request of the Investment Company, prepare various reports or other
financial documents in accordance with generally accepted accounting
principles as required by federal, state and other applicable laws and
regulations; and

H. Such other similar services as may be reasonably requested by the
Investment Company.

The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section One,
shall hereafter be referred to as "Fund Accounting Services."

Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for Fund Accounting Services in
accordance with the fees agreed upon from time to time between the
parties hereto. Such fees do not include out-of-pocket disbursements
of the Company for which the Funds shall reimburse the Company.
Out-of-pocket disbursements shall include, but shall not be limited
to, the items agreed upon between the parties from time to time.

B. The Fund and/or the Class, and not the Company, shall bear the cost
of: custodial expenses; membership dues in the Investment Company
Institute or any similar organization; transfer agency expenses;
investment advisory expenses; costs of printing and mailing stock
certificates, Prospectuses, reports and notices; administrative
expenses; interest on borrowed money; brokerage commissions; taxes
and fees payable to federal, state and other governmental agencies;
fees of Trustees or Directors of the Investment Company; independent
auditors expenses; legal and audit department expenses billed to the
Company for work performed related to the Investment Company, the
Funds, or the Classes; law firm expenses; organizational expenses; or
other expenses not specified in this Article 3 which may be properly
payable by the Funds and/or Classes.

C. The compensation and out-of-pocket expenses attributable to the Fund
shall be accrued by the Fund and shall be paid to the Company no less
frequently than monthly, and shall be paid daily upon request of the
Company. The Company will maintain detailed information about the
compensation and out-of-pocket expenses by Fund and Class.

D. Any schedule of compensation agreed to hereunder, as may be adjusted
from time to time, shall be dated and signed by a duly authorized
officer of the Investment Company and/or the Funds and a duly
authorized officer of the Company.

E. The fee for the period from the effective date of this Agreement with
respect to a Fund or a Class to the end of the initial month shall be
prorated according to the proportion that such period bears to the
full month period. Upon any termination of this Agreement before the
end of any month, the fee for such period shall be prorated according
to the proportion which such period bears to the full month period.
For purposes of determining fees payable to the Company, the value of
the Fund's net assets shall be computed at the time and in the manner
specified in the Fund's Prospectus.

F. The Company, in its sole discretion, may from time to time
subcontract to, employ or associate with itself such person or
persons as the Company may believe to be particularly suited to
assist it in performing Fund Accounting Services. Such person or
persons may be affiliates of the Company, third-party service
providers, or they may be officers and employees who are employed by
both the Company and the Investment Company; provided, however, that
the Company shall be as fully responsible to each Fund for the acts
and omissions of any such subcontractor as it is for its own acts and
omissions. The compensation of such person or persons shall be paid
by the Company and no obligation shall be incurred on behalf of the
Investment Company, the Funds, or the Classes in such respect.

SECTION TWO: ADMINISTRATIVE SERVICES.

Article 4. Appointment.

The Investment Company hereby appoints the Company as Administrator for the
period on the terms and conditions set forth in this Agreement. The Company
hereby accepts such appointment and agrees to furnish the services set forth in
Article 5 of this Agreement in return for the compensation set forth in Article
9 of this Agreement.

Article 5. The Company's Duties.

As Administrator, and subject to the supervision and control of the Board
and in accordance with Proper Instructions (as defined hereafter) from the
Investment Company, the Company will provide facilities, equipment, and
personnel to carry out the following administrative services for operation of
the business and affairs of the Investment Company and each of its portfolios:

A. prepare, file, and maintain the Investment Company's governing
documents and any amendments thereto, including the Charter (which has
already been prepared and filed), the By-laws and minutes of meetings
of the Board and Shareholders;

B. prepare and file with the Securities and Exchange Commission and the
appropriate state securities authorities the registration statements
for the Investment Company and the Investment Company's shares and
all amendments thereto, reports to regulatory authorities and
shareholders, prospectuses, proxy statements, and such other
documents all as may be necessary to enable the Investment Company to
make a continuous offering of its shares;

C. prepare, negotiate, and administer contracts (if any) on behalf of
the Investment Company with, among others, the Investment Company's
investment advisers and distributors, subject to any applicable
restrictions of the Board or the 1940 Act;

D. calculate performance data of the Investment Company for dissemination
to information services covering the investment company industry;

E. prepare and file the Investment Company's tax returns;

F. coordinate the layout and printing of publicly disseminated
prospectuses and reports;

G. perform internal audit examinations in accordance with a charter to be
adopted by the Company and the Investment Company;

H. assist with the design, development, and operation of the Investment
Company and the Funds;

I. provide individuals reasonably acceptable to the Board for
nomination, appointment, or election as officers of the Investment
Company, who will be responsible for the management of certain of the
Investment Company's affairs as determined by the Investment
Company's Board; and

J. consult with the Investment Company and its Board on matters
concerning the Investment Company and its affairs.

The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Two,
shall hereafter be referred to as "Administrative Services."

Article 6. Records.

The Company shall create and maintain all necessary books and records in
accordance with all applicable laws, rules and regulations, including but not
limited to records required by Section 31(a) of the Investment Company act of
1940 and the rules thereunder, as the same may be amended from time to time,
pertaining to the Administrative Services performed by it and not otherwise
created and maintained by another party pursuant to contract with the Investment
Company. Where applicable, such records shall be maintained by the Company for
the periods and in the places required by Rule 31a-2 under the 1940 Act. The
books and records pertaining to the Investment Company which are in the
possession of the Company shall be the property of the Investment Company. The
Investment Company, or the Investment Company's authorized representatives,
shall have access to such books and records at all times during the Company's
normal business hours. Upon the reasonable request of the Investment Company,
copies of any such books and records shall be provided promptly by the Company
to the Investment Company or the Investment Company's authorized
representatives.

Article 7. Duties of the Fund.

The Fund assumes full responsibility for the preparation, contents and
distribution of its own offering document and for complying with all applicable
requirements the 1940 Act, the Internal Revenue Code, and any other laws, rules
and regulations of government authorities having jurisdiction.

Article 8. Expenses.

The Company shall be responsible for expenses incurred in providing office
space, equipment, and personnel as may be necessary or convenient to provide the
Administrative Services to the Investment Company, including the compensation of
the Company employees who serve as trustees or directors or officers of the
Investment Company. The Investment Company shall be responsible for all other
expenses incurred by the Company on behalf of the Investment Company, including
without limitation postage and courier expenses, printing expenses, travel
expenses, registration fees, filing fees, fees of outside counsel and
independent auditors, or other professional services, organizational expenses,
insurance premiums, fees payable to persons who are not the Company's employees,
trade association dues, and other expenses properly payable by the Funds and/or
the Classes.

Article 9. Compensation.

For the Administrative Services provided, the Investment Company hereby
agrees to pay and the Company hereby agrees to accept as full compensation for
its services rendered hereunder an administrative fee at an annual rate per
Fund, as specified below.

The compensation and out of pocket expenses attributable to the Fund shall
be accrued by the Fund and paid to the Company no less frequently than monthly,
and shall be paid daily upon request of the Company. The Company will maintain
detailed information about the compensation and out of pocket expenses by the
Fund.
Max. Admin. Average Daily Net Assets
Fee of the Funds
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
(Average Daily Net Asset break-points are on a complex-wide basis)

However, in no event shall the administrative fee received during any year
of the Agreement be less than, or be paid at a rate less than would aggregate
$125,000 per Fund and $30,000 per Class. The minimum fee set forth above in this
Article 9 may increase annually upon each March 1 anniversary of this Agreement
over the minimum fee during the prior 12 months, as calculated under this
agreement, in an amount equal to the increase in Pennsylvania Consumer Price
Index (not to exceed 6% annually) as last reported by the U.S. Bureau of Labor
Statistics for the twelve months immediately preceding such anniversary.

Article 10. Responsibility of Administrator.

A. The Company shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Investment Company in
connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this
Agreement. The Company shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Investment Company) on
all matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. Any person, even though
also an officer, director, trustee, partner, employee or agent of the
Company, who may be or become an officer, director, trustee, partner,
employee or agent of the Investment Company, shall be deemed, when
rendering services to the Investment Company or acting on any
business of the Investment Company (other than services or business
in connection with the duties of the Company hereunder) to be
rendering such services to or acting solely for the Investment
Company and not as an officer, director, trustee, partner, employee
or agent or one under the control or direction of the Company even
though paid by the Company.

B. The Company shall be kept indemnified by the Investment Company and be
without liability for any action taken or thing done by it in
performing the Administrative Services in accordance with the above
standards. In order that the indemnification provisions contained in
this Article 10 shall apply, however, it is understood that if in any
case the Investment Company may be asked to indemnify or hold the
Company harmless, the Investment Company shall be fully and promptly
advised of all pertinent facts concerning the situation in question,
and it is further understood that the Company will use all reasonable
care to identify and notify the Investment Company promptly concerning
any situation which presents or appears likely to present the
probability of such a claim for indemnification against the Investment
Company. The Investment Company shall have the option to defend the
Company against any claim which may be the subject of this
indemnification. In the event that the Investment Company so elects,
it will so notify the Company and thereupon the Investment Company
shall take over complete defense of the claim, and the Company shall
in such situation initiate no further legal or other expenses for
which it shall seek indemnification under this Article. The Company
shall in no case confess any claim or make any compromise in any case
in which the Investment Company will be asked to indemnify the Company
except with the Investment Company's written consent.

SECTION THREE: Transfer Agency Services.

Article 11. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the
Investment Company hereby appoints the Company to act as, and the Company agrees
to act as, transfer agent and dividend disbursing agent for each Fund's Shares,
and agent in connection with any accumulation, open-account or similar plans
provided to the shareholders of any Fund ("Shareholder(s)"), including without
limitation any periodic investment plan or periodic withdrawal program.

Article 12. Duties of the Company.
The Company shall perform the following services in accordance with Proper
Instructions as may be provided from time to time by the Investment Company as
to any Fund:

A. Purchases

(1) The Company shall receive orders and payment for the
purchase of shares and promptly deliver payment and
appropriate documentation therefore to the custodian of the
relevant Fund, (the "Custodian"). The Company shall notify
the Fund and the Custodian on a daily basis of the total
amount of orders and payments so delivered.

(2) Pursuant to purchase orders and in accordance with the Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and hold
such Shares in the appropriate Shareholder accounts.

(3) For certificated Funds and/or Classes, if a Shareholder or
its agent requests a certificate, the Company, as Transfer
Agent, shall countersign and mail by first class mail, a
certificate to the Shareholder at its address as set forth
on the transfer books of the Funds, and/or Classes, subject
to any Proper Instructions regarding the delivery of
certificates.

(4) In the event that any check or other order for the purchase
of Shares of the Fund and/or Class is returned unpaid for
any reason, the Company shall debit the Share account of the
Shareholder by the number of Shares that had been credited
to its account upon receipt of the check or other order,
promptly mail a debit advice to the Shareholder, and notify
the Fund and/or Class of its action. In the event that the
amount paid for such Shares exceeds proceeds of the
redemption of such Shares plus the amount of any dividends
paid with respect to such Shares, the Fund and/the Class or
its distributor will reimburse the Company on the amount of
such excess.

B. Distribution

(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as
Dividend Disbursing Agent for the Funds in accordance with
the provisions of its governing document and the
then-current Prospectus of the Fund. The Company shall
prepare and mail or credit income, capital gain, or any
other payments to Shareholders. As the Dividend Disbursing
Agent, the Company shall, on or before the payment date of
any such distribution, notify the Custodian of the estimated
amount required to pay any portion of said distribution
which is payable in cash and request the Custodian to make
available sufficient funds for the cash amount to be paid
out. The Company shall reconcile the amounts so requested
and the amounts actually received with the Custodian on a
daily basis. If a Shareholder is entitled to receive
additional Shares by virtue of any such distribution or
dividend, appropriate credits shall be made to the
Shareholder's account, for certificated Funds and/or
Classes, delivered where requested; and

(2) The Company shall maintain records of account for each Fund
and Class and advise the Investment Company, each Fund and
Class and its Shareholders as to the foregoing.

C. Redemptions and Transfers

(1) The Company shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund Prospectus or set
forth in Proper Instructions, deliver the appropriate
instructions therefor to the Custodian. The Company shall
notify the Funds on a daily basis of the total amount of
redemption requests processed and monies paid to the Company
by the Custodian for redemptions.

(2) At the appropriate time upon receiving redemption proceeds
from the Custodian with respect to any redemption, the
Company shall pay or cause to be paid the redemption
proceeds in the manner instructed by the redeeming
Shareholders, pursuant to procedures described in the
then-current Prospectus of the Fund.

(3) If any certificate returned for redemption or other request
for redemption does not comply with the procedures for
redemption approved by the Fund, the Company shall promptly
notify the Shareholder of such fact, together with the
reason therefor, and shall effect such redemption at the
price applicable to the date and time of receipt of
documents complying with said procedures.

(4) The Company shall effect transfers of Shares by the registered
owners thereof.

(5) The Company shall identify and process abandoned accounts
and uncashed checks for state escheat requirements on an
annual basis and report such actions to the Fund.

D. Recordkeeping

(1) The Company shall record the issuance of Shares of each
Fund, and/or Class, and maintain pursuant to applicable
rules of the Securities and Exchange Commission ("SEC") a
record of the total number of Shares of the Fund and/or
Class which are authorized, based upon data provided to it
by the Fund, and issued and outstanding. The Company shall
also provide the Fund on a regular basis or upon reasonable
request with the total number of Shares which are authorized
and issued and outstanding, but shall have no obligation
when recording the issuance of Shares, except as otherwise
set forth herein, to monitor the issuance of such Shares or
to take cognizance of any laws relating to the issue or sale
of such Shares, which functions shall be the sole
responsibility of the Funds.

(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by
the Investment Company or the Fund to include a record for
each Shareholder's account of the following:

(a) Name, address and tax identification number (and
whether such number has been certified);

(b) Number of Shares held;

(d) Any stop or restraining order placed against the
account;

(e) Information with respect to withholding in the case of
a foreign account or an account for which withholding
is required by the Internal Revenue Code;

(f) Any dividend reinvestment order, plan application,
dividend address and correspondence relating to the current maintenance of the
account;

(g) Certificate numbers and denominations for any
Shareholder holding certificates;

(h) Any information required in order for the Company to
perform the calculations contemplated or required by this Agreement.

(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such
record retention shall be at the expense of the Company, and
such records may be inspected by the Fund at reasonable
times. The Company may, at its option at any time, and shall
forthwith upon the Fund's demand, turn over to the Fund and
cease to retain in the Company's files, records and
documents created and maintained by the Company pursuant to
this Agreement, which are no longer needed by the Company in
performance of its services or for its protection. If not so
turned over to the Fund, such records and documents will be
retained by the Company for six years from the year of
creation, during the first two of which such documents will
be in readily accessible form. At the end of the six year
period, such records and documents will either be turned
over to the Fund or destroyed in accordance with Proper
Instructions.

E. Confirmations/Reports

(1) The Company shall furnish to the Fund periodically the following
information:

(a) A copy of the transaction register;

(b) Dividend and reinvestment blotters;

(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the Fund
to the Company;

(d) Shareholder lists and statistical information;

(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees, or other transaction-
or sales-related payments;

(f) Such other information as may be agreed upon from time
to time.

(2) The Company shall prepare in the appropriate form, file with
the Internal Revenue Service and appropriate state agencies,
and, if required, mail to Shareholders, such notices for
reporting dividends and distributions paid as are required
to be so filed and mailed and shall withhold such sums as
are required to be withheld under applicable federal and
state income tax laws, rules and regulations.

(3) In addition to and not in lieu of the services set forth above, the
Company shall:

(a) Perform all of the customary services of a transfer
agent, dividend disbursing agent and, as relevant,
agent in connection with accumulation, open-account
or similar plans (including without limitation any
periodic investment plan or periodic withdrawal
program), including but not limited to: maintaining
all Shareholder accounts, mailing Shareholder
reports and Prospectuses to current Shareholders,
withholding taxes on accounts subject to back-up or
other withholding (including non-resident alien
accounts), preparing and filing reports on U.S.
Treasury Department Form 1099 and other appropriate
forms required with respect to dividends and
distributions by federal authorities for all
Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for
all purchases and redemptions of Shares and other
conformable transactions in Shareholder accounts,
preparing and mailing activity statements for
Shareholders, and providing Shareholder account
information; and

(b) provide a system which will enable the Fund to
monitor the total number of Shares of each Fund
(and/or Class) sold in each state ("blue sky
reporting"). The Fund shall by Proper Instructions
(i) identify to the Company those transactions and
assets to be treated as exempt from the blue sky
reporting for each state and (ii) verify the
classification of transactions for each state on
the system prior to activation and thereafter
monitor the daily activity for each state. The
responsibility of the Company for each Fund's
(and/or Class's) state blue sky registration status
is limited solely to the recording of the initial
classification of transactions or accounts with
regard to blue sky compliance and the reporting of
such transactions and accounts to the Fund as
provided above.

F. Other Duties

(1) The Company shall answer correspondence from
Shareholders relating to their Share accounts and such
other correspondence as may from time to time be
addressed to the Company;

(2) The Company shall prepare Shareholder meeting lists,
mail proxy cards and other material supplied to it by
the Fund in connection with Shareholder meetings of
each Fund; receive, examine and tabulate returned
proxies, and certify the vote of the Shareholders;

(3) The Company shall establish and maintain facilities and
procedures for safekeeping of stock certificates, check
forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.

The foregoing, along with any additional services that the Company shall
agree in writing to perform for the Investment Company under this Section Three,
shall hereafter be referred to as "Transfer Agency Services."

Article 13. Duties of the Investment Company.
A. Compliance

The Investment Company or Fund assume full responsibility for the
preparation, contents and distribution of their own and/or their
classes' Prospectus and for complying with all applicable
requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act and any laws, rules and regulations of government
authorities having jurisdiction.

B. Share Certificates

The Investment Company shall supply the Company with a sufficient
supply of blank Share certificates and from time to time shall renew
such supply upon request of the Company. Such blank Share
certificates shall be properly signed, manually or by facsimile, if
authorized by the Investment Company and shall bear the seal of the
Investment Company or facsimile thereof; and notwithstanding the
death, resignation or removal of any officer of the Investment
Company authorized to sign certificates, the Company may continue to
countersign certificates which bear the manual or facsimile signature
of such officer until otherwise directed by the Investment Company.

C. Distributions

The Fund shall promptly inform the Company of the declaration of any
dividend or distribution on account of any Fund's shares.

Article 14. Compensation and Expenses.
A. Annual Fee

For performance by the Company pursuant to Section Three of this
Agreement, the Investment Company and/or the Fund agree to pay the
Company an annual maintenance fee for each Shareholder account as
agreed upon between the parties and as may be added to or amended
from time to time. Such fees may be changed from time to time subject
to written agreement between the Investment Company and the Company.
Pursuant to information in the Fund Prospectus or other information
or instructions from the Fund, the Company may sub-divide any Fund
into Classes or other sub-components for recordkeeping purposes. The
Company will charge the Fund the same fees for each such Class or
sub-component the same as if each were a Fund.

B. Reimbursements

In addition to the fee paid under Article 7A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed
upon between the parties, as may be added to or amended from time to
time. In addition, any other expenses incurred by the Company at the
request or with the consent of the Investment Company and/or the
Fund, will be reimbursed by the appropriate Fund.

C. Payment

The compensation and out-of-pocket expenses shall be accrued by the
Fund and shall be paid to the Company no less frequently than
monthly, and shall be paid daily upon request of the Company. The
Company will maintain detailed information about the compensation and
out-of-pocket expenses by Fund and Class.

SECTION FOUR: Custody Services Procurement.

Article 15. Appointment.
The Investment Company hereby appoints Company as its agent to evaluate and
obtain custody services from a financial institution that (i) meets the criteria
established in Section 17(f) of the 1940 Act and (ii) has been approved by the
Board as eligible for selection by the Company as a custodian (the "Eligible
Custodian"). The Company accepts such appointment.

Article 16. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the Company
shall:

A. evaluate and obtain custody services from a financial institution that
meets the criteria established in Section 17(f) of the 1940 Act and has
been approved by the Board as being eligible for selection by the Company
as an Eligible Custodian;

B. negotiate and enter into agreements with Eligible Custodians for the
benefit of the Investment Company, with the Investment Company as a
party to each such agreement. The Company may, as paying agent, be a
party to any agreement with any such Eligible Custodian;

C. establish procedures to monitor the nature and the quality of the
services provided by Eligible Custodians;

D. monitor and evaluate the nature and the quality of services provided
by Eligible Custodians;

E. periodically provide to the Investment Company (i) written reports on
the activities and services of Eligible Custodians; (ii) the nature
and amount of disbursements made on account of the each Fund with
respect to each custodial agreement; and (iii) such other information
as the Board shall reasonably request to enable it to fulfill its
duties and obligations under Sections 17(f) and 36(b) of the 1940 Act
and other duties and obligations thereof;

F. periodically provide recommendations to the Board to enhance Eligible
Custodian's customer services capabilities and improve upon fees being
charged to the Fund by Eligible Custodian; and

The foregoing, along with any additional services that Company shall agree
in writing to perform for the Fund under this Section Four, shall hereafter be
referred to as "Custody Services Procurement."

Article 17. Fees and Expenses.
A. Annual Fee

For the performance of Custody Services Procurement by the Company
pursuant to Section Four of this Agreement, the Investment Company
and/or the Fund agree to compensate the Company in accordance with
the fees agreed upon from time to time.

B. Reimbursements

In addition to the fee paid under Section 11A above, the Investment
Company and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items agreed
upon between the parties, as may be added to or amended from time to
time. In addition, any other expenses incurred by the Company at the
request or with the consent of the Investment Company and/or the
Fund, will be reimbursed by the appropriate Fund.

C. Payment

Article 18. Representations.
The Company represents and warrants that it has obtained all required
approvals from all government or regulatory authorities necessary to enter into
this arrangement and to provide the services contemplated in Section Four of
this Agreement.

SECTION FIVE: General Provisions.

Article 19. Proper Instructions.

As used throughout this Agreement, a "Proper Instruction" means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will be deemed to
be Proper Instructions if (a) the Company reasonably believes them to have been
given by a person previously authorized in Proper Instructions to give such
instructions with respect to the transaction involved, and (b) the Investment
Company, or the Fund, and the Company promptly cause such oral instructions to
be confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Investment Company, or the Fund, and the Company are satisfied that such
procedures afford adequate safeguards for the Fund's assets. Proper Instructions
may only be amended in writing.

Article 20. Assignment.
Except as provided below, neither this Agreement nor any of the rights or
obligations under this Agreement may be assigned by either party without the
written consent of the other party.

A. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.

B. With regard to Transfer Agency Services, the Company may without
further consent on the part of the Investment Company subcontract for
the performance of Transfer Agency Services with

(1) its subsidiary, Federated Shareholder Service Company, a Delaware
business trust, which is duly registered as a transfer agent pursuant
to Section 17A(c)(1) of the Securities Exchange Act of 1934, as
amended, or any succeeding statute ("Section 17A(c)(1)"); or

(2) such other provider of services duly registered as a transfer agent
under Section 17A(c)(1) as Company shall select.

The Company shall be as fully responsible to the Investment Company
for the acts and omissions of any subcontractor as it is for its own acts and
omissions.

C. With regard to Fund Accounting Services, Administrative Services and
Custody Procurement Services, the Company may without further consent
on the part of the Investment Company subcontract for the performance
of such services with Federated Administrative Services, a
wholly-owned subsidiary of the Company.

D. The Company shall upon instruction from the Investment Company
subcontract for the performance of services under this Agreement with
an Agent selected by the Investment Company, other than as described
in B. and C. above; provided, however, that the Company shall in no
way be responsible to the Investment Company for the acts and
omissions of the Agent.

Article 21. Documents.
A. In connection with the appointment of the Company under this Agreement,
the Investment Company shall file with the Company the following documents:

(1) A copy of the Charter and By-Laws of the Investment Company and all
amendments thereto;

(2) A copy of the resolution of the Board of the Investment Company
authorizing this Agreement;

(3) Specimens of all forms of outstanding Share certificates of the
Investment Company or the Funds in the forms approved by the Board of
the Investment Company with a certificate of the Secretary of the
Investment Company as to such approval;

(4) All account application forms and other documents relating to
Shareholders accounts; and

(5) A copy of the current Prospectus for each Fund.

B. The Fund will also furnish from time to time the following documents:

(1) Each resolution of the Board of the Investment Company
authorizing the original issuance of each Fund's, and/or Class's
Shares;

(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to the
sale of Shares of any Fund, and/or Class;

(3) A certified copy of each amendment to the governing document and
the By-Laws of the Investment Company;

(4) Certified copies of each vote of the Board authorizing officers
to give Proper Instructions to the Custodian and agents for fund
accountant, custody services procurement, and shareholder
recordkeeping or transfer agency services;

(5) Specimens of all new Share certificates representing Shares of
any Fund, accompanied by Board resolutions approving such forms;

(6) Such other certificates, documents or opinions which the Company
may, in its discretion, deem necessary or appropriate in the
proper performance of its duties; and

(7) Revisions to the Prospectus of each Fund.

Article 22. Representations and Warranties.
A. Representations and Warranties of the Company

The Company represents and warrants to the Fund that:

(1) it is a corporation duly organized and existing and in good
standing under the laws of the Commonwealth of Pennsylvania;

(2) It is duly qualified to carry on its business in each
jurisdiction where the nature of its business requires such
qualification, and in the Commonwealth of Pennsylvania;

(3) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this
Agreement;

(4) all requisite corporate proceedings have been taken to authorize
it to enter into and perform its obligations under this
Agreement;

(5) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement;

(6) it is in compliance with federal securities law requirements and
in good standing as an administrator and fund accountant; and

B. Representations and Warranties of the Investment Company

The Investment Company represents and warrants to the Company that:

(1) It is an investment company duly organized and existing and in
good standing under the laws of its state of organization;

(2) It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform its obligations under this
Agreement;

(3) All corporate proceedings required by said Charter and By-Laws
have been taken to authorize it to enter into and perform its
obligations under this Agreement;

(4) The Investment Company is an open-end investment company
registered under the 1940 Act; and

(5) A registration statement under the 1933 Act will be effective,
and appropriate state securities law filings have been made and
will continue to be made, with respect to all Shares of each Fund
being offered for sale.

Article 23. Standard of Care and Indemnification.
A. Standard of Care

With regard to Sections One, Three and Four, the Company shall be
held to a standard of reasonable care in carrying out the provisions
of this Contract. The Company shall be entitled to rely on and may
act upon advice of counsel (who may be counsel for the Investment
Company) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice, provided
that such action is not in violation of applicable federal or state
laws or regulations, and is in good faith and without negligence.

B. Indemnification by Investment Company

The Company shall not be responsible for and the Investment Company
or Fund shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents, employees and affiliates,
harmless against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liabilities arising out of or
attributable to:

(1) The acts or omissions of any Custodian, Adviser, Sub-adviser or
other party contracted by or approved by the Investment Company
or Fund,

(2) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper
form which

(a) are received by the Company or its agents or
subcontractors and furnished to it by or on behalf
of the Fund, its Shareholders or investors
regarding the purchase, redemption or transfer of
Shares and Shareholder account information;

(b) are received by the Company from independent pricing
services or sources for use in valuing the assets of the Funds; or

(c) are received by the Company or its agents or subcontractors from
Advisers, Sub-advisers or other third parties contracted by or
approved by the Investment Company of Fund for use in the
performance of services under this Agreement;

(d) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the Investment Company.

(3) The reliance on, or the carrying out by the Company or its
agents or subcontractors of Proper Instructions of the
Investment Company or the Fund.

(4) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the
securities laws or regulations of any state that such Shares
be registered in such state or in violation of any stop
order or other determination or ruling by any federal agency
or any state with respect to the offer or sale of such
Shares in such state.

Provided, however, that the Company shall not be protected
by this Article 23.B. from liability for any act or omission
resulting from the Company's willful misfeasance, bad faith,
negligence or reckless disregard of its duties or failure to
meet the standard of care set forth in 23.A. above.

C. Reliance

At any time the Company may apply to any officer of the Investment
Company or Fund for instructions, and may consult with legal counsel
with respect to any matter arising in connection with the services to
be performed by the Company under this Agreement, and the Company and
its agents or subcontractors shall not be liable and shall be
indemnified by the Investment Company or the appropriate Fund for any
action reasonably taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel provided such action
is not in violation of applicable federal or state laws or
regulations. The Company, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signatures
of the officers of the Investment Company or the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.

D. Notification

In order that the indemnification provisions contained in this
Article 23 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of such
assertion, and shall keep the other party advised with respect to all
developments concerning such claim. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.

Article 24. Term and Termination of Agreement.
This Agreement shall be effective from March 1, 1996 and shall continue
until February 28, 2003 (`Term"). Thereafter, the Agreement will continue for 18
month terms. The Agreement can be terminated by either party upon 18 months
notice to be effective as of the end of such 18 month period. In the event,
however, of willful misfeasance, bad faith, negligence or reckless disregard of
its duties by the Company, the Investment Company has the right to terminate the
Agreement upon 60 days written notice, if Company has not cured such willful
misfeasance, bad faith, negligence or reckless disregard of its duties within 60
days. The termination date for all original or after-added Investment companies
which are, or become, a party to this Agreement. shall be coterminous.
Investment Companies that merge or dissolve during the Term, shall cease to be a
party on the effective date of such merger or dissolution.

Should the Investment Company exercise its rights to terminate, all
out-of-pocket expenses associated with the movement of records and materials
will be borne by the Investment Company or the appropriate Fund. Additionally,
the Company reserves the right to charge for any other reasonable expenses
associated with such termination. The provisions of Articles 10 and 23 shall
survive the termination of this Agreement.

Article 25. Amendment.
This Agreement may be amended or modified by a written agreement executed
by both parties.

Article 26. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and the
Investment Company may from time to time agree on such provisions interpretive
of or in addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. Any such
interpretive or additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Charter. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.

Article 27. Governing Law.
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts

Article 28. Notices.
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Investment Company at
Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the
Company at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or
to such other address as the Investment Company or the Company may hereafter
specify, shall be deemed to have been properly delivered or given hereunder to
the respective address.

Article 29. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original. Article 30.
Limitations of Liability of Trustees and Shareholders of the Company.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Company and signed by an authorized officer of the Company,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, and
the obligations of this Agreement are not binding upon any of the Trustees or
Shareholders of the Company, but bind only the appropriate property of the Fund,
or Class, as provided in the Declaration of Trust.

Article 31. Merger of Agreement.
This Agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject hereof whether
oral or written.

Article 32. Successor Agent.
If a successor agent for the Investment Company shall be appointed by the
Investment Company, the Company shall upon termination of this Agreement deliver
to such successor agent at the office of the Company all properties of the
Investment Company held by it hereunder. If no such successor agent shall be
appointed, the Company shall at its office upon receipt of Proper Instructions
deliver such properties in accordance with such instructions.

In the event that no written order designating a successor agent or Proper
Instructions shall have been delivered to the Company on or before the date when
such termination shall become effective, then the Company shall have the right
to deliver to a bank or trust company, which is a "bank" as defined in the 1940
Act, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $2,000,000, all
properties held by the Company under this Agreement. Thereafter, such bank or
trust company shall be the successor of the Company under this Agreement.

Article 33. Force Majeure.
The Company shall have no liability for cessation of services hereunder or
any damages resulting therefrom to the Fund as a result of work stoppage, power
or other mechanical failure, natural disaster, governmental action,
communication disruption or other impossibility of performance.

Article 34. Assignment; Successors.
This Agreement shall not be assigned by either party without the prior
written consent of the other party, except that either party may assign all of
or a substantial portion of its business to a successor, or to a party
controlling, controlled by, or under common control with such party. Nothing in
this Article 34 shall prevent the Company from delegating its responsibilities
to another entity to the extent provided herein.

Article 35. Severability.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.

Article 36. Limitations of Liability of Trustees and Shareholders of the
Investment Company.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Investment Company and signed by an authorized officer of the
Investment Company, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, and the obligations of this Agreement are not binding upon any of
the Trustees or Shareholders of the Investment Company, but bind only the
property of the Fund, or Class, as provided in the Declaration of Trust.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.

INVESTMENT
COMPANIES (listed
on Exhibit 1)

By: /s/ S. Elliott Cohan
S. Elliott Cohan
Assistant Secretary

FEDERATED SERVICES COMPANY

By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary

<PAGE>

EXHIBIT 1
CONTRACT
DATE INVESTMENT COMPANY
Portfolios
Classes

March 1, 1997 Federated Equity Funds
Federated Growth Strategies Fund
Class A Shares
Class B Shares
Class C Shares

Federated Small Cap Strategies Fund
Class A Shares
Class B Shares
Class C Shares

Federated Capital Appreciation Fund
Class A Shares
Class B Shares
Class C Shares

Federated Aggressive Growth Fund
Class A Shares
Class B Shares
Class C Shares

FEDERATED SERVICES COMPANY provides the following services:

Fund Accounting
Administrative Services
Transfer Agency Services
Custody Services Procurement

Exhibit 9(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K

Amended and Restated
SHAREHOLDER SERVICES AGREEMENT

THIS AGREEMENT, amended and restated as of the first day of September,
1995, (originally made and entered into as of the first day of March, 1994), by
and between those investment companies listed on Exhibit 1, as may be amended
from time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 and who have approved this
form of Agreement (individually referred to herein as a "Fund" and collectively
as "Funds") and Federated Shareholder Services, a Delaware business trust,
having its principal office and place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779 ("FSS").

1. The Funds hereby appoint FSS to render or cause to be rendered personal
services to shareholders of the Funds and/or the maintenance of
accounts of shareholders of the Funds ("Services"). In addition to
providing Services directly to shareholders of the Funds, FSS is hereby
appointed the Funds' agent to select, negotiate and subcontract for the
performance of Services. FSS hereby accepts such appointments. FSS
agrees to provide or cause to be provided Services which, in its best
judgment (subject to supervision and control of the Funds' Boards of
Trustees or Directors, as applicable), are necessary or desirable for
shareholders of the Funds. FSS further agrees to provide the Funds,
upon request, a written description of the Services which FSS is
providing hereunder.

2. During the term of this Agreement, each Fund will pay FSS and FSS
agrees to accept as full compensation for its services rendered
hereunder a fee at an annual rate, calculated daily and payable
monthly, up to 0.25% of 1% of average net assets of each Fund.

For the payment period in which this Agreement becomes effective or
terminates with respect to any Fund, there shall be an appropriate
proration of the monthly fee on the basis of the number of days that
this Agreement is in effect with respect to such Fund during the month.

3. This Agreement shall continue in effect for one year from the date of
its execution, and thereafter for successive periods of one year only
if the form of this Agreement is approved at least annually by the
Board of each Fund, including a majority of the members of the Board of
the Fund who are not interested persons of the Fund ("Independent Board
Members") cast in person at a meeting called for that purpose.

4. Notwithstanding paragraph 3, this Agreement may be terminated as
follows:

(a) at any time, without the payment of any penalty, by the vote of
a majority of the Independent Board Members of any Fund or by a
vote of a majority of the outstanding voting securities of any
Fund as defined in the Investment Company Act of 1940 on sixty
(60) days' written notice to the parties to this Agreement;

(b) automatically in the event of the Agreement's assignment as defined
in the Investment Company Act of 1940; and

(c) by any party to the Agreement without cause by giving the other
party at least sixty (60) days' written notice of its intention to terminate.

5. FSS agrees to obtain any taxpayer identification number certification
from each shareholder of the Funds to which it provides Services that
is required under Section 3406 of the Internal Revenue Code, and any
applicable Treasury regulations, and to provide each Fund or its
designee with timely written notice of any failure to obtain such
taxpayer identification number certification in order to enable the
implementation of any required backup withholding.

6. FSS shall not be liable for any error of judgment or mistake of law or
for any loss suffered by any Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. FSS shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for such
Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Any person, even
though also an officer, trustee, partner, employee or agent of FSS, who
may be or become a member of such Fund's Board, officer, employee or
agent of any Fund, shall be deemed, when rendering services to such
Fund or acting on any business of such Fund (other than services or
business in connection with the duties of FSS hereunder) to be
rendering such services to or acting solely for such Fund and not as an
officer, trustee, partner, employee or agent or one under the control
or direction of FSS even though paid by FSS.

This Section 6 shall survive termination of this Agreement.

7. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by
the party against which an enforcement of the change, waiver,
discharge or termination is sought.

8. FSS is expressly put on notice of the limitation of liability as set
forth in the Declaration of Trust of each Fund that is a Massachusetts
business trust and agrees that the obligations assumed by each such
Fund pursuant to this Agreement shall be limited in any case to such
Fund and its assets and that FSS shall not seek satisfaction of any
such obligations from the shareholders of such Fund, the Trustees,
Officers, Employees or Agents of such Fund, or any of them.

9. The execution and delivery of this Agreement have been authorized by
the Trustees of FSS and signed by an authorized officer of FSS, acting
as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of
them personally, and the obligations of this Agreement are not binding
upon any of the Trustees or shareholders of FSS, but bind only the
trust property of FSS as provided in the Declaration of Trust of FSS.

10. Notices of any kind to be given hereunder shall be in writing
(including facsimile communication) and shall be duly given if
delivered to any Fund and to such Fund at the following address:
Federated Investors Tower, Pittsburgh, PA 15222-3779, Attention:
President and if delivered to FSS at Federated Investors Tower,
Pittsburgh, PA 15222-3779, Attention: President.

11. This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written. If any provision of this Agreement
shall be held or made invalid by a court or regulatory agency decision,
statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. Subject to the provisions of Sections 3 and 4,
hereof, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall
be governed by Pennsylvania law; provided, however, that nothing herein
shall be construed in a manner inconsistent with the Investment Company
Act of 1940 or any rule or regulation promulgated by the Securities and
Exchange Commission thereunder.

12. This Agreement may be executed by different parties on separate
counterparts, each of which, when so executed and delivered, shall
be an original, and all such counterparts shall together constitute
one and the same instrument.

13. This Agreement shall not be assigned by any party without the prior
written consent of FSS in the case of assignment by any Fund, or of the
Funds in the case of assignment by FSS, except that any party may
assign to a successor all of or a substantial portion of its business
to a party controlling, controlled by, or under common control with
such party. Nothing in this Section 14 shall prevent FSS from
delegating its responsibilities to another entity to the extent
provided herein.

IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.

Investment Companies
(listed on Exhibit 1)

Attest: /s/ John W. McGonigle By: /s/ John F. Donahue
John W. McGonigle John F. Donahue
Secretary Chairman

Federated Shareholder Services

Attest: /s/ John W. McGonigle By: /s/ Glen R. Johnson
Secretary President

<PAGE>

Exhibit 1

Federated Equity Funds
Federated Growth Strategies Fund
Class A Shares
Class B Shares
Class C Shares

Federated Small Cap Strategies Fund
Class A Shares
Class B Shares
Class C Shares

Federated Capital Appreciation Fund
Class A Shares
Class B Shares
Class C Shares

Federated Aggressive Growth Fund
Class A Shares
Class B Shares
Class C Shares

* Source: Investment Company Institute

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class A
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 1,121,562
<SHARES-COMMON-PRIOR> 1,121,204
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 108,804,293
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 178,012
<DISTRIBUTIONS-OF-GAINS> 2,209,569
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 66,891
<NUMBER-OF-SHARES-REDEEMED> 75,039
<SHARES-REINVESTED> 8,506
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 87.580
<PER-SHARE-NII> 0.240
<PER-SHARE-GAIN-APPREC> 11.350
<PER-SHARE-DIVIDEND> 0.160
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 97.010
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class B
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 65,863
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 6,369,220
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 98
<DISTRIBUTIONS-OF-GAINS> 89,485
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 67,529
<NUMBER-OF-SHARES-REDEEMED> 2,621
<SHARES-REINVESTED> 955
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 88.220
<PER-SHARE-NII> (0.250)
<PER-SHARE-GAIN-APPREC> 10.740
<PER-SHARE-DIVIDEND> 0.010
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 96.700
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> Federated Equity Funds
Federated Capital Appreciation Fund
Class C
<PERIOD-TYPE> 10-mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 88,523,927
<INVESTMENTS-AT-VALUE> 116,334,501
<RECEIVABLES> 2,012,677
<ASSETS-OTHER> 7,486
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118,354,664
<PAYABLE-FOR-SECURITIES> 2,377,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,758
<TOTAL-LIABILITIES> 2,471,489
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,949,497
<SHARES-COMMON-STOCK> 7,334
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 87,074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,036,030
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,810,574
<NET-ASSETS> 709,662
<DIVIDEND-INCOME> 1,197,203
<INTEREST-INCOME> 176,421
<OTHER-INCOME> 0
<EXPENSES-NET> 1,113,888
<NET-INVESTMENT-INCOME> 259,736
<REALIZED-GAINS-CURRENT> 9,100,399
<APPREC-INCREASE-CURRENT> 3,829,310
<NET-CHANGE-FROM-OPS> 13,189,445
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 11,319
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,228
<NUMBER-OF-SHARES-REDEEMED> 7
<SHARES-REINVESTED> 113
<NET-CHANGE-IN-ASSETS> 17,682,917
<ACCUMULATED-NII-PRIOR> 5,448
<ACCUMULATED-GAINS-PRIOR> 74,213,546
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 671,263
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,358,605
<AVERAGE-NET-ASSETS> 107,321,648
<PER-SHARE-NAV-BEGIN> 88.220
<PER-SHARE-NII> (0.250)
<PER-SHARE-GAIN-APPREC> 10.800
<PER-SHARE-DIVIDEND> 0.010
<PER-SHARE-DISTRIBUTIONS> 2.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 96.760
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class A Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 11,915,957
<SHARES-COMMON-PRIOR> 9,499,332
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 307,881,776
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 439,174
<DISTRIBUTIONS-OF-GAINS> 50,905,303
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,354,390
<NUMBER-OF-SHARES-REDEEMED> 5,295,894
<SHARES-REINVESTED> 1,358,129
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 2,042,918
<PER-SHARE-NAV-BEGIN> 26.220
<PER-SHARE-NII> 0.040
<PER-SHARE-GAIN-APPREC> 5.010
<PER-SHARE-DIVIDEND> 0.040
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.840
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class B Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 423,321
<SHARES-COMMON-PRIOR> 51,294
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 10,858,238
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 314,552
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 479,932
<NUMBER-OF-SHARES-REDEEMED> 120,979
<SHARES-REINVESTED> 13,074
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 272,389,067
<PER-SHARE-NAV-BEGIN> 26.230
<PER-SHARE-NII> (0.100)
<PER-SHARE-GAIN-APPREC> 4.910
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.650
<EXPENSE-RATIO> 2.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> Federated Equity Funds
Federated Growth Strategies Fund
Class C Shares
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 257,414,298
<INVESTMENTS-AT-VALUE> 319,897,938
<RECEIVABLES> 5,050,319
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,948,257
<PAYABLE-FOR-SECURITIES> 1,467,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,861
<TOTAL-LIABILITIES> 2,540,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 225,680,063
<SHARES-COMMON-STOCK> 142,807
<SHARES-COMMON-PRIOR> 2,181
<ACCUMULATED-NII-CURRENT> 15,300
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34,228,393
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 62,483,640
<NET-ASSETS> 3,667,382
<DIVIDEND-INCOME> 2,621,704
<INTEREST-INCOME> 883,993
<OTHER-INCOME> 0
<EXPENSES-NET> 3,152,092
<NET-INVESTMENT-INCOME> 353,605
<REALIZED-GAINS-CURRENT> 34,229,221
<APPREC-INCREASE-CURRENT> 25,049,643
<NET-CHANGE-FROM-OPS> 59,632,469
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 47,135
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 153,301
<NUMBER-OF-SHARES-REDEEMED> 14,839
<SHARES-REINVESTED> 2,164
<NET-CHANGE-IN-ASSETS> 71,895,126
<ACCUMULATED-NII-PRIOR> 100,869
<ACCUMULATED-GAINS-PRIOR> 51,266,162
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,918
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,551,287
<AVERAGE-NET-ASSETS> 272,389,067
<PER-SHARE-NAV-BEGIN> 26.220
<PER-SHARE-NII> (0.050)
<PER-SHARE-GAIN-APPREC> 4.900
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 5.390
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 25.680
<EXPENSE-RATIO> 1.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class A
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 1,582,917
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 23,242,444
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 9,870
<NUMBER-OF-SHARES-SOLD> 2,243,995
<NUMBER-OF-SHARES-REDEEMED> 661,204
<SHARES-REINVESTED> 126
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.050)
<PER-SHARE-GAIN-APPREC> 4.750
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.020
<PER-SHARE-NAV-END> 14.680
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class B
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 2,195,987
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 32,111,770
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,289,952
<NUMBER-OF-SHARES-REDEEMED> 93,965
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.160)
<PER-SHARE-GAIN-APPREC> 4.780
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.620
<EXPENSE-RATIO> 2.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Federated Equity Funds
Federated Small Cap Strategies Fund
Class C
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Oct-31-1996
<INVESTMENTS-AT-COST> 58,635,030
<INVESTMENTS-AT-VALUE> 60,572,881
<RECEIVABLES> 1,719,888
<ASSETS-OTHER> 2,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 62,295,548
<PAYABLE-FOR-SECURITIES> 1,259,655
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 186,171
<TOTAL-LIABILITIES> 1,445,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,721,764
<SHARES-COMMON-STOCK> 376,307
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 190,753
<ACCUMULATED-NET-GAINS> 1,380,860
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,937,851
<NET-ASSETS> 5,495,508
<DIVIDEND-INCOME> 91,437
<INTEREST-INCOME> 93,916
<OTHER-INCOME> 0
<EXPENSES-NET> 361,000
<NET-INVESTMENT-INCOME> (175,647)
<REALIZED-GAINS-CURRENT> 1,375,654
<APPREC-INCREASE-CURRENT> 1,937,851
<NET-CHANGE-FROM-OPS> 3,137,858
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 395,842
<NUMBER-OF-SHARES-REDEEMED> 19,535
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 60,849,722
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,023
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711,649
<AVERAGE-NET-ASSETS> 21,805,586
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> (0.160)
<PER-SHARE-GAIN-APPREC> 4.760
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.600
<EXPENSE-RATIO> 2.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>