FEDERATED EQUITY FUNDS, 485BPOS, 1998-12-30

FEDERATED EQUITY FUNDS
485BPOS, 1998-12-30

Previous: FEDERATED EQUITY FUNDS, NSAR-B, 1998-12-30

Next: PAINEWEBBER MANAGED INVESTMENTS TRUST, NSAR-B, 1998-12-30

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. 42_............................. X
---- ------

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
------

Amendment No. 36 ............................................. X
---- ------

FEDERATED EQUITY FUNDS

(Exact Name of Registrant as Specified in Charter)

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

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

John W. McGonigle, Esquire,
Federated Investors Tower
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)
X on January 1, 1999 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on _________________ pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.

If appropriate, check the following box:

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

Copy to:

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

PROSPECTUS

Federated Growth Strategies Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking capital appreciation by investing primarily in growth
equity securities.

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

CONTENTS

Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4

What are the Principal Securities in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 5
What do Shares Cost? 6
How is the Fund Sold? 9
How to Purchase Shares 9
How to Redeem and Exchange Shares 11
Account and Share Information 13

Who Manages the Fund? 14

Financial Information 15

DECEMBER 31, 1998

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is appreciation of capital. While there is no
assurance that the Fund will achieve its investment objective, it endeavors to
do so by following the strategies and policies described in this
prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing primarily in common stock
of companies with market capitalizations above $100 million that offer superior
growth prospects.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

The Shares offered by this prospectus are not deposits or obligations of any
bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.

Risk/Return Bar Chart and Table

[The graphic presentation displayed here consists of a bar chart representing
the annual total returns of Class A Shares of Federated Growth Strategies Fund
as of the calendar year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with "-15" and increasing
in increments of 15 up to 45.

The `x' axis represents calculation periods for the last ten calendar years of
the Trust, beginning with the earliest year. The light gray shaded chart
features ten distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentages for the Class A
Shares of Federated Growth Strategies Fund, stated directly at the top of each
respective bar for the calendar years 1988 through 1997, are 28.75%, 29.24%,
(4.90%), 35.08%, 8.59%, 6.62%, (11.87%), 40.02%, 23.33%, and 27.06%.]

The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.

The Fund's Class A Shares are sold subject to a sales charge (load). The impact
of the sales charges are not reflected in the total returns above, and if these
amounts were reflected, returns would be less than those shown.

The Fund's Class A Shares total return from January 1, 1998 to September 30,
1998 was (8.60%).

Within the period shown in the chart, the Fund's Class A Shares highest
quarterly return was 22.12% (quarter ended March 31, 1988). Its lowest quarterly
return was (18.26%) (quarter ended September 30, 1990).

Average Annual Total Return

Average Annual Return for the Fund's Class A, Class B, and Class C Shares,
compared to the Standard& Poors 500 Index (S&P 500), and Lipper growth Fund
Index
(LGFI).

<TABLE>
<CAPTION>
Calendar Period Class A Class B Class C S&P 500 LGFI
<S> <C> <C> <C> <C> <C>
1 Year 20.07% 19.11% 25.15% 33.36% 28.03%
5 Years 14.27% -- -- 20.27% 17.07%
10 Years 16.29% -- -- 18.02% 16.07%
Life of the Fund1 -- 22.14% 24.49% -- --
</TABLE>

1 The Fund's Class A, Class B, and Class C Shares start of performance dates
were August 23, 1984, August 16, 1995 and August 16, 1995, respectively.

The table shows the Fund's Class A, Class B, and Class C Shares average
annual total returns compared to the S&P 500, a broad-based market index, and
LGFI, an average of funds with similar investment objectives.

Past performance does not necessarily predict future performance. This
information provides you with historical performance information so that you
can analyze whether the Fund's investment risks are balanced by its potential
rewards.

<PAGE>

What are the Fund's Fees and Expenses?

FEDERATED GROWTH STRATEGIES FUND

FEES AND EXPENSES

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

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

Annual Fund Operating Expenses (before waivers)/1/
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee.................................................................................. 0.75% 0.75% 0.75%
Distribution (12b-1) Fee........................................................................ None 0.75% 0.75%
Shareholder Services Fee/2/..................................................................... 0.25% 0.25% 0.25%
Other Expenses.................................................................................. 0.20% 0.21% 0.21%
Total Annual Fund Operating Expenses............................................................ 1.20% 1.96%/3/ 1.96%
- ----------------------------------------------------------------------------------------------------------------------------------
1 Although not contractually obligated to do so, the shareholder services provider waived
certain amounts. These are shown below along with the net expenses the Fund actually paid
for the fiscal year ended October 31, 1998.
Waiver of Fund Expenses....................................................................... 0.00%/4/ -- 0.02%
Total Actual Annual Fund Operating Expenses (after waivers)................................... 1.20% 1.96% 1.94%

2 The shareholder services fees have been voluntarily reduced. This voluntary reduction can be terminated at any time. The
shareholder services fees paid by the Fund (after the voluntary reductions) for Class A and Class C Shares were 0.25% and 0.23%,
respectively for the year ended October 31, 1998.

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

4 Amount waived less than 0.01%.
</TABLE>

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

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

<TABLE>
<CAPTION>
Share Class 1 Year 3 Years 5 Years 10 Years
Class A Shares
<S> <C> <C> <C> <C>
Expenses assuming
redemption $666 $ 910 $1,173 $1,925
Expenses assuming no
redemption $666 $ 910 $1,173 $1,925

Class B Shares
Expenses assuming
redemption $749 $1,015 $1,257 $2,089
Expenses assuming no
redemption $199 $ 615 $1,057 $2,089

Class C Shares
Expenses assuming
redemption $299 $ 615 $1,057 $2,285
Expenses assuming no
redemption $199 $ 615 $1,057 $2,285
</TABLE>

What are the Fund's Investment Strategies?

The Fund pursues its investment objective by investing primarily in common stock
of companies with market capitalizations above $100 million that offer superior
growth prospects. Using its own quantitative process, the Adviser rates the
future performance potential of companies. The Adviser evaluates each company's
earnings quality in light of their current valuation to narrow the list of
attractive companies. The Adviser then evaluates product positioning, management
quality and sustainability of current growth trends of those companies. Using
this type of fundamental analysis, the Adviser selects the most promising
companies for the Fund's portfolio.

Portfolio Turnover

The Fund may actively trade its portfolio securities in an attempt to achieve
its investment objective. Active trading will cause the Fund to have an
increased portfolio turnover rate, which is likely to generate shorter-term
gains (losses) for its shareholders, which are taxed at a higher rate than
longer-term gains (losses). Actively trading portfolio securities increases the
Fund's trading costs and may have an adverse impact on the Fund's
performance.

Temporary Defensive Investments

The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items, and shorter- term, higher quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested
by shareholders.

What are the Principal Securities in Which the Fund Invests?

Common Stocks

Common stocks are the most prevalent type of equity security. Common
stockholders receive the residual value of the issuer's earnings and assets
after the issuer pays its creditors and any preferred stockholders. As a result,
changes in an issuer's earnings directly influence the value of its common
stock.

American Depositary Receipts

American Depositary Receipts represent interests in underlying securities issued
by a foreign company, but traded in another market than the underlying security.
The foreign securities underlying American Depositary Receipts (ADRs) are traded
in the U.S. ADRs provide a way to buy shares of foreign-based companies in the
U.S. rather than in overseas markets. ADRs are also traded in U.S. dollars,
eliminating the need for foreign exchange transactions. Depositary Receipts
involve many of the same risks of investing directly in foreign securities,
including Country Risk and Currency Risk.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The Fund's investment adviser attempts to manage market risk of investing in
individual securities by limiting the amount the Fund invests in each stock.

LIQUIDITY RISKS

Equity securities that are not widely held may trade less frequently than more
widely held securities. This limits trading opportunity, making it more
difficult to sell or buy the securities at a favorable price or time. In
response, the Fund may have to lower the price, sell other securities, or give
up an investment opportunity, any of which could have a negative effect on its
performance. Infrequent trading may also lead to greater price volatility.

RISKS RELATED TO COMPANY SIZE

Generally, the smaller the market capitalization of a company, the fewer the
number of shares traded daily, the less liquid its stock and the more volatile
its price. Market capitalization is determined by multiplying the number of
outstanding shares by the current market price per share.

In addition, investing in small capitalization companies entails greater risk
because these companies may have unproven track records, limited product or
service base, limited access to capital and may be more likely to fail than
larger, more established companies.

SECTOR RISK

Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain sector
may perform differently than other sectors or as the market as a whole. As the
adviser allocates more of the Fund's portfolio holdings to a particular sector,
the Fund's performance will be more susceptible to any economic, business or
other developments which generally affect that sector.

RISK OF FOREIGN INVESTING

Exchange rates for currency fluctuate daily. The combination of currency risk
and market risks tends to make securities traded in foreign markets more
volatile than securities traded exclusively in the U.S.

Foreign securities pose additional risks because foreign economic or political
conditions may be less favorable than those of the United States. Foreign
financial markets may also have fewer investor protections. Securities in
foreign markets may also be subject to taxation policies that reduce returns for
U.S. investors.

Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.

RISKS RELATED TO INVESTING FOR GROWTH

Due to their relatively high valuations, growth stocks are typically more
volatile than value stocks. For instance, the price of a growth stock may
experience a larger decline on an analyst's downward earnings estimate revision,
a negative fundamental development, or other adverse market development.
Further, growth stocks tend to have lower dividend yields than value stocks.
This means they depend more on price changes for returns and may be more
adversely affected in a down market compared to higher yielding stocks.

What do Shares Cost?

You can purchase, redeem, or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next determined net asset value (NAV) plus any applicable
sales charge (public offering price).

NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern
time) each day the NYSE is open.

The Fund's current NAV and public offering price may be found in the mutual
fund section of local newspapers under "Federated" and the appropriate class
designation listing.

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

<TABLE>
<CAPTION>
Maximum Minimum Sales Charge
Initial/ --------------------------------
Subsequent Front-End Contingent
Investment Sales Deferred
Shares Offered Amounts/1/ Charge/2/ Sales Charge/3/
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Class A $1500/$100 5.50% 0.00%
Class B $1500/$100 None 5.50%
Class C $1500/$100 None 1.00%
- --------------------------------------------------------------------------
</TABLE>

1 The minimum initial and subsequent investment amounts for retirement plans are
$250 and $100, respectively. The minimum subsequent investment amounts for
Systematic Investment Programs is $50. Investment professionals may impose
higher or lower minimum investment requirements on their customers than those
imposed by the Fund. Orders for $250,000 or more will be invested in Class A
Shares instead of Class B Shares to maximize your return and minimize the
sales charges and marketing fees. Accounts held in the name of an investment
professional may be treated differently. Class B Shares will automatically
convert into Class A Shares after eight full years from the purchase date.
This conversion is a non-taxable event.

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

3 See "Sales Charge When You Redeem."

SALES CHARGE WHEN YOU PURCHASE

<TABLE>
<CAPTION>
Class A Shares
- -----------------------------------------------------------------------
Sales Charge
as a Percentage Sales Charge
of Public as a Percentage
Purchase Amount Offering Price of NAV
- -----------------------------------------------------------------------
<S> <C> <C>
Less than $50,000 5.50% 5.82%
$50,000 but less
than $100,000 4.50% 4.71%
$100,000 but less
than $250,000 3.75% 3.90%
$250,000 but less
than $500,000 2.50% 2.56%
$500,000 but less
than $1 million 2.00% 2.04%
$1 million or greater 0.00% 0.00%
- -----------------------------------------------------------------------
</TABLE>

1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24months after purchase if an investment
professional received an advance payment on the transaction.

The sales charge at purchase may be reduced or eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales
charge;

. combining concurrent purchases of Shares:

- by you, your spouse, and your children under age 21; or
- of the same share class of two or more Federated Funds (other than money
market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for
more information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;

. by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);

. through wrap accounts or other investment programs where you pay the
investment professional directly for services;

. through investment professionals that receive no portion of the sales
charge;

. as a Federated Life Member (Class A Shares only) and their immediate family
members; or

. Trustee or employee of the Fund, the Adviser, the Distributor, and their
affiliates, and the immediate family members of these individuals.

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

SALES CHARGE WHEN YOU REDEEM

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

<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------------------------------------------------
A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase under certain investment
programs where an investment professional received an advance payment on
the transaction.
- -------------------------------------------------------------------------------

Class B Shares
- -------------------------------------------------------------------------------
Shares Held Up To: CDSC
- -------------------------------------------------------------------------------
<S> <C>
1 year 5.50%
- -------------------------------------------------------------------------------
2 years 4.75%
- -------------------------------------------------------------------------------
3 years 4.00%
- -------------------------------------------------------------------------------
4 years 3.00%
- -------------------------------------------------------------------------------
5 years 2.00%
- -------------------------------------------------------------------------------
6 years 1.00%
- -------------------------------------------------------------------------------
7 years or more 0.00%
- -------------------------------------------------------------------------------

<CAPTION>
Class C Shares
- -------------------------------------------------------------------------------
You will pay a 1% CDSC if you redeem Shares within one year of the purchase
date.
- -------------------------------------------------------------------------------
</TABLE>

You will not be charged a CDSC when redeeming Shares:

. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser
amount;

. that you exchanged into the same share class of another Federated Fund where
the shares were held for the applicable CDSC holding period (other than a
money market fund);

. purchased through investment professionals that did not receive advanced
sales payments; or

. if after you purchase Shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for
not meeting the minimum balance requirement;

. if your redemption is a required retirement plan distribution;

. upon the death of the last surviving shareholder(s) of the account

If your redemption qualifies, you or your investment professional
should notify the Distributor at the time of redemption to eliminate the CDSC.
If the Distributor is not notified, the CDSC will apply.

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

. Shares that are not subject to a CDSC;

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

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

How is the Fund Sold?

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

The Fund's Distributor markets the Shares described in this prospectus to
institutions or individuals, directly or through investment professionals. When
the Distributor receives sales charges and marketing fees, it may pay some or
all of them to investment professionals. The Distributor and its affiliates may
pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares. The Distributor is
a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

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

How to Purchase Shares

You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.

Where the Fund offers more than one Share Class and you do not specify the
Class choice on your New Account Form or form of payment (Federal Reserve wire
or check), you automatically will receive Class A Shares.

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and

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

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

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New Account
Form; and

. Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees the Fund or its transfer agent incurs.

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

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston,MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

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

By Check

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

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

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

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

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

THROUGH AN EXCHANGE

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

BY SYSTEMATIC INVESTMENT PROGRAM

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

BY AUTOMATED CLEARINGHOUSE (ACH)

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

RETIREMENT INVESTMENTS

You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or rollover of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

. through an investment professional if you purchased Shares through an
investment professional; or

. directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

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

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by calling the fund once you have completed
the appropriate authorization form for telephone transactions. If you call
before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time)
you will receive a redemption amount based on that day's NAV.

By Mail

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

You will receive a redemption amount based on the next calculated NAV
after the Fund receives your written request in proper form. Send requests by
mail to:

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

Send requests by private courier or overnight delivery service to:

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

All requests must include:

. Fund Name and Share Class, account number and account registration;

. amount to be redeemed or exchanged;

. signatures of all Shareholders exactly as registered; and

. if exchanging, the Fund Name and Share Class, account number and account
registration into which you are exchanging.

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

Signature Guarantees

Signatures must be guaranteed if:
. your redemption will be sent to an address other than the address of record;

. your redemption will be sent to an address of record that was changed within
the last thirty days;

. a redemption is payable to someone other than the shareholder(s) of record;
or

. if exchanging (transferring) into another fund with a different shareholder
registration.

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

PAYMENT METHODS FOR REDEMPTIONS

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

. an electronic transfer to your account at a financial institution that is an
ACH member; or

. wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

. to allow your purchase to clear;

. during periods of market volatility; or

. when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes.
This withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGES

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

. ensure that the account registrations are identical;

. meet any minimum initial investment requirements; and

. receive a prospectus for the fund into which you wish to exchange.

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

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

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

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

Systematic Withdrawal Program (SWP) on Class B Shares

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

. you redeem 12% or less of your account value in a single year;

. your account is at least one year old;

. you reinvest all dividends and capital gains distributions; and

. your account has at least a $10,000 balance when you establish the SWP. (You
cannot aggregate multiple Class B Share accounts to meet this minimum
balance).

You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem only at
a rate of 1% monthly, 3% quarterly, or 6% semi-annually.

ADDITIONAL CONDITIONS

Telephone Transactions

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

Share Certificates

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

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

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

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays any dividends annually to shareholders. Dividends are
paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own shares in order to
earn a dividend.

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

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

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.

Fund distributions are expected to be both dividends and capital gains.
Redemptions and exchanges are taxable sales. Please consult your tax adviser
regarding your federal, state, and local tax liability.

Who Manages the Fund?

The Board of Trustees governs the Fund. The Board selects and oversees the
Adviser, Federated Management. The Adviser manages the Fund's assets, including
buying and selling portfolio securities. The Adviser's address is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

THE FUND'S PORTFOLIO MANAGERS ARE:

James E. Grefenstette

James E. Grefenstette has been the Fund's portfolio manager since December,
1994. Mr. Grefenstette has been a Portfolio Manager for various Federated Funds
since December 1994. Mr. Grefenstette joined Federated Investors, Inc. or its
predecessor 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.

Salvatore Esposito

Salvatore Esposito has been the Fund's portfolio manager since November 1997.
Mr. Esposito has been a Portfolio Manager of various Federated Funds since
August 1997. Mr. Esposito joined Federated Investors, Inc. or its predecessor 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.

The Adviser and other subsidiaries of Federated advise and/or provide
administrative services to more than 300 mutual funds and private accounts,
which total over $120 billion in assets as of December31, 1997. Federated was
established in 1955 and is one of the largest mutual fund investment managers in
the United States with more than 2,000 employees. Over 4,000 investment
professionals make Federated Funds available to their customers.

The Adviser receives an annual investment advisory fee of 0.75% of the Fund's
average daily net assets. The Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses.

YEAR 2000 READINESS

The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999. The Year 2000 problem may cause systems to process information incorrectly
and could disrupt businesses that rely on computers, like the Fund.

While it is impossible to determine in advance all of the risks to the Fund,
the Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.

The Fund's service providers are making changes to their computer systems to
fix any Year 2000 problems. In addition, they are working to gather information
from third-party providers to determine their Year 2000 readiness.

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase. However, this may be difficult with certain issuers. For example,
funds dealing with foreign service providers or investing in foreign securities,
will have difficulty determining the Year 2000 readiness of those entities. This
is especially true of entities or issuers in emerging markets. The financial
impact of these issues for the Fund is still being determined. There can be no
assurance that potential Year 2000 problems would not have a material adverse
effect on the Fund.

Financial Information

FINANCIAL HIGHLIGHTS

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

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

Financial Highlights--Class A Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 31.54 $ 25.84 $ 26.22 $ 21.28 $ 23.92
Income from Investment Operations:
Net investment income/ (net operating (0.14)/1/ (0.04) 0.04 0.24 0.21
loss)
Net realized and unrealized (1.48) 8.56 5.01 5.64 (2.18)
gain/(loss) on investments
TOTAL FROM INVESTMENT OPERATIONS (1.62) 8.52 5.05 5.88 (1.97)
Less Distributions:
Distributions from net investment income -- (0.00)/2/ (0.04) (0.26) (0.19)
Distributions from net realized gain (6.39) (2.82) (5.39) (0.68) (0.48)
on investment transactions
TOTAL DISTRIBUTIONS (6.39) (2.82) (5.43) (0.94) (0.67)
Net Asset Value, End of Period $ 23.53 $ 31.54 $ 25.84 $ 26.22 $ 21.28
Total Return3 (6.12%) 36.37% 23.16% 29.03% (8.43%)

Ratios to Average Net Assets:
Expenses 1.20% 1.14% 1.13% 1.10% 0.99%
Net investment income/ (net operating (0.54%) (0.14%) 0.15% 1.05% 0.89%
loss)
Expense waiver/reimbursement4 0.00%/2/ 0.10% 0.15% 0.16% --
Supplemental Data:
Net assets, end of period (000 omitted) $510,552 $509,678 $307,382 $249,110 $320,630
Portfolio turnover 119% 146% 89% 125% 59%
</TABLE>

1 Per share numbers have been calculated using the average shares method, which
more appropriately represents the per share data for the period since the use
of the undistributed income method did not accord with the results of
operations.

2 Amounts distributed per share do not round to $0.01.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

Financial Highlights--Class B Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996 1995/1/
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 31.02 $ 25.65 $ 26.23 $21.51
Income from Investment Operations:
Net operating loss (0.34)/2/ (0.10) (0.10) (0.02)
Net realized and unrealized gain/(loss)
on investments (1.41) 8.29 4.91 0.74
TOTAL FROM INVESTMENT OPERATIONS (1.75) 8.19 4.81 0.72
Less Distributions:
Distributions from net realized gain on
investment transactions (6.39) (2.82) (5.39) --
Net Asset Value, End of Period $ 22.88 $ 31.02 $ 25.65 $26.23
Total Return/3/ (6.78%) 35.23% 22.03% 2.82%

Ratios to Average Net Assets:
Expenses 1.96% 1.99% 2.03% 2.04%/4/
Net operating loss (1.34%) (1.04%) (0.79)% (0.66%)/4/
Supplemental Data:
Net assets, end of period (000 omitted) $77,975 $39,588 $10,858 $1,345
Portfolio turnover 119% 146% 89% 125%
</TABLE>

1 Reflects operations for the period from August 16, 1995 (date of initial
public investment) to October 31, 1995.

2 Per share numbers have been calculated using the average shares method, which
more appropriately represents the per share data for the period since the use
of the undistributed income method did not accord with the results of
operations.

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

4 Computed on an annualized basis.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

Financial Highlights--Class C Shares
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996 1995/1/
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 31.16 $25.68 $26.22 $21.51
Income from Investment Operations:
Net operating loss (0.34)/2/ (0.20) (0.05) (0.02)
Net realized and unrealized gain/(loss) on investments (1.41) 8.50 4.90 0.73
TOTAL FROM INVESTMENT OPERATIONS (1.75) 8.30 4.85 0.71
Less Distributions:
Distributions from net realized gain on investment (6.39) (2.82) (5.39) --
transactions
Net Asset Value, End of Period $ 23.02 $31.16 $25.68 $26.22
Total Return3 (6.74%) 35.66% 22.12% 2.78%

Ratios to Average Net Assets:
Expenses 1.94% 1.90% 1.92% 2.05%/4/
Net operating loss (1.34%) (0.91%) (0.72)% (0.71%)/4/
Expense waiver/reimbursement5 0.02% 0.09% 0.12%
Supplemental Data:
Net assets, end of period (000 omitted) $12,654 $5,860 $3,667 $ 57
Portfolio turnover 119% 146% 89% 125%
</TABLE>

1 Reflects operations for the period from August 16, 1995 (date of initial
public investment) to October 31, 1995.

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

4 Computed on an annualized basis.

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

[LOGO OF Federated]
World-Class Investment Manager
SM

Federated
Growth
Strategies
Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

DECEMBER 31, 1998

A Statement of Additional Information (SAI) dated December 31, 1998, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. The
annual report discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the annual report and other information without charge call your
investment professional or the Fund at 1-800- 341-7400.

You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at
http://www.sec.gov. You can call 1-800-SEC-0330 for information on the Public
Reference Room's operations and copying charges.

[LOGO OF Federated]

Federated Growth Strategies Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017
Cusip 314172107
Cusip 314172206
Cusip 314172305

G01228-01 (12/98)

Federated is a registered mark
of Federated Investors, Inc.
1998 (c)Federated Investors, Inc. [RECYCLED LOGO]

Statement of Additional Information December 31, 1998

Federated Growth Strategies Fund

[A Portfolio of Federated Equity Funds]

Class A Shares, Class B Shares, Class C Shares

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Growth Strategies
Fund (Fund), dated December 31, 1998. This SAI incorporates by reference the
Fund's Annual Report. Obtain the prospectus or the Annual Report without
charge by calling 1-800-341-7400.

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

How is the Fund Organized
Securities in Which the Fund Invests
What Do Shares Cost?
How is the Fund Sold?

Exchanging Securities for Shares

Subaccounting Services
Redemption in Kind
Massachusetts Partnership Law
Account and Share Information
Tax Information
Who Manages and Provides Services
to the Fund?
How Does the Fund Measure Performance?
Who is Federated Investors, Inc.?
Financial Information
Investment Ratings

Addresses

[Federated Investors Logo]
Federated Securities Corp., Distributor,
subsidiary of Federated Investors
CUSIP 314172107
CUSIP 314172206
CUSIP 314172305

G01228-02(12/98)

HOW IS THE FUND ORGANIZED?
================================================================================

The Fund is a diversified portfolio of Federated Equity Funds (Trust). The
Trust is an open-end, management investment company that was established under
the laws of the Commonwealth of Massachusetts on April 17, 1984. The Trust may
offer separate series of shares representing interests in separate portfolios of
securities.

The Board of Trustees (the Board) has established three classes of shares of the
Fund, known as Class A Shares, Class B Shares and Class C Shares (Shares). This
SAI relates to all classes of the above-mentioned Shares.

SECURITIES IN WHICH THE FUND INVESTS
================================================================================

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

Equity securities represent a share of the issuer's earnings and assets, after
the issuer pays its liabilities. Generally, issuers have discretion as to the
payment of any dividends or distributions. As a result, investors cannot predict
the income they will receive from equity securities. However, equity securities
offer greater potential for appreciation than many other types of securities,
because their value increases directly with the value of the issuer's business.
The following describes the types of equity securities in which the Fund
invests.

Common Stocks are the most prevalent type of equity security. Common
stockholders receive the residual value of the issuer's earnings and assets
after the issuer pays its creditors and any preferred stockholders. As a
result, changes in an issuer's earnings directly influence the value of its
common stock.

Preferred stocks have the right to receive specified dividends or
distributions before the payment of dividends or distributions on common
stock. Some preferred stocks also participate in dividends and distributions
paid on common stock. Preferred stocks may also permit the issuer to redeem
the stock. The Fund may treat such redeemable preferred stock as a fixed
income security.

Warrants give the Fund the option to buy the issuer's stock or other equity
securities at a specified price. The Fund may buy the designated shares by
paying the exercise price before the warrant expires. Warrants may become
worthless if the price of the stock does not rise above the exercise price by
the expiration date. Rights are the same as warrants, except they are
typically issued to existing stockholders.

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

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

The following describes the types of fixed income securities in which the Fund
invests.

Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt security. The Credit Risks of corporate debt securities vary
widely among issuers.

Demand instruments are corporate debt securities that the issuer must repay
upon demand. Other demand instruments require a third party, such as a dealer
or bank, to repurchase the security for its face value upon demand. The Fund
treats demand instruments as short-term securities, even though their stated
maturity may extend beyond one year.Insurance contracts include guaranteed
investment contracts, funding agreements and annuities.

Convertible securities are fixed income securities that the Fund has the option
to exchange for equity securities at a specified conversion price. The option
allows the Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. For example, the Fund may hold fixed
income securities convertible into shares of common stock at a conversion price
of $10 per share. If the market value of the shares reached $12, the Fund could
realize an additional $2 per share by converting its fixed income securities.

Convertible securities have lower yields than comparable fixed income securities
to compensate for the value of the conversion option. In addition, the
conversion price exceeds the market value of the underlying equity securities at
the time a convertible security is issued. Thus, convertible securities may
provide lower returns than non-convertible fixed income securities or equity
securities depending upon changes in the price of the underlying equity
securities. However, convertible securities permit the Fund to realize some of
the potential appreciation of the underlying equity securities with less risk of
losing its initial investment.

The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.

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

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

For example, a Fund could close out an open purchase (or sale) contract by
entering into an offsetting sale (or purchase) contract for the same amount of
the same assets and the same delivery date. If the offsetting purchase price is
less than the original sale price, the Fund realizes a gain; if it is more, the
Fund realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Fund realizes a gain; if it is less, the Fund
realizes a loss. The Fund might not always be able to close out a position when
it wants to; if this happens, the Fund will be required to keep the contract
open (even if it is losing money on the contract ), and to make any payments
required under the contract (even if it has to sell portfolio securities at
unfavorable prices to do so), and the Fund could incur substantial losses.
Inability to close out a contract could also harm the Fund by preventing it from
disposing of or trading any assets it has been using to secure its obligations
under the contract.

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

Depending upon how they are used and the relationships between the market value
of a derivative contract and the underlying asset, derivative contracts may
increase or decrease the Fund's exposure to Market Risk and Currency Risk, and
may also expose the Fund to Liquidity Risk and Leverage Risk. OTC contracts also
expose the Fund to Credit Risk in the event that a counterparty defaults on the
contract.

The Fund may trade in the following types of derivative contracts.

Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a price, date,
and time specified when the contract is made. Futures contracts traded OTC are
frequently referred to as "forward contracts." Entering into a contract to buy
is commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling
a contract or holding a short position. Futures are considered to be commodity
contracts.

The Fund may buy and sell financial futures and futures on indices.

Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period of time. A
call option gives the holder (buyer) the right to purchase the underlying
asset from the seller (writer) of the option. A put option gives the holder
the right to sell the underlying asset to the writer of the option. The writer
of the option receives a payment, or "premium," from the buyer, which the
writer keeps regardless of whether the buyer uses (or exercises) the option.

The Fund may:

Buy put options on portfolio securities and futures in anticipation of a
decrease in the value of the underlying asset.

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

When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.

Foreign Securities are securities of issuers based outside the U.S. They are
primarily denominated in foreign currencies and traded outside of the U.S. In
addition to the risks normally associated with U.S. securities of the same type,
Foreign Securities are subject to Country Risk and Currency Risk. [Trading in
certain foreign markets is also subject to Liquidity Risk.]

Depositary Receipts represent interests in underlying securities issued by a
foreign company, but traded in another market than the underlying security.
The foreign securities underlying American Depositary Receipts (ADRs) are
traded in the U.S. ADRs provide a way to buy shares of foreign-based companies
in the U.S. rather than in overseas markets. ADRs are also traded in U.S.
dollars, eliminating the need for foreign exchange transactions. The foreign
securities underlying European Depositary Receipts (EDRs), Global Depositary
Receipts (GDRs), and International Depositary Receipts (IDRs), are traded
globally or outside the U.S. Depositary Receipts involve many of the same
risks of investing directly in foreign securities, including Country Risk and
Currency Risk.

Foreign Exchange Contracts. In order to convert U.S. dollars into the currency
needed to buy a foreign security, or to convert foreign currency received from
the sale of a foreign security into U.S. dollars, the Fund may enter into
"spot" currency trades. The Fund may also enter into derivative contracts in
which a foreign currency is an underlying asset. Use of these derivative
contracts may increase or decrease the Fund's exposure to Currency Risk.

Foreign Government Securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the International
Bank for Reconstruction and Development (the World Bank), the Asian
Development Bank, the European Investment Bank and the Inter-American
Development Bank.

Foreign government securities also include fixed income securities of "quasi-
governmental agencies" which are either issued by entities that are owned by a
national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit
and general taxing powers. Further, foreign government securities include
mortgage- related securities issued or guaranteed by national, state or
provincial governmental instrumentalities, including quasi-governmental
agencies.

Special Transactions

Repurchase Agreements are transactions in which a Fund buys a security from a
dealer or bank and agrees to sell the security back at a mutually agreed upon
time and price. The repurchase price exceeds the sale price, reflecting an
agreed upon interest rate effective for the period the Fund owns the security
subject to repurchase. The agreed upon interest rate is unrelated to the
interest rate on the underlying security. The Funds 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

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

Repurchase Agreements are subject to Credit Risk.

When Issued Transactions are arrangements in which a Fund purchases securities
for a set price, with payment and delivery scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. The Fund records the
transaction when it agrees to purchase the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions, and the market values of the
securities purchased may vary from the purchase prices. Therefore, when issued
transactions create Market Risk for the Fund. When issued transactions also
involve Credit Risk in the event of a counterparty default.

Securities Lending. A Fund may lend portfolio securities to firms that the
Adviser has determined are creditworthy.. In return,, it will receive either
cash or liquid securities as collateral from the borrower. A Fund will
reinvest cash collateral in securities that qualify as an otherwise acceptable
investment for the Fund. However, the Fund must pay interest to the borrower
for the use of any cash collateral. If the market value of the loaned
securities increases, the borrower must furnish additional collateral. While
portfolio securities are on loan, the borrower pays the Fund the equivalent of
any dividends or interest received on them. Loans are subject to termination
at the option of the Fund or the borrower. The Fund will not have the right to
vote on securities while they are being lent, but it will terminate a loan in
anticipation of any important vote. 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 collateral to a securities lending agent or
broker.

Securities lending activities are subject to Market Risk and Credit Risk.

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

EQUITY SECURITIES INVESTMENT RISKS

Leverage Risk
- -------------

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

FIXED INCOME SECURITIES INVESTMENT RISKS

Bond Market Risk
- ----------------

. Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

. Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity of a
fixed income security to changes in interest rates.

Credit Risk
- -----------

. Credit risk is the possibility that an issuer will default (the issuer fails
to repay interest and principal when due). If an issuer defaults, the Fund
will lose money.

. Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Services. Fixed income securities
receive different credit ratings depending on the rating service's assessment
of the likelihood of default by the issuer. The lower the credit rating, the
greater the credit risk. In the case of unrated securities, the Fund must rely
entirely upon the Adviser's credit assessment.

. Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of the security
and the yield of a U.S. Treasury security with a comparable maturity (the
"spread") measures the additional interest received for taking risk. Spreads
may increase generally in response to adverse economic or market conditions. A
security's spread may also increase if the security's rating is lowered, or
the security is perceived to have an increased credit risk. An increase in the
spread will cause the price of the security to decline.

. Credit risk includes the possibility that a party to a transaction involving
the Fund will fail to meet its obligations. This could cause the Fund to lose
the benefit of the transaction or disrupt management of the Fund's portfolio.

Call Risk
- ---------

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

. If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

Liquidity Risks
- ---------------

. Fixed income securities that have noninvestment grade credit ratings, have not
been rated or that are not widely held may trade less frequently than more
widely held securities. This limits trading opportunities, making it more
difficult to sell or buy the security at a favorable price or time. In
response, the Fund may have to lower the price, sell other securities, or give
up an investment opportunity, any of which could have a negative effect on its
performance. Infrequent trading may also lead to greater price volatility.

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

. OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

Risks Associated with Noninvestment Grade Securities
- ----------------------------------------------------

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

Leverage Risk
- -------------

. Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the Fund's risk of loss and potential for gain.

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.

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

Investing in Illiquid Securities

The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for settlement in
more than seven days after notice and certain restricted securities not
determined by the Trustees to be liquid.

Pledging Assets

The Fund will not mortgage, pledge, or hypothecate any assets, except to secure
permitted borrowings. In those cases, it may pledge assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 10% of the value of
total assets at the time of the borrowing.

Writing Covered Call Options

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

Acquiring Securities

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

Investing in Restricted and Illiquid Securities

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

For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."

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

DETERMINING MARKET VALUE OF SECURITIES

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

. for equity securities, according to the last sale price in the market in which
they are primarily traded (either a national securities exchange or the over-
the-counter market), if available;

. in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices;

. for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;

. for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, except that short-term
obligations with remaining maturities of less than 60 days at the time of
purchase may be valued at amortized cost or at fair market value as determined
in good faith by the Board; and

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

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

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

Trading in Foreign Securities. Trading in foreign securities may be completed
at times which vary from the closing of the New York Stock Exchange (NYSE). In
computing its NAV, the Fund values foreign securities at the latest closing
price on the exchange on which they are traded immediately prior to the closing
of the NYSE. Certain foreign currency exchange rates may also be determined at
the latest rate prior to the closing of the NYSE. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE. If
such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by the
Fund's Board, although the actual calculation may be done by others.

WHAT DO SHARES COST?
================================================================================

The Fund's net asset value (NAV) per Share fluctuates and is based on the market
value of all securities and other assets of the Fund. The NAV for each class of
Shares may differ due to the variance in daily net income realized by each
class. Such variance will reflect only accrued net income to which the
shareholders of a particular class are entitled.

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

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

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

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

Concurrent Purchases. You can combine concurrent purchases of the same Share
class of two or more Federated Funds in calculating the applicable sales charge.

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

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

Purchases by Affiliates of the Fund. The following individuals and their
immediate family members may buy Shares at NAV without any sales charge because
there are nominal sales efforts associated with their purchases:

. the Trustees, employees, and sales representatives of the Fund, the Adviser,
the Distributor and their affiliates;

. Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc. (Federated)
on December 31, 1997;

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

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

FEDERATED LIFE MEMBERS

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

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

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

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

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

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

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

. representing minimum required distributions from an Individual Retirement
Account or other retirement plan in Federated Funds to a shareholder who has
attained the age of 70-1/2;

. which are involuntary redemptions processed by the Fund because the accounts
that do not meet the minimum balance requirements;

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

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

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

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

HOW IS THE FUND SOLD?
================================================================================

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.

FRONT-END SALES CHARGE REALLOWANCES

The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professional for sales and/or administrative services. Any payments
to investment professional in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.

RULE 12B-1 PLAN

As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professional such as banks,
broker/dealers, trust departments of bank, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. Also, the
Fund's service providers that receive asset-based fees also benefit from stable
or increasing Fund assets.

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

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

Federated and its subsidiaries may benefit from arrangements where the Rule 12b-
1 Plan fees related to Class B Shares may be paid to third-parties who have
advanced commissions to investment professionals.

SHAREHOLDER SERVICES

The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated, for providing shareholder services and maintaining shareholder
accounts. Federated Shareholder Services Company may select others to perform
these services for their customers and may pay them fees.

SUPPLEMENTAL PAYMENTS

Investment professionals may be paid fees out of the assets of the Distributor
and/or Federated Shareholder Services Company (but not out of Fund assets). The
Distributor and/or Federated Shareholder Services Company may be reimbursed by
the Adviser or its affiliates.

Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professional may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to informational meetings about the Fund or other special events at
recreational-type facilities, or items of material value. These payments will
be based upon the amount of Shares the investment professional sells or may sell
and/or upon the type and nature of sales or marketing support furnished by the
investment professional.

When an investment professional's customer purchases shares, the investment
professional may receive:

. an amount equal to 0.50% of the NAV of Class A Shares under certain qualified
retirement plans as approved by the Distributor. (Such payments are subject to
a reclaim from the investment professional should the assets leave the program
within 12 months after purchase.)

. an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and C
Shares.

In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.

Class A Shares. Investment professionals purchasing Class A Shares for their
customers are eligible to receive an advance payment from the Distributor based
on the following breakpoints:

Advance Payments
as a Percentage of
Amount Public Offering Price
------ ---------------------
First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%

For accounts with assets over $1 million, the dealer advance payments resets
annually to the first breakpoint on the anniversary of the first purchase.

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

A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase. The CDSC does not apply
under certain investment programs where the investment professional does not
receive an advance payment on the transaction including, but not limited to,
trust accounts and wrap programs where the investor pays an account level fee
for investment management.

EXCHANGING SECURITIES FOR SHARES
================================================================================

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

SUBACCOUNTING SERVICES
================================================================================

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

REDEMPTION IN KIND
================================================================================

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

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

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

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

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.

In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust 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.

ACCOUNT AND SHARE 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 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.

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

As of December 8, 1998, the following shareholder owned of record, beneficially,
or both, 5% or more of the outstanding Class C Shares of the Fund: MLPF&S for
the sole benefit of its customers, Jacksonville, FL, owned approximately 29,472
shares (5.25%).

TAX INFORMATION
================================================================================

FEDERAL INCOME TAX

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

The Fund will be treated as a single, separate entity for federal income tax
purposes so that income earned and capital gains and losses realized by the
Trust's other portfolios will be separate from those realized by the Fund.

FOREIGN INVESTMENTS

If the Fund purchases foreign securities, their investment income may be subject
to foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.

Distributions from a Fund may be based on estimates of book income for the year.
Book income generally consists solely of the coupon income generated by the
portfolio, whereas tax basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of fixed
income securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations cannot be anticipated, a portion of distributions to shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.

If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon disposition of PFIC investments.

If more than 50% of the value of the Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of the Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
================================================================================

BOARD OF TRUSTEES

The Board is responsible for managing the Trust's business affairs and for
exercising all the Trust's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes the following
data: name, address, birthdate, present position(s) held with the Trust,
principal occupations for the past five years and other notable positions held,
total compensation received as a Trustee from the Trust for its most recent
fiscal year, and the total compensation received from the Federated Fund Complex
for the most recent calendar year. The Trust is comprised of seven funds and
the Federated Fund Complex is comprised of 56 investment companies, whose
investment advisers are affiliated with the Fund's Adviser.

As of December 8, 1998, the Fund's Board and Officers as a group owned less than
1% of the Fund's outstanding Class A, B, C Shares.

An asterisk (*) denotes a Trustee who is deemed to be an interested person as
defined in the Investment Company Act of 1940. The following symbol (#) denotes
a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.

<TABLE>
<CAPTION>
Total
Compensation
Name Aggregate From Trust
Birthdate Compensation and Fund
Address Principal Occupations From Trust Complex
Position With Trust for Past 5 Years
- --------------------------------- ---------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
John F. Donahue*## Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the
Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and
Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and 56 other
1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment
Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies in
CHAIRMAN AND TRUSTEE Ltd. the Fund
Complex

Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $637.36 $111,222
Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: for the
15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trust and 56
Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. other
TRUSTEE investment
companies in
the Fund
Complex

John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $701.20 $122,362 for
Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust and
Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private 56 other
John R. Wood Associates, real estate ventures in Southwest Florida; formerly: President, investment
Inc. Realtors Naples Property Management, Inc. and Northgate Village Development companies in
3255 Tamiami Trial North Corporation. the Fund
Naples, FL Complex
TRUSTEE

Nicholas Constantakis** Director or Trustee of the Federated Fund Complex; formerly: $485.32 $0 for the
Birthdate: September 3, 1939 Partner, Andersen Worldwide SC. Trust and
175 Woodshire Drive 36 other
Pittsburgh, PA investment
TRUSTEE companies in
the Fund
Complex

William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $701.20 $122,362 for
Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust and
One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; 56 other
Pittsburgh, PA Director, Ryan Homes, Inc. investment
TRUSTEE companies in
Retired: Director, United Refinery; Director, Forbes Fund; Chairman, the Fund
Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex

James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $701.20 $122,362 for
Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust and
571 Hayward Mill Road 56 other
Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment
TRUSTEE Administrator, United States Securities and Exchange Commission. companies in
the Fund
Complex

Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $637.36 $111,222 for
Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust and
3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and 56 other
Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment
Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies in
TRUSTEE the Fund
Complex

Edward L. Flaherty, Jr., Esq.# Director or Trustee of the Federated Fund Complex; Attorney, of $701.20 $122,362 for
Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust and
Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., 56 other
205 Ross Street Western Region; Partner, Meyer and Flaherty. investment
Pittsburgh, PA companies in
TRUSTEE the Fund
Complex

Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $637.36 $111,222 for
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust and
One Royal Palm Way President, State Street Bank and Trust Company and State Street 56 other
100 Royal Palm Way Corporation. investment
Palm Beach, FL companies in
TRUSTEE Retired: Director, VISA USA and VISA International; Chairman and the Fund
Director, Massachusetts Bankers Association; Director, Depository Complex
Trust Corporation.

John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $637.36 $111,222 for
Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust and
President, Duquesne University 56 other
Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment
TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies in
Law. the Fund
Complex

Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $637.36 $111,222 for
Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust and
1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International 56 other
University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment
Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies in
TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National the Fund
Advisory Council for Environmental Policy and Technology, Federal Complex
Emergency Management Advisory Board and Czech Management Center,
Prague.

Retired: Professor, United States Military Academy; Professor,
United States Air Force Academy.

Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $637.36 $111,222 for
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust and
4905 Bayard Street 56 other
Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment
TRUSTEE business owner. companies in
the Fund
Complex

Glen R. Johnson Trustee, Federated Investors, Inc.; staff member, Federated $ 0 $0 for the
Birthdate: May 2, 1929 Securities Corp. Trust and 8
Federated Investors Tower other
1001 Liberty Avenue investment
Pittsburgh, PA companies in
PRESIDENT the Fund
Complex

J. Christopher Donahue## President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the
Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and 18
Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; other
1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment
Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies in
EXECUTIVE VICE PRESIDENT and Federated Global Research Corp.; President, Passport Research, the Fund
Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex
Federated Services Company.

Edward C. Gonzales Trustee or Director of some of the Funds in the Federated Fund $ 0 $0 for the
Birthdate: October 22, 1930 Complex; President, Executive Vice President and Treasurer of some Trust and 1
Federated Investors Tower of the Funds in the Federated Fund Complex; Vice Chairman, Federated other
1001 Liberty Avenue Investors, Inc.; Vice President, Federated Advisers, Federated investment
Pittsburgh, PA Management, Federated Research, Federated Research Corp., Federated company in
EXECUTIVE VICE PRESIDENT Global Research Corp. and Passport Research, Ltd.; Executive Vice the Fund
President and Director, Federated Securities Corp.; Trustee, Complex
Federated Shareholder Services Company.

John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the
Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and 56
Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated other
1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment
Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in
EXECUTIVE VICE PRESIDENT AND Services Company; Director, Federated Securities Corp. the Fund
SECRETARY Complex

Richard J. Thomas Treasurer of the Federated Fund Complex; Vice President - Funds $ 0 $0 for the
Birthdate: June 17, 1954 Financial Services Division, Federated Investors, Inc.; Formerly: Trust and
Federated Investors Tower various management positions within Funds Financial Services 56 other
1001 Liberty Avenue Division of Federated Investors, Inc. investment
Pittsburgh, PA companies in
TREASURER the Fund
Complex

Richard B. Fisher President or Vice President of some of the Funds in the Federated $ 0 $0 for the
Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and 6
Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated other
1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment
Pittsburgh, PA companies in
VICE PRESIDENT the Fund
Complex

J. Thomas Madden Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the
Birthdate: October 22, 1945 Federated Fund Complex; Executive Vice President, Federated Trust and 12
Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated other
1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment
Pittsburgh, PA Research, Ltd.; Vice President, Federated Investors, Inc.; Formerly: companies in
CHIEF INVESTMENT OFFICER Executive Vice President and Senior Vice President, Federated the Fund
Investment Counseling Institutional Portfolio Management Services Complex
Division; Senior Vice President, Federated Research Corp., Federated
Advisers, Federated Management, Federated Research, and Passport
Research, Ltd.

James E. Grefenstette Vice President, Federated Investment Counseling, Federated Advisers, $ 0 $0 for the
Birthdate: November 7, 1962 Federated Global Research Corp., Federated Management, Federated Trust and no
Federated Investors Tower Research, Federated Research Corp. and Passport Research, Ltd.; other
1001 Liberty Avenue Formerly: Assistant Vice President and Investment Analyst, investment
Pittsburgh, PA Federated Advisers, Federated Management, Federated Research, and companies in
SENIOR PORTFOLIO MANAGER/VICE Federated Research Corp. ; and Assistant Vice President, Federated the Fund
PRESIDENT Global Research Corp. Complex

Aash M. Shah Vice President, Federated Investment Counseling, Federated Advisers, $ 0 $0 for the
Birthdate: December 16, 1964 Federated Global Research Corp., Federated Management, Federated Trust and no
Federated Investors Tower Research, Federated Research Corp. and Passport Research, Ltd.; other
1001 Liberty Avenue Formerly: Vice President, Federated Investment Counseling investment
Pittsburgh, PA Institutional Portfolio Management Services Division; Assistant Vice companies in
SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Advisers, Federated the Fund
PRESIDENT Management, Federated Research, Federated Global Research Corp., and Complex
Federated Research Corp.
</TABLE>

## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President
of the Trust.

** Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
are reported as of the end of the last calendar year.

INVESTMENT ADVISER

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

The Adviser is a wholly owned subsidiary of Federated.

The Adviser shall not be liable to the Trust, the Fund, or any Fund shareholder
for any losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.

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

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.

Research Services. Research services 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 may be used by the Adviser or by affiliates of
Federated in advising other accounts. To the extent that receipt of these
services may replace 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 those 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.

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

ADMINISTRATOR

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

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

.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% 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 voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.

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

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

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

INDEPENDENT PUBLIC ACCOUNTANTS

Ernst & Young LLP is the independent public accountant for the Fund.

FEES PAID BY THE FUND FOR SERVICES

For the Year ended
October 31,

1998 1997 1996

Advisory Fee Earned....... $4,546,048 $3,438,932 $2,042,918
Advisory Fee Reduction.... $ 0 $ 0 $ 0
Brokerage Commissions..... $1,288,654 $1,166,954 $ 532,694
Administrative Fee........ $ 457,074 $ 346,201 $ 205,948
12b-1 Fee.................
Class A Shares........ $ 0
Class B Shares........ $ 490,096
Class C Shares........ $ 75,712
Shareholder Services Fee..
Class A Shares........ $1,309,942
Class B Shares........ $ 163,366
Class C Shares........ $ 23,069

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

If the Fund's expenses are capped at a particular level, the cap does not
include reimbursement to the Fund of any expenses incurred by shareholders who
use the transfer agent's subaccounting facilities.

HOW DOES THE FUND MEASURE PERFORMANCE?
================================================================================

The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.

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

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

Average Annual Total Returns and Yield

Total returns given for the one-, five-, ten-year and since inception periods
ended October 31, 1998.

Yield given for the 30-day period ended October 31, 1998.

30-Day Period 1 Year 5 Years 10 Years Since
Inception
on August
23, 1984
- --------------------------------------------------------------------------------
Class A Shares
- --------------------------------------------------------------------------------
Total Return NA (11.30)% 11.98% 12.88% NA
Yield 0.00% NA NA NA NA
- --------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years 10 Years Since
Inception
on August
15, 1995
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Total Return NA (10.83)% NA NA 14.72%
Yield 0.00% NA NA NA NA
- --------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years 10 Years Since
Inception
on August
15, 1995
- --------------------------------------------------------------------------------
Class C Shares
- --------------------------------------------------------------------------------
Total Return NA (7.48)% NA NA 15.51%
Yield 0.00% NA NA NA NA
- --------------------------------------------------------------------------------

TOTAL RETURN

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

The average annual total return for Shares is the average compounded rate of
return for a given period that would equate a $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 NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.

YIELD

The yield of Shares is calculated by dividing: (i) the net investment income
per Share earned by the Shares over a thirty-day period; by (ii) the maximum
offering price per Share on the last day of the period. This number is then
annualized using semi-annual compounding. This means that the amount of income
generated during the 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 Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

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

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

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

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

You may use financial publications and/or indices to obtain a more complete view
of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:

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.

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.

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.

Dow Jones Industrial Average (DJIA). Represents share prices of selected blue-
chip industrial corporations. The DJIA indicates daily changes in the average
price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for the
stock market as a whole.

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.

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.

Morningstar, Inc. An independent rating service, is the publisher of the bi-
weekly Mutual Fund Values, which 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.

Standard & Poor's Daily Stock Price Index of 500 Common Stocks (S&P 500).
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 S & P 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.

Stategic 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.

WHO IS FEDERATED INVESTORS, INC.?
================================================================================

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

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

FEDERATED FUNDS OVERVIEW

Municipal funds. In the municipal sector, as of December 31, 1997, Federated
managed 11 bond funds with approximately $2.1 billion in assets and 22 money
market funds with approximately $10.9 billion in total assets. In 1976,
Federated introduced one of the first municipal bond mutual funds in the
industry and is now one of the largest institutional buyers of municipal
securities. The Funds may quote statistics from organizations including The Tax
Foundation and the National Taxpayers Union regarding the tax obligations of
Americans.

Equity funds. In the equity sector, Federated has more than 27 years'
experience. As of

December 31, 1997, Federated managed 29 equity funds totaling approximately
$11.7 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

Corporate bond funds. In the corporate bond sector, as of December 31, 1997,
Federated managed 11 money market funds and 16 bond funds with assets
approximating $17.1 billion and $5.6 billion, respectively. Federated's
corporate bond decision making--based on intensive, diligent credit analysis--
is backed by over 22 years of experience in the corporate bond sector. In 1972,
Federated introduced one of the first high-yield bond funds in the industry. In
1983, Federated was one of the first fund managers to participate in the asset-
backed securities market, a market totaling more than $200 billion.

Government funds. In the government sector, as of December 31, 1997, Federated
manages 9 mortgage-backed, 6 government/ agency and 18 government money market
mutual funds, with assets approximating $5.9 billion, $1.5 billion and $35
billion, respectively. Federated trades approximately $400 million in U.S.
government and mortgage-backed securities daily and places approximately $23
billion in repurchase agreements each day. Federated introduced the first U.S.
government fund to invest in U.S. government bond securities in 1969. Federated
has been a major force in the short- and intermediate-term government markets
since 1982 and currently manages approximately $36 billion in government funds
within these maturity ranges.

Money market funds. In the money market sector, Federated gained prominence in
the mutual fund industry in 1974 with the creation of the first institutional
money market fund. Simultaneously, the company pioneered the use of the
amortized cost method of accounting for valuing shares of money market funds, a
principal means used by money managers today to value money market fund shares.
Other innovations include the first institutional tax-free money market fund.
As of December 31, 1997, Federated managed more than $63.1 billion in assets
across 51 money market funds, including 18 government, 11 prime and 22
municipal with assets approximating $35 billion, $17.1 billion and $10.9
billion, respectively.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -

William D. Dawson, III; and global equities and fixed income - Henry A.
Frantzen. The Chief Investment Officers are Executive Vice Presidents of the
Federated advisory companies.

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 $4 trillion to the more than
6,700 funds available, according to the Investment Company Institute.

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

FEDERATED CLIENTS OVERVIEW

Institutional Clients. Federated meets the needs of approximately 900
institutional clients nationwide by managing and servicing separate accounts and
mutual funds for a variety of purposes, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisers. The marketing effort to these institutional clients is headed by
John B. Fisher, President, Institutional Sales Division, Federated Securities
Corp.

Bank Marketing. Other institutional clients include more than 1,600 banks and
trust organizations. Virtually all of the trust divisions of the top 100 bank
holding companies use Federated Funds in their clients' portfolios. 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 country--
supported by more wholesalers than any other mutual fund distributor.
Federated's service to financial professionals and institutions has earned it
high ratings in several surveys performed by DALBAR, Inc. DALBAR is recognized
as the industry benchmark for service quality measurement. The marketing effort
to these firms is headed by James F. Getz, President, Broker/Dealer Sales
Division, Federated Securities Corp.

FINANCIAL INFORMATION
================================================================================

The Financial Statements for the Fund for the fiscal year ended October 31, 1998
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Growth Strategies Fund dated October 31, 1998.

INVESTMENT RATINGS
================================================================================

Standard and Poor's Long-Term Debt Rating Definitions

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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.

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 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 IBCA, 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 imminent default in payment of interest or principal.

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-1 (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 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 IBCA, 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.

ADDRESSES
================================================================================

Federated Growth Strategies Fund
Class A, Class B, Class C
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

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

Distributor
Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

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

Investment Adviser
Federated Management Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

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

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

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

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

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

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

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

Federated Small Cap Strategies Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking capital appreciation by investing primarily in equity
securities of small-cap companies.

CONTENTS

Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which
the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 5
What do Shares Cost? 6
How is the Fund Sold? 9
How to Purchase Shares 9
How to Redeem and Exchange Shares 11
Account and Share Information 13
Who Manages the Fund? 14
Financial Information 15

DECEMBER 31, 1998

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide capital appreciation. While there
is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the strategies and policies described in this
prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the S&P 600 Small Cap Index. The Adviser invests in
companies that offer growth prospects or in companies whose stock is
undervalued.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

The value of equity securities in the Fund's portfolio will go up and down.
These fluctuations could be a sustained trend or a drastic movement. The Fund's
portfolio will reflect changes in prices of individual portfolio stocks or
general changes in stock valuations. Consequently, the Fund's share price may
decline and you could lose money. Other risks of investing in the Fund include:
Liquidity Risks, Risks Related to Company Size, Sector Risk, and Risk of Foreign
Investing. The Shares offered by this prospectus are not deposits or obligations
of any bank, are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other government agency.

Risk/Return Bar Chart and Table

[The graphic presentation displayed here consists of a bar chart representing
the annual total returns of Class B Shares of Federated Small Cap Strategies
Fund as of the calendar year-end for each of two years.

The `y' axis reflects the "% Total Return" beginning with "0" and increasing in
increments of 7 up to 35.

The `x' axis represents calculation periods for the last two calendar years of
the Trust, beginning with the earliest year. The light gray shaded chart
features two distinct vertical bars, each shaded in charcoal, and each visually
representing by height the total return percentages for the calendar year stated
directly at its base. The calculated total return percentages for the Class B
Shares of Federated Small Cap Strategies Fund, stated directly at the top of
each respective bar for the calendar years 1996 and 1997, are 34.15% and
13.40%.]

The bar chart shows the variability of the Fund's Class B Shares total returns
on a calendar year- end basis.

The Fund's Class B Shares are sold subject to a contingent deferred sales charge
(load). The impact of the contingent deferred sales charges are not reflected in
the total returns above, and if these amounts were reflected, returns would be
less than those shown.

The Fund's Class B Shares total return from January1, 1998 to September 30, 1998
was (19.18%).

Within the period shown in the chart, the Fund's Class B Shares highest
quarterly return was 22.19% (quarter ended September30, 1997). Its lowest
quarterly return was (11.35%) (quarter ended December 31, 1997).

Average Annual Total Return
Average Annual Return for the Fund's Class A, Class B, and Class C Shares,
compared to the Russell 2000 Index (RUS2).

<TABLE>
<CAPTION>
Calendar Year End Class A Class B Class C RUS2
<S> <C> <C> <C> <C>
Life of Fund/1/ 28.21% 29.36% 30.64% 21.15%
1 Year 7.88% 7.93% 12.32% 22.36%
</TABLE>

1 The Fund's Class A, Class B, and Class C Shares start of performance date was
November 1, 1995. The table shows the Fund's Class A, Class B, and Class C
Shares average annual total returns compared to the RUS2, a broad- based
market index.

What are the Fund's Fees and Expenses?

FEDERATED SMALL CAP STRATEGIES FUND

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

Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price
or redemption proceeds, as applicable) 0.00% 5.50% 1.00%

Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other
Distributions) (as a percentage of offering price) None None None

Redemption Fee (as a percentage of amount redeemed, if applicable) None None None

Exchange Fee None None None

/1/ Although not contractually obligated to do so, the adviser waived certain
amounts. These are shown below along with the net expenses the Fund
actually paid for the fiscal year ended October 31, 1998.

<TABLE>
<S> <C> <C> <C>
Waiver of Fund Expenses 0.32% 0.07% 0.07%

Total Actual Annual Fund Operating Expenses (after waivers) 1.28% 2.03% 2.03%
</TABLE>

/2/ The adviser has voluntarily waived a portion of the management fee. The
adviser can terminate this voluntary waiver at any time. The management fee
paid by the Fund (after the voluntary waiver) was 0.68% for the year ended
October 31, 1998.

/3/ Class A Shares did not pay or accrue the distribution (12b-1) fee during
the year ended October 31, 1998. Class A Shares has no present intention of
paying or accruing the distribution (12b-1) fee during the year ended
October 31, 1999.

/4/ Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.

EXAMPLE

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

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

<TABLE>
<CAPTION>
Share Class 1 Year 3 Years 5 Years 10 Years
Class A
<S> <C> <C> <C> <C>
Expenses assuming $704 $1,027 $1,373 $2,346
redemption
Expenses assuming $704 $1,027 $1,373 $2,346
no redemption
Class B
Expenses assuming $763 $1,058 $1,329 $2,304
redemption
Expenses assuming $213 $ 658 $1,129 $2,304
no redemption
Class C
Expenses assuming $313 $ 658 $1,129 $2,431
redemption
Expenses assuming $213 $ 658 $1,129 $2,431
no redemption
</TABLE>

What are the Fund's Investment Strategies?

The Fund pursues its investment objective by investing at least 65% of its
assets in equity securities of companies that fall within the market
capitalization range of the S&P 600 Small Cap Index (Index). As of October 21,
1998 this range was $18.5 million to $3.2 billion. Market capitalization is
determined by multiplying the number of outstanding shares by the current market
price per share.

The Adviser invests in companies that offer growth prospects or in companies
whose stock is undervalued. Using its own quantitative process, the Adviser
rates the future performance potential of companies. The Adviser evaluates each
company's earnings quality in light of their current valuation to narrow the
list of attractive companies. The Adviser then evaluates product positioning,
management quality and sustainability of current growth trends of those
companies. Using this type of fundamental analysis, the Adviser selects the most
promising companies for the Fund's portfolio.

The Fund may also seek capital appreciation by buying securities in initial
public offerings. The Fund will participate in such offerings without regard to
the issuer's market capitalization. The Adviser may select initial public
offerings based on its fundamental analysis of the issuer.

The Fund may attempt to manage market risk by buying and selling financial
futures and options. This may include the purchase of index futures contracts as
a substitute for direct investments in stocks. It may also include the purchase
and sale of options to protect against general declines in small capitalization
stocks economically.

Portfolio Turnover

Temporary Defensive Investments

What are the Principal Securities in Which the fund invests?

Common Stocks

American Depositary Receipts

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The Fund's investment adviser attempts to manage market risk of investing in
individual securities by limiting the amount the Fund invests in each stock.

LIQUIDITY RISKS

Fund may have to lower the price, sell other securities, or give up an
investment opportunity, any of which could have a negative effect on its
performance. Infrequent trading may also lead to greater price volatility.

RISKS RELATED TO COMPANY SIZE

SECTOR RISK

RISK OF FOREIGN INVESTING

Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.

What do Shares Cost?

NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern
time) each day the NYSE is open.

The Fund's current NAV and public offering price may be found in the mutual
fund section of local newspapers under "Federated" and the appropriate class
designation listing.

<TABLE>
<CAPTION>
Shares Offered Minimum Maximum
Initial/ Sales Charge
Subsequent
Investment
Amounts/1/
Front-End Contingent
Sales Deferred
Charge/2/ Sales
Charge/3/
<S> <C> <C> <C>
Class A $1500/$100 5.50% 0.00%
Class B $1500/$100 None 5.50%
Class C $1500/$100 None 1.00%
</TABLE>

1 The minimum initial and subsequent investment amounts for retirement plans
are $250 and $100, respectively. The minimum subsequent investment amounts
for Systematic Investment Programs is $50. Investment professionals may
impose higher or lower minimum investment requirements on their customers
than those imposed by the Fund. Orders for $250,000 or more will be invested
in Class A Shares instead of Class B Shares to maximize your return and
minimize the sales charges and marketing fees. Accounts held in the name of
an investment professional may be treated differently. Class B Shares will
automatically convert into Class A Shares after eight full years from the
purchase date. This conversion is a non-taxable event.

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

3 See "Sales Charge When You Redeem."

SALES CHARGE WHEN YOU PURCHASE

<TABLE>
<CAPTION>
Class A Shares
Purchase Amount Sales Charge as a Sales Charge as a
Percentage of Percentage of NAV
Public Offering
Price
<S> <C> <C>
Less than $50,000 5.50% 5.82%
$50,000 but less 4.50% 4.71%
than$100,000
$100,000 but less 3.75% 3.90%
than$250,000
$250,000 but less 2.50% 2.56%
than$500,000
$500,000 but less 2.00% 2.04%
than$1million
$1 million or greater1 0.00% 0.00%
</TABLE>

The sales charge at purchase may be reduced or eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales
charge;

. combining concurrent purchases of Shares:

- by you, your spouse, and your children under age 21;

- or of the same share class of two or more Federated
Funds (other than money market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still
invested in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for
more information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;

. by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);

. through wrap accounts or other investment programs where you pay the
investment professional directly for services;

. through investment professionals that receive no portion of the sales charge;

. as a Federated Life Member (Class A Shares only) and their immediate family
members; or

. Trustee or employee of the Fund, the Adviser, the Distributor, and their
affiliates, and the immediate family members of these individuals.

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

SALES CHARGE WHEN YOU REDEEM

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

Class A Shares

A contingent deferred sales charge of 0.75% of the redemption amount applies to
Class A Shares redeemed up to 24 months after purchase under certain investment
programs where an investment professional received an advance payment on
the transaction.

<TABLE>
<CAPTION>
Class B Shares
Shares Held Up To: CDSC
<S> <C>
1 year 5.50%
2 years 4.75%
3 years 4.00%
4 years 3.00%
5 years 2.00%
6 years 1.00%
7 years or more 0.00%
</TABLE>

Class C Shares
You will pay a 1% CDSC if you redeem Shares within one year of
the purchase date.

You will not be charged a CDSC when redeeming Shares:

. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser amount;

. that you exchanged into the same share class of the applicable CDSC holding
period (other than a another Federated Fund where the shares were held money
market fund);

. purchased through investment professionals that did
not receive advanced sales payments; or

. if after you purchase Shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for not meeting the
minimum balance requirement;

. if your redemption is a required retirement plan distribution;

. upon the death of the last surviving shareholder(s) of the account.

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

. Shares that are not subject to a CDSC;

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

How is the Fund Sold?

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

RULE 12B-1 PLAN

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

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and

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

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New Account
Form; and

. Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the
next calculated NAV after the Fund receives your wire or your check. If your
check does not clear, your purchase will be canceled and you could be liable
for any losses or fees the Fund or its transfer agent incurs.

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

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston, MA

Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

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

By Check

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

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

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

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

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARINGHOUSE (ACH)

RETIREMENT INVESTMENTS
You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or rollover of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.

How to Redeem and exchange shares

You should redeem or exchange Shares:

. through an investment professional if you purchased Shares through an
investment professional; or

. directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by calling the Fund once you have completed
the appropriate authorization form for telephone transactions. If you call
before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time)
you will receive a redemption amount based on that day's NAV.

By Mail

You may redeem or exchange Shares by mailing a written request to the Fund.
You will receive a redemption amount based on the next calculated NAV
after the Fund receives your written request in proper form. Send requests by
mail to:

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

Send requests by private courier or overnight delivery service to:

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

All requests must include:

. Fund Name and Share Class, account number and account registration;

. amount to be redeemed or exchanged;

. signatures of all Shareholders exactly as registered;and

. if exchanging, the Fund Name and Share Class, account number and account
registration into which you are exchanging.

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

Signature Guarantees

Signatures must be guaranteed if:

. your redemption will be sent to an address other than the address of record;

. your redemption will be sent to an address of record that was changed within
the last thirty days;

. a redemption is payable to someone other than the shareholder(s) of record;
or

. if exchanging (transferring) into another fund with a different shareholder
registration.

PAYMENT METHODS FOR REDEMPTIONS

. an electronic transfer to your account at a financial institution that is an
ACH member;or

. wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

. to allow your purchase to clear;

. during periods of market volatility; or

. when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGES

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

. ensure that the account registrations are identical;

. meet any minimum initial investment requirements; and

. receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction. The Fund may modify or terminate the exchange privilege at
any time. The Fund's management or investment adviser may determine from the
amount, frequency and pattern of exchanges that a shareholder is engaged in
excessive trading that is detrimental to the Fund and other shareholders. If
this occurs, the Fund may terminate the availability of exchanges to that
shareholder and may bar that shareholder from purchasing other Federated Funds.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100 on a
regular basis.

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

SYSTEMATIC WITHDRAWAL PROGRAM (SWP) ON CLASS B SHARES

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

. you redeem 12% or less of your account value in a single year;

. your account is at least one year old;

. you reinvest all dividends and capital gains distributions; and

. your account has at least a $10,000 balance when you establish the SWP. (You
cannot aggregate multiple Class B Share accounts to meet this minimum
balance).

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

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

TAX INFORMATION

The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns.
Fund distributions of dividends and capital gains are taxable to you whether
paid in cash or reinvested in the Fund.
Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.

Who Manages the Fund?

The Fund's portfolio managers are:

Aash M. Shah

Aash M. Shah has been the Fund's portfolio manager since its inception. Mr. Shah
has been a Portfolio Manager of various Federated Funds since November 1995. Mr.
Shah joined Federated Investors, Inc. or its predecessor in 1993 and has been a
Vice President of the Fund's investment adviser since January 1997. Mr. Shah
served as an Assistant Vice President of the investment adviser from 1995 to
1996, and as an Investment Analyst from 1993 to 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.

Keith J. Sabol

Keith J. Sabol has been the Fund's portfolio manager since December 1997. Mr.
Sabol has been a Portfolio Manager of various Federated Funds since November
1996. Mr. Sabol joined Federated Investors, Inc. or its predecessor in 1994 and
has been an Assistant Vice President of the Fund's investment adviser since
January 1997. Mr. Sabol was an Investment Analyst, and then Equity Research
Coordinator for the Fund's investment adviser from 1994 to 1996. During 1992 and
1993, Mr. Sabol earned his M.S. in Industrial Administration from Carnegie
Mellon University.

The Adviser and other subsidiaries of Federated advise and/or provide
administrative services to more than 300 mutual funds and private accounts,
which total over $120 billion in assets as of December 31, 1997. Federated was
established in 1955 and is one of the largest mutual fund investment managers in
the United States with more than 2,000 employees. Over 4,000 investment
professionals make Federated Funds available to their customers.

Year 2000 Readiness

Financial Information

FINANCIAL HIGHLIGHTS

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

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

Financial Highlights--Class A Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.75 $ 14.68 $ 10.00
Income from Investment Operations:
Net operating loss (0.14)/1/ (0.04) (0.05)/2/
Net realized and unrealized (loss)/gain on investments and (3.35) 4.33 4.75
futures contracts
TOTAL FROM INVESTMENT OPERATIONS (3.49) 4.29 4.70
Less Distributions:
Distributions in excess of net investment income -- -- (0.02)
Distributions from net realized gain on investments and futures contracts (0.00)/3/ (0.22) --
TOTAL DISTRIBUTIONS (0.00)/3/ (0.22) (0.02)
Net Asset Value, End of Period $ 15.26 $ 18.75 $ 14.68
Total Return4 (18.60)% 29.55% 47.06%

Ratios to Average Net Assets:
Expenses 1.28% 1.44% 1.35%
Net operating loss (0.82)% (0.65)% (0.39)%
Expense waiver/reimbursement/5/ 0.07% 0.00% 1.70%
Supplemental Data:
Net assets, end of period (000 omitted) $142,250 $134,903 $23,242
Portfolio turnover 59% 118% 83%
</TABLE>

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

3 Amounts distributed per share do not round to $0.01.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of charge.

Financial Highlights--Class B Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.53 $ 14.62 $ 10.00
Income From Investment Operations:
Net operating loss (0.28)/1/ (0.09) (0.16)/2/
Net realized and unrealized (loss)/gain on investments and (3.29) 4.22 4.78
futures contracts
TOTAL FROM INVESTMENT OPERATIONS (3.57) 4.13 4.62
Less Distributions:
Distributions from net realized gain on investments and futures contracts (0.00)/3/ (0.22) --
Net Asset Value, End of Period $ 14.96 $ 18.53 $ 14.62
Total Return/4/ (19.25)% 28.56% 46.20%

Ratios to Average Net Assets:
Expenses 2.03% 2.19% 2.10%
Net operating loss (1.57)% (1.40)% (1.27)%
Expense waiver/reimbursement/5/ 0.07% 0.00% 1.70%
Supplemental Data:
Net assets, end of period (000 omitted) $195,188 $183,180 $32,112
Portfolio turnover 59% 118% 83%
</TABLE>

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

3 Amounts distributed per share do not round to $0.01.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of charge.

Financial Highlights--Class C Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.51 $ 14.60 $10.00
Income From Investment Operations:
Net operating loss (0.27)/1/ (0.10) (0.16)/2/
Net realized and unrealized (loss)/gain on investments (3.29) 4.23 4.76
and futures contracts
TOTAL FROM INVESTMENT OPERATIONS (3.56) 4.13 4.60
Less Distributions:
Distributions from net realized gain on investments and futures contracts (0.00)/3/ (0.22) --
Net Asset Value, End of Period $ 14.95 $ 18.51 $14.60
Total Return/4/ (19.22)% 28.60% 46.00%

Ratios to Average Net Assets:
Expenses 2.03% 2.19% 2.10%
Net operating loss (1.57)% (1.40)% (1.28)%
Expense waiver/reimbursement5 0.07% 0.00% 1.70%
Supplemental Data:
Net assets, end of period (000 omitted) $33,318 $26,375 $5,496
Portfolio turnover 59% 118% 83%
</TABLE>

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

3 Amounts distributed per share do not round to $0.01.

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

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

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of charge.

[LOGO OF FEDERATED INVESTORS]

Federated Small Cap Strategies Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

DECEMBER 31, 1998

[LOGO OF FEDERATED INVESTORS]

Federated Small Cap Strategies Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com

Federated Securities Corp. Distributor

1940 Act File No. 811-4017
Cusip 314172404
Cusip 314172503
Cusip 314172602
G01228-04 (12/98)

Federated is a registered mark
of Federated Investors, Inc.
1998 (C) Federated Investors, Inc. [RECYCLED PAPER LOGO]

Statement of Additional Information December 31, 1998

Federated Small Cap Strategies Fund
[A Portfolio of Federated Equity Funds]
Class A Shares, Class B Shares, Class C Shares

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Small Cap
Strategies Fund (Fund), dated December 31, 1998. This SAI incorporates by
reference the Fund's Annual Report. Obtain the prospectus or the Annual
Report without charge by calling 1-800-341-7400.

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

How is the Fund Organized
Securities in Which the Fund Invests
What Do Shares Cost?
How is the Fund Sold?

Exchanging Securities for Shares

Addresses

[Federated Investors Logo]
Federated Securities Corp., Distributor,
subsidiary of Federated Investors
CUSIP 314172404
CUSIP 314172503
CUSIP 314172602

G01228-06(12/98)

HOW IS THE FUND ORGANIZED?
===============================================================================

The Fund is a diversified portfolio of Federated Equity Funds (Trust). The Trust
is an open-end, management investment company that was established under the
laws of the Commonwealth of Massachusetts on April 17, 1984. The Trust may offer
separate series of shares representing interests in separate portfolios of
securities.

SECURITIES IN WHICH THE FUND INVESTS
===============================================================================

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial
real estate market.

The following describes the types of fixed income securities in which the Fund
invests.

Treasury securities are direct obligations of the federal government of the
United States. Investors regard treasury securities as having the lowest
credit risk.

Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a "GSE"). Some
GSEs are supported by the full, faith and credit of the United States. Other
GSEs receive support through federal subsidies, loans or other benefits. A few
GSEs have no explicit financial support, but are regarded as having implied
support because the federal government sponsors their activities. Investors
regard agency securities as having low credit risk, but not as low as Treasury
securities.

The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risk, it does not
reduce the market and prepayment risks of these mortgage backed securities.

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

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

The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.

The Fund may trade in the following types of derivative contracts.

The Fund may buy and sell financial futures and futures on indices.

The Fund may:

Buy call options on portfolio securities, indexes and futures in anticipation
of an increase in the value of the underlying asset.

Buy put options on portfolio securities, indexes and futures in anticipation
of a decrease in the value of the underlying asset.

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

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

When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.

Special Transactions

Repurchase Agreements are subject to Credit Risk.

Securities Lending. A Fund may lend portfolio securities to firms that the
Adviser has determined are creditworthy. In return,, it will receive either
cash or liquid securities as collateral from the borrower. A Fund will
reinvest cash collateral in securities that qualify as an otherwise acceptable
investment for the Fund. However, the Fund must pay interest to the borrower
for the use of any cash collateral. If the market value of the loaned
securities increases, the borrower must furnish additional collateral. While
portfolio securities are on loan, the borrower pays the Fund the equivalent of
any dividends or interest received on them. Loans are subject to termination
at the option of the Fund or the borrower. The Fund will not have the right to
vote on securities while they are being lent, but it will terminate a loan in
anticipation of any important vote. 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 collateral to a securities lending agent or
broker.

Securities lending activities are subject to Market Risk and Credit Risk.

Hedging activities are intended to reduce various kinds of risks. For example,
in order to protect against certain events that might cause the value of its
portfolio securities to decline, the Fund can buy or sell a derivative contract
(or a combination of derivative contracts) intended to rise in value under the
same circumstances. Hedging activities will not eliminate risk, even if they
work as they are intended to. In addition, these strategies are not always
successful, and could result in increased expenses and losses to the Fund.

EQUITY SECURITIES INVESTMENT RISKS

Leverage Risk
- -------------

FIXED INCOME SECURITIES INVESTMENT RISKS

Bond Market Risk
- ----------------
. Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

Credit Risk
- -----------
. Credit risk is the possibility that an issuer will default (the issuer fails
to repay interest and principal when due). If an issuer defaults, the Fund
will lose money.

Call Risk
- ---------

Liquidity Risks
- ---------------

. OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

Risks Associated with Noninvestment Grade Securities
- ----------------------------------------------------

Leverage Risk
- -------------

INVESTMENT LIMITATIONS

Selling Short and Buying on Margin

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

Issuing Senior Securities and Borrowing Money

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

Pledging Assets

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

Concentration of Investments

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

Investing in Commodities

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

Investing in Real Estate

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

Lending Cash or Securities

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

Underwriting

Diversification of Investments

With respect to securities comprising 75% of the value of its total assets, the
Fund will not purchase securities issued by 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) if, as a result, more than 5% of the value of its total assets would
be invested in the securities of that issuer, and will not acquire more than 10%
of the outstanding 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.

Investing in Illiquid Securities

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

Purchasing Securities to Exercise Control

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

Writing Covered Call Options

Investing in Restricted and Illiquid Securities

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."

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.

DETERMINING MARKET VALUE OF SECURITIES

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

. for equity securities, according to the last sale price in the market in which
they are primarily traded (either a national securities exchange or the over-
the-counter market), if available;

. in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices;

. for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;

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

WHAT DO SHARES COST?
===============================================================================

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

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

Concurrent Purchases. You can combine concurrent purchases of the same Share
class of two or more Federated Funds in calculating the applicable sales charge.

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

. the Trustees, employees, and sales representatives of the Fund, the Adviser,
the Distributor and their affiliates;

. Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc. (Federated)
on December 31, 1997;

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

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

FEDERATED LIFE MEMBERS

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

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

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

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

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

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

. representing minimum required distributions from an Individual Retirement
Account or other retirement plan in Federated Funds to a shareholder who has
attained the age of 70-1/2;

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

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

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

HOW IS THE FUND SOLD?
===============================================================================

FRONT-END SALES CHARGE REALLOWANCES
The Distributor receives a front-end sales charge on certain Share sales. The
Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professional for sales and/or administrative services. Any payments
to investment professional in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to an investment professional.

RULE 12B-1 PLAN
As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professional such as banks,
broker/dealers, trust departments of bank, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. Also, the
Fund's service providers that receive asset-based fees also benefit from stable
or increasing Fund assets.

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

SHAREHOLDER SERVICES

SUPPLEMENTAL PAYMENTS

Investment professionals receive such fees for providing distribution-related or
shareholder services such as sponsoring sales, providing sales literature,
conducting training seminars for employees, and engineering sales-related
computer software programs and systems. Also, investment professional may be
paid cash or promotional incentives, such as reimbursement of certain expenses
relating to attendance at informational meetings about the Fund or other special
events at recreational-type facilities, or items of material value. These
payments will be based upon the amount of Shares the investment professional
sells or may sell and/or upon the type and nature of sales or marketing support
furnished by the investment professional.

When an investment professional's customer purchases shares, the investment
professional may receive:

. an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and C
Shares.

In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.

Class A Shares. Investment professionals purchasing Class A Shares for their
customers are eligible to receive an advance payment from the Distributor based
on the following breakpoints:

Advance Payments
as a Percentage of
Amount Public Offering Price
------ ---------------------

First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%

For accounts with assets over $1 million, the dealer advance payments resets
annually to the first breakpoint on the anniversary of the first purchase.

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

SUBACCOUNTING SERVICES
===============================================================================

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

MASSACHUSETTS PARTNERSHIP LAW
===============================================================================

ACCOUNT AND SHARE INFORMATION
===============================================================================
VOTING RIGHTS

As of December 8, 1998, the following shareholder owned of record, beneficially,
or both, 5% or more of the outstanding Class A Shares of the Fund: FROJACK Co.
#2006513, First National Bank North Dakota, Grand Forks, ND, owned approximately
639,055 shares (6.77%).

As of December 8, 1998, the following shareholder owned of record, beneficially,
or both, 5% or more of the outstanding Class B Shares of the Fund: MLPF&S for
the sole benefit of its customers, Jacksonville, FL, owned approximately
1,061,052 shares (8.05%).

As of December 8, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of the outstanding Class C Shares of the Fund:
MLPF&S for the sole benefit of its customers, Jacksonville, FL, owned
approximately 461,925 shares (20.11%); and HUBCO, Regions Financial Corp.,
Birmingham, AL, owned approximately 356,974 shares (15.54%).

TAX INFORMATION
===============================================================================
FEDERAL INCOME TAX

FOREIGN INVESTMENTS
If the Fund purchases foreign securities, their investment income may be subject
to foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?
===============================================================================
BOARD OF TRUSTEES

Total
Name Compensation
Birthdate Aggregate From Trust
Address Principal Occupations Compensation and Fund
Position With Trust for Past 5 Years From Trust Complex
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John F. Donahue*## Chief Executive Officer and Director or Trustee of the Federated $ 0 $0 for the
Birthdate: July 28, 1924 Fund Complex. Chairman and Director, Federated Investors, Inc.; Trust and
Federated Investors Tower Chairman and Trustee, Federated Advisers, Federated Management, and 56 other
1001 Liberty Avenue Federated Research; Chairman and Director, Federated Research Corp., investment
Pittsburgh, PA and Federated Global Research Corp.; Chairman, Passport Research, companies
CHAIRMAN AND TRUSTEE Ltd. in the Fund
Complex

Thomas G. Bigley Director or Trustee of the Federated Fund Complex; Director, Member $478.53 $111,222 for
Birthdate: February 3, 1934 of Executive Committee, Children's Hospital of Pittsburgh; formerly: the Trust
15 Old Timber Trail Senior Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; and 56 other
Pittsburgh, PA Director, Member of Executive Committee, University of Pittsburgh. investment
TRUSTEE companies in
the Fund
Complex

John T. Conroy, Jr. Director or Trustee of the Federated Fund Complex; President, $526.48 $122,362 for
Birthdate: June 23, 1937 Investment Properties Corporation; Senior Vice President, John R. the Trust
Wood/IPC Commercial Dept. Wood and Associates, Inc., Realtors; Partner or Trustee in private and 56 other
John R. Wood Associates, Inc. real estate ventures in Southwest Florida; formerly: President, investment
Realtors Naples Property Management, Inc. and Northgate Village Development companies
3255 Tamiami Trial North Naples, Corporation. in the Fund
FL Complex
TRUSTEE

Nicholas Constantakis** Director or Trustee of the Federated Fund Complex; formerly: $378.60 $0 for the
Birthdate: September 3, 1939 Partner, Andersen Worldwide SC. Trust and
175 Woodshire Drive 36 other
Pittsburgh, PA investment
TRUSTEE companies in
the Fund
Complex

William J. Copeland Director or Trustee of the Federated Fund Complex; Director and $526.48 $122,362 for
Birthdate: July 4, 1918 Member of the Executive Committee, Michael Baker, Inc.; formerly: the Trust
One PNC Plaza-23rd Floor Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; and 56 other
Pittsburgh, PA Director, Ryan Homes, Inc. investment
TRUSTEE companies
Retired: Director, United Refinery; Director, Forbes Fund; Chairman, in the Fund
Pittsburgh Foundation; Chairman, Pittsburgh Civic Light Opera. Complex

James E. Dowd, Esq. Director or Trustee of the Federated Fund Complex; Attorney-at-law; $526.48 $122,362 for
Birthdate: May 18, 1922 Director, The Emerging Germany Fund, Inc. the Trust
571 Hayward Mill Road and 56 other
Concord, MA Retired: President, Boston Stock Exchange, Inc.; Regional investment
TRUSTEE Administrator, United States Securities and Exchange Commission. companies
in the Fund
Complex

Lawrence D. Ellis, M.D.* Director or Trustee of the Federated Fund Complex; Professor of $478.53 $111,222 for
Birthdate: October 11, 1932 Medicine, University of Pittsburgh; Medical Director, University of the Trust
3471 Fifth Avenue Pittsburgh Medical Center Downtown; Hematologist, Oncologist, and and 56 other
Suite 1111 Internist, Presbyterian and Montefiore Hospitals; Member, National investment
Pittsburgh, PA Board of Trustees, Leukemia Society of America. companies
TRUSTEE in the Fund
Complex

Edward L. Flaherty, Jr., Esq. # Director or Trustee of the Federated Fund Complex; Attorney, of $526.48 $122,362 for
Birthdate: June 18, 1924 Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park the Trust
Miller, Ament, Henny & Kochuba Restaurants, Inc.; formerly: Counsel, Horizon Financial, F.A., and 56 other
205 Ross Street Western Region; Partner, Meyer and Flaherty. investment
Pittsburgh, PA companies in
TRUSTEE the Fund
Complex

Peter E. Madden Director or Trustee of the Federated Fund Complex; formerly: $478.53 $111,222 for
Birthdate: March 16, 1942 Representative, Commonwealth of Massachusetts General Court; the Trust
One Royal Palm Way President, State Street Bank and Trust Company and State Street and 56 other
100 Royal Palm Way Corporation. investment
Palm Beach, FL Retired: Director, VISA USA and VISA International; Chairman and companies
TRUSTEE Director, Massachusetts Bankers Association; Director, Depository in the Fund
Trust Corporation. Complex

John E. Murray, Jr., J.D., S.J.D. Director or Trustee of the Federated Fund Complex; President, Law $478.53 $111,222 for
Birthdate: December 20, 1932 Professor, Duquesne University; Consulting Partner, Mollica & Murray. the Trust
President, Duquesne University and 56 other
Pittsburgh, PA Retired: Dean and Professor of Law, University of Pittsburgh School investment
TRUSTEE of Law; Dean and Professor of Law, Villanova University School of companies
Law. in the Fund
Complex

Wesley W. Posvar Director or Trustee of the Federated Fund Complex; President, World $478.53 $111,222 for
Birthdate: September 14, 1925 Society of Ekistics, Athens; Professor, International Politics; the Trust
1202 Cathedral of Learning Management Consultant; Trustee, Carnegie Endowment for International and 56 other
University of Pittsburgh Peace, RAND Corporation, Online Computer Library Center, Inc., investment
Pittsburgh, PA National Defense University and U.S. Space Foundation; President companies
TRUSTEE Emeritus, University of Pittsburgh; Founding Chairman, National in the Fund
Advisory Council for Environmental Policy and Technology, Federal Complex
Emergency Management Advisory Board and Czech Management Center,
Prague.
Retired: Professor, United States Military Academy; Professor,
United States Air Force Academy.

Marjorie P. Smuts Director or Trustee of the Federated Fund Complex; Public $478.53 $111,222 for
Birthdate: June 21, 1935 Relations/Marketing/Conference Planning. the Trust
4905 Bayard Street and 56 other
Pittsburgh, PA Retired: National Spokesperson, Aluminum Company of America; investment
TRUSTEE business owner. companies
in the Fund
Complex

J. Christopher Donahue## President or Executive Vice President of the Federated Fund Complex; $ 0 $0 for the
Birthdate: April 11, 1949 Director or Trustee of some of the Funds in the Federated Fund Trust and
Federated Investors Tower Complex; President and Director, Federated Investors, Inc.; 18 other
1001 Liberty Avenue President and Trustee, Federated Advisers, Federated Management, and investment
Pittsburgh, PA Federated Research; President and Director, Federated Research Corp. companies
EXECUTIVE VICE PRESIDENT and Federated Global Research Corp.; President, Passport Research, in the Fund
Ltd.; Trustee, Federated Shareholder Services Company; Director, Complex
Federated Services Company.

John W. McGonigle Executive Vice President and Secretary of the Federated Fund $ 0 $0 for the
Birthdate: October 26, 1938 Complex; Executive Vice President, Secretary, and Director, Trust and
Federated Investors Tower Federated Investors, Inc.; Trustee, Federated Advisers, Federated 56 other
1001 Liberty Avenue Management, and Federated Research; Director, Federated Research investment
Pittsburgh, PA Corp. and Federated Global Research Corp.; Director, Federated companies in
EXECUTIVE VICE PRESIDENT AND Services Company; Director, Federated Securities Corp. the Fund
SECRETARY Complex

Richard B. Fisher President or Vice President of some of the Funds in the Federated $ 0 $0 for the
Birthdate: May 17, 1923 Fund Complex; Director or Trustee of some of the Funds in the Trust and
Federated Investors Tower Federated Fund Complex; Executive Vice President, Federated 6 other
1001 Liberty Avenue Investors, Inc.; Chairman and Director, Federated Securities Corp. investment
Pittsburgh, PA companies in
VICE PRESIDENT the Fund
Complex

J. Thomas Madden Chief Investment Officer of this Fund and various other Funds in the $ 0 $0 for the
Birthdate: October 22, 1945 Federated Fund Complex; Executive Vice President, Federated Trust and
Federated Investors Tower Investment Counseling, Federated Global Research Corp., Federated 12 other
1001 Liberty Avenue Advisers, Federated Management, Federated Research, and Passport investment
Pittsburgh, PA Research, Ltd.; Vice President, Federated Investors, Inc.; Formerly: companies
CHIEF INVESTMENT OFFICER Executive Vice President and Senior Vice President, Federated in the Fund
Investment Counseling Institutional Portfolio Management Services Complex
Division; Senior Vice President, Federated Research Corp., Federated
Advisers, Federated Management, Federated Research, and Passport
Research, Ltd.

James E. Grefenstette Vice President, Federated Investment Counseling, Federated Advisers, $ 0 $0 for the
Birthdate: November 7, 1962 Federated Global Research Corp., Federated Management, Federated Trust and
Federated Investors Tower Research, Federated Research Corp. and Passport Research, Ltd.; no other
1001 Liberty Avenue Formerly: Assistant Vice President and Investment Analyst, investment
Pittsburgh, PA Federated Advisers, Federated Management, Federated Research, and companies in
SENIOR PORTFOLIO MANAGER/VICE Federated Research Corp. ; and Assistant Vice President, Federated the Fund
PRESIDENT Global Research Corp. Complex

Aash M. Shah Vice President, Federated Investment Counseling, Federated Advisers, $ 0 $0 for the
Birthdate: December 16, 1964 Federated Global Research Corp., Federated Management, Federated Trust and
Federated Investors Tower Research, Federated Research Corp. and Passport Research, Ltd.; no other
1001 Liberty Avenue Formerly: Vice President, Federated Investment Counseling investment
Pittsburgh, PA Institutional Portfolio Management Services Division; Assistant Vice companies in
SENIOR PORTFOLIO MANAGER/VICE President and Investment Analyst, Federated Advisers, Federated the Fund
PRESIDENT Management, Federated Research, Federated Global Research Corp., and Complex
Federated Research Corp.

</TABLE>

## Mr. Donahue is the father of J. Christopher Donahue, Executive Vice President
of the Trust.

**Mr. Constantakis became a member of the Board of Trustees on February 23,
1998. He did not earn any fees for serving the Fund Complex since these fees
are reported as of the end of the last calendar year.

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

The Adviser is a wholly owned subsidiary of Federated.

BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. The Adviser will generally use those who are recognized dealers in
specific portfolio instruments, except when a better price and execution of the
order can be obtained elsewhere. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the Fund
and other funds distributed by the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.

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

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

.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million

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

CUSTODIAN
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
securities and cash of the Fund. Foreign instruments purchased by the Fund are
held by foreign banks participating in a network coordinated by State Street
Bank.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Services Company, through its registered transfer agent subsidiary,
Federated Shareholder Services Company, maintains all necessary shareholder
records. The Funds pays the transfer agent a fee based on the size, type, and
number of accounts and transactions made by shareholders.

INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP is the independent public accountant for the Fund.

FEES PAID BY THE FUND FOR SERVICES

For the Year ended
October 31,

1998 1997 1996

<S> <C> <C> <C>
Advisory Fee Earned....... $2,906,645 $1,283,451 $155,023
Advisory Fee Reduction.... $ 254,218 $1,283,451 $155,023
Brokerage Commissions..... $ 569,050 $ 474,382 $ 0
Administrative Fee........ $ 292,243 $ 195,031 $184,493
12b-1 Fee.................
Class A Shares........ $ 0
Class B Shares........ $1,573,652
Class C Shares........ $ 237,848
Shareholder Services Fee..
Class A Shares........ $ 365,048
Class B Shares........ $ 524,551
Class C Shares........ $ 79,283

</TABLE>

HOW DOES THE FUND MEASURE PERFORMANCE?
===============================================================================
The Fund may advertise Share performance by using the Securities and Exchange
Commission's (SEC) standard method for calculating performance applicable to all
mutual funds. The SEC also permits this standard performance information to be
accompanied by non-standard performance information.

Average Annual Total Returns and Yield

Total returns given for the one-year and since inception periods ended October
31, 1998.

Yield given for the 30-day period ended October 31, 1998.

30-Day Period 1 Year 5 Years 10 Years Since Inception
on November 1,
1995
- --------------------------------------------------------------------------------
Class A Shares
- --------------------------------------------------------------------------------
Total Return NA (23.07)% NA NA 13.59%
Yield 0.00% NA NA NA NA
- -------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years 10 Years Since Inception
on November 1,
1995
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Total Return NA (23.69)% NA NA 13.90%
Yield 0.00% NA NA NA NA
- --------------------------------------------------------------------------------

30-Day Period 1 Year 5 Years 10 Years Since Inception
on November 1,
1995
- --------------------------------------------------------------------------------
Class C Shares
- --------------------------------------------------------------------------------
Total Return NA (20.03)% NA NA 14.90%
Yield 0.00% NA NA NA NA
- --------------------------------------------------------------------------------

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

YIELD
The yield of Shares is calculated by dividing: (i) the net investment income
per Share earned by the Shares over a thirty-day period; by (ii) the maximum
offering price per Share on the last day of the period. This number is then
annualized using semi-annual compounding. This means that the amount of income
generated during the 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 Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

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

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

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

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

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.

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.

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.

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.

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.

Strategic Insight Small Company Growth Funds Index consists of mutual funds that
invest primarily in companies below $750 million in total market capitalization.

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.

WHO IS FEDERATED INVESTORS, INC.?
================================================================================

FEDERATED FUNDS OVERVIEW

Equity funds. In the equity sector, Federated has more than 27 years'
experience. As of December 31, 1997, Federated managed 29 equity funds totaling
approximately $11.7 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.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -

William D. Dawson, III; and global equities and fixed income - Henry A.
Frantzen. The Chief Investment Officers are Executive Vice Presidents of the
Federated advisory companies.

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

FEDERATED CLIENTS OVERVIEW

FINANCIAL INFORMATION
===============================================================================

The Financial Statements for the Fund for the fiscal year ended October 31, 1998
are incorporated herein by reference to the Annual Report to Shareholders of
Federated Small Cap Strategies Fund dated October 31, 1998.

INVESTMENT RATINGS
================================================================================

Standard and Poor's Long-Term Debt Rating Definitions

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

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

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

Moody's Investors Service, Inc. Long-Term Bond Rating Definitions

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 IBCA, Inc. Long-Term Debt Rating Definitions

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 imminent default in payment of interest or principal.

Moody's Investors Service, Inc. Commercial Paper Ratings

. 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.

Standard and Poor's Commercial Paper Ratings

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 IBCA, 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.

ADDRESSES
==============================================================================

Federated Small Cap Strategies Fund
Class A, Class B, Class C

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

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

Distributor

Federated Securities Corp. Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

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

Investment Adviser

Federated Management Federated Investors Tower
1001 Liberty Avenue,
Pittsburgh, PA 15222-3779

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

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

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

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

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

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

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

PROSPECTUS

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

A mutual fund seeking capital appreciation by investing primarily in equity
securities of mid- to large-cap companies.

CONTENTS

Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 6
What do Shares Cost? 6
How is the Fund Sold? 9
How to Purchase Shares 9
How to Redeem and Exchange Shares 11
Account and Share Information 13
Who Manages the Fund? 14
Financial Information 16

DECEMBER 31, 1998

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Risk/Return Bar Chart and Table

[The graphic representation displayed here consists of a bar chart representing
the annual total returns of Class A Shares of Federated Capital Appreciation
Fund as of the calendar year-end for each of ten years.

The `y' axis reflects the "% Total Return" beginning with "-5" and increasing
in increments of 5 up to 40.

The `x' axis represents calculation periods for the last ten calendar years
of the Trust, beginning with the earliest year. The light gray shaded chart
features ten distinct vertical bars, each shaded in charcoal, and each
visually representing by height the total return percentages for the
calendar year stated directly at its base. The calculated total return
percentages for the Class A Shares of Federated Capital Appreciation Fund,
stated directly at the top of each respective bar for the calendar years
1988 through 1997, are 13.97%, 17.58%, (4.43%), 27.42%, 11.38%, 11.31%,
(0.30%), 37.17%, 18.39%, and 30.62%.]

The bar chart shows the variability of the Fund's Class A Shares total returns
on a calendar year-end basis.

The Fund's Class A Shares total return from January 1, 1998 to September 30,
1998 was (3.56%).

Within the period shown in the chart, the Fund's Class A Shares highest
quarterly return was 16.36% (quarter ended June 30, 1997). Its lowest quarterly
return was (15.52%) (quarter ended September 30, 1990).

Average Annual Total Return

Average Annual Return for the Fund's Class A, Class B, and Class C Shares,
compared to the Standard & Poors 500 Index (S&P 500), and Lipper Growth and
Income Funds Average (LGIFA).

Calendar Period Class A Class B Class C S&P 500 LGIFA
1 Year 23.41% 23.90% 28.45% 33.36% 26.88%
5 Years 17.34% -- -- 20.27% 18.03%
10 Years 15.00% -- -- 18.02% 16.01%
Life of Fund1 -- 21.00% 23.22% -- --

1 The Fund's Class A, Class B, and Class C Shares start of performance dates
were January 1, 1977, January 4, 1996 and January 4, 1996, respectively.

The table shows the Fund's Class A, Class B, and Class C Shares average
annual total returns compared to the S&P 500, a broad-based market index, and
LGIFA, an average of funds with similar investment objectives.

What are the Fund's Fees and Expenses?

FEDERATED CAPITAL APPRECIATION FUND

FEES AND EXPENSES

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

Annual Fund Operating Expenses (before waivers)/1/
Expenses That are Deducted From Fund Assets (as a percentage of average net assets)
Management Fee/2/ 0.75% 0.75% 0.75%
Distribution (12b-1) Fee/3/ 0.25% 0.75% 0.75%
Shareholder Services Fee 0.25% 0.25% 0.25%
0.31% 0.31% 0.31%
Other Expenses
Total Annual Fund Operating Expenses 1.56% 2.06%/4/ 2.06%
1 Although not contractually obligated to do so, the adviser waived certain amounts. These are shown below along with the net
expenses the Fund actually paid for the fiscal year ended October 31, 1998.
Waiver of Fund Expenses 0.27% 0.02% 0.02%
Total Actual Annual Fund Operating Expenses (after waivers) 1.29% 2.04% 2.04%
2 The adviser has voluntarily waived a portion of the management fee. The adviser can terminate this voluntary waiver at any time.
The management fee paid by the Fund (after the voluntary waiver) was 0.73% for the year ended October 31, 1998.
3 Class A Shares did not pay or accrue the distribution (12b-1) fee during the year ended October 31, 1998. Class A Shares has no
present intention of paying or accruing the distribution (12b-1) fee during the year ended October 31, 1999.
4 Class B Shares convert to Class A Shares (which pay lower ongoing expenses) approximately eight years after purchase.
</TABLE>

EXAMPLE

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

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

Share Class 1 Year 3 Years 5 Years 10 Years
Class A
Expenses assuming $700 $1,016 $1,353 $2,304
redemption
Expenses assuming $700 $1,016 $1,353 $2,304
no redemption
Class B
Expenses assuming $759 $1,046 $1,308 $2,262
redemption
Expenses assuming $209 $ 646 $1,108 $2,262
no redemption
Class C
Expenses assuming $309 $ 646 $1,108 $2,390
redemption
Expenses assuming $209 $ 646 $1,108 $2,390
no redemption

What are the Fund's Investment Strategies?

The Fund pursues its investment objective by investing primarily in common stock
of companies with medium and large market capitalizations that offer superior
growth prospects or of companies whose stock is undervalued. This includes
companies with market capitalization in excess of $500 million. Market
Capitalization is determined by multiplying the number of outstanding shares by
the current market price per share. The Fund also invests in convertible
securities issued by these companies.

Using its own quantitative process, the Adviser rates the future performance
potential of companies. The Adviser evaluates each company's earnings quality in
light of their current valuation to narrow the list of attractive companies. The
Adviser then evaluates product positioning, management quality and
sustainability of current growth trends of those companies. Using this type of
fundamental analysis, the Adviser selects the most promising companies for the
Fund's portfolio.

Portfolio Turnover

Temporary Defensive Investments

The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items, and shorter-term, higher quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested by
shareholders.

What are the Principal Securities in Which the Fund Invests?

Common Stocks

American Depositary Receipts

Convertible securities

Convertible securities are fixed income securities that the Fund has the option
to exchange for equity securities at a specified conversion price. The option
allows the Fund to realize additional returns if the market price of the equity
securities exceeds the conversion price. Convertible securities may provide
lower returns than non-convertible fixed income securities or equity securities
depending upon changes in the price of the underlying equity securities.
However, convertible securities permit the Fund to realize some of the potential
appreciation of the underlying equity securities with less risk of losing its
initial investment.

What are the Specific Risks of Investing in the Fund?

STOCK MARKET RISKS

The Fund's investment adviser attempts to manage market risk of investing in
individual securities by limiting the amount the Fund invests in each stock.

LIQUIDITY RISKS

RISKS RELATED TO COMPANY SIZE

SECTOR RISK

RISK OF FOREIGN INVESTING

Due to these risk factors, foreign securities may be more volatile and less
liquid than similar securities traded in the U.S.

What do Shares Cost?

NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern
time) each day the NYSE is open.

The Fund's current NAV and public offering price may be found in the mutual
fund section of local newspapers under "Federated" and the appropriate class
designation listing.

Minimum Maximum Sales Charge
Initial/ Contingent
Subsequent Front-End Deferred
Investment Sales Sales
Shares Offered Amounts/1/ Charge/2/ Charge/3/

Class A $1500/$100 5.50% 0.00%
Class B $1500/$100 None 5.50%
Class C $1500/$100 None 1.00%

1 The minimum initial and subsequent investment amounts for retirement plans
are $250 and $100, respectively. The minimum subsequent investment amounts
for Systematic Investment Programs is $50. Investment professionals may
impose higher or lower minimum investment requirements on their customers
than those imposed by the Fund. Orders for $250,000 or more will be invested
in Class A Shares instead of Class B Shares to maximize your return and
minimize the sales charges and marketing fees. Accounts held in the name of
an investment professional may be treated differently. Class B Shares will
automatically convert into Class A Shares after eight full years from the
purchase date. This conversion is a non-taxable event.

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

3 See "Sales Charge When You Redeem."

SALES CHARGE WHEN YOU PURCHASE

Class A Shares
Sales Charge Sales Charge
as a Percentage as a Percentage
of Public of NAV
Purchase Amount Offering Price

Less than $50,000 5.50% 5.82%
$50,000 but less than 4.50% 4.71%
$100,000
$100,000 but less than 3.75% 3.90%
$250,000
$250,000 but less than 2.50% 2.56%
$500,000
$500,000 but less than 2.00% 2.04%
$1 million
$1 million or greater1 0.00% 0.00%

1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance
payment on the transaction.

The sales charge at purchase may be reduced or eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales charge;

. combining concurrent purchases of Shares:

-- by you, your spouse, and your children under age 21; or
-- of the same share class of two or more Federated Funds (other than money
market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;

. by exchanging shares from the same share class of another Federated Fund
(other than a money market fund);

. through wrap accounts or other investment programs where you pay the
investment professional directly for services;

. through investment professionals that receive no portion of the sales charge;
or

. as a Federated Life Member (Class A Shares only) and their immediate family
members; or

. Trustee or employee of the Fund, the Adviser, the Distributor, and their
affiliates and the immediate family members of these individuals.

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

SALES CHARGE WHEN YOU REDEEM

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

Class A Shares

Class B Shares

Shares Held Up To: CDSC
1 year 5.50%
2 years 4.75%
3 years 4.00%
4 years 3.00%
5 years 2.00%
6 years 1.00%
7 years or more 0.00%

Class C Shares

You will pay a 1% CDSC if you redeem Shares within one year of the purchase
date.

You will not be charged a CDSC when redeeming Shares:

. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser amount;

. that you exchanged into the same share class of another Federated Fund where
the shares were held for the applicable CDSC holding period (other than a
money market fund);

. purchased through investment professionals that did not receive advanced
sales payments; or

. if after you purchase Shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for not meeting the
minimum balance requirement;

. if your redemption is a required retirement plan distribution;

. upon the death of the last surviving shareholder(s) of the account.

If your redemption qualifies, you or your investment professional should notify
the Distributor at the time of redemption to eliminate the CDSC. If the
Distributor is not notified, the CDSC will apply.

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

. Shares that are not subject to a CDSC;

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

How is the Fund Sold?

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

The Fund's Distributor markets the Shares described in this prospectus to
institutions or individuals, directly or through investment professionals. When
the Distributor receives sales charges and marketing fees, it may pay some or
all of them to investment professionals. The Distributor and its affiliates may
pay out of their assets other amounts (including items of material value) to
investment professionals for marketing and servicing Shares.The Distributor is a
subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

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

How to Purchase Shares

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and

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

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New Account
Form; and

. Send your payment to the Fund by Federal Reserve wire or check.

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

By Wire
Send your wire to:
State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire
ABA Number 011000028
Attention: EDGEWIRE
Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

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

By Check
Make your check payable to The Federated Funds, note your account number on the
check, and mail it to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

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

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

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

THROUGH AN EXCHANGE

BY SYSTEMATIC INVESTMENT PROGRAM

BY AUTOMATED CLEARINGHOUSE (ACH)

RETIREMENT INVESTMENTS

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

. through an investment professional if you purchased Shares through an
investment professional; or

. directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

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

DIRECTLY FROM THE FUND

By Telephone

By Mail
You may redeem or exchange Shares by mailing a written request to the Fund.

You will receive a redemption amount based on the next calculated NAV after
the Fund receives your written request in proper form. Send requests by mail to:
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:
Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

All requests must include:

. Fund Name and Share Class, account number and account registration;

. amount to be redeemed or exchanged;

. signatures of all Shareholders exactly as registered; and

. if exchanging, the Fund Name and Share Class, account number and account
registration into which you are exchanging.

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

Signature Guarantees

Signatures must be guaranteed if:

. your redemption will be sent to an address other than the address of record;

. your redemption will be sent to an address of record that was changed within
the last thirty days;

. a redemption is payable to someone other than the shareholder(s) of record;
or

. if exchanging (transferring) into another fund with a different shareholder
registration.

PAYMENT METHODS FOR REDEMPTIONS

. an electronic transfer to your account at a financial institution that is an
ACH member; or

. wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

Redemption in Kind

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

LIMITATIONS ON REDEMPTION PROCEEDS

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

. to allow your purchase to clear;

. during periods of market volatility; or

. when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

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

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGES

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

. ensure that the account registrations are identical;

. meet any minimum initial investment requirements; and

. receive a prospectus for the fund into which you wish to exchange.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

Systematic Withdrawal Program (SWP) on Class B Shares

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

. you redeem 12% or less of your account value in a single year;

. your account is at least one year old;

. you reinvest all dividends and capital gains distributions; and

. your account has at least a $10,000 balance when you establish the SWP. (You
cannot aggregate multiple Class B Share accounts to meet this minimum
balance).

ADDITIONAL CONDITIONS

Telephone Transactions

Share Certificates

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

DIVIDENDS AND CAPITAL GAINS

ACCOUNTS WITH LOW BALANCES

TAX INFORMATION

Who Manages the Fund?

THE FUND'S PORTFOLIO MANAGERS ARE:

Arthur J. Barry
Arthur J. Barry has been the Fund's portfolio manager since March 1997. Mr.
Barry has been a Portfolio Manager of various Federated Funds since March 1997.
Mr. Barry joined Federated Investors, Inc. or its predecessor in 1994 as an
Investment Analyst. He served as an Assistant Vice President of the Fund's
investment adviser from 1997 through June 1998 and has been a Vice President of
the adviser since July 1998.

James E. Grefenstette
James E. Grefenstette has been the Fund's portfolio manager since November 1997.
Mr. Grefenstette has been a Portfolio Manager for various Federated Funds since
December 1994. Mr. Grefenstette joined Federated Investors, Inc. or its
predecessor 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 adviser 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 and received his M.S. in
Industrial Administration from Carnegie Mellon University.

J. Thomas Madden
J. Thomas Madden has been the Fund's portfolio manager since the Fund's
inception date. Mr. Madden joined Federated Investors, Inc. or its predecessor
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.

The Adviser and other subsidiaries of Federated advise and/or provide
administrative services to more than 300 mutual funds and private accounts,
which total over $120 billion in assets as of December 31, 1997. Federated was
established in 1955 and is one of the largest mutual fund investment managers in
the United States with more than 2,000 employees. Over 4,000 investment
professionals make Federated Funds available to their customers.

YEAR 2000 READINESS

Financial Information

FINANCIAL HIGHLIGHTS

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

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

Financial Highlights--Class A Shares

(for a share outstanding throughout each period)/1/

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996/3/ 1995/2/ 1994/2/
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.08 $ 16.17 $ 14.60 $ 11.47 $ 11.90
Income from Investment Operations:
Net investment income 0.09 0.09 0.04 0.18 0.20
Net realized and unrealized gain/(loss) 1.01 4.85 1.89 4.07 (0.24)
on investments
TOTAL FROM INVESTMENT OPERATIONS 1.10 4.94 1.93 4.25 (0.04)
Less Distributions:
Distributions from net investment income (0.12) (0.11) (0.03) (0.18) (0.19)
Distributions from net realized gain on (2.33) (0.92) (0.33) (0.94) (0.20)
investments
TOTAL DISTRIBUTIONS (2.45) (1.03) (0.36) (1.12) (0.39)
Net Asset Value, End of Period $ 18.73 $ 20.08 $ 16.17 $ 14.60 $ 11.47
Total Return/4/ 6.23% 32.10% 13.36% 37.17% (0.30%)

Ratios to Average Net Assets:
Expenses 1.29% 1.23% 1.23%/6/ 1.08% 1.15%
Net investment income 0.44% 0.85% 0.31%/6/ 1.29% 1.63%
Expense waiver/reimbursement/5/ 0.02% 0.07% 0.27%/6/ 0.15% --
Supplemental Data:
Net assets, end of period (000 omitted) $158,587 $148,175 $108,804 $98,200 $81,377
Portfolio turnover 68% 85% 79% 81% 23%
</TABLE>

1 All prior years amounts have been restated for a 6- for-1 stock split
effective as of October 29, 1997.

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

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

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

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

6 Computed on an annualized basis.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

Financial Highlights--Class B Shares

(for a share outstanding throughout each period)/1/

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996/2/
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.04 $ 16.12 $ 14.70
Income from Investment Operations:
Net investment income/(net operating loss) (0.03) 0.12 (0.04)/3/
Net realized and unrealized gain on investments 0.96 4.72 1.80
TOTAL FROM INVESTMENT OPERATIONS 0.93 4.84 1.76
Less Distributions:
Distributions from net investment income (0.02) -- (0.01)
Distributions from net realized gain on investments (2.33) (0.92) (0.33)
TOTAL DISTRIBUTIONS (2.35) (0.92) (0.34)
Net Asset Value, End of Period $ 18.62 $ 20.04 $ 16.12
Total Return/4/ 5.20% 31.65% 12.00%

Ratios to Average Net Assets:
Expenses 2.04% 1.98% 1.98%/6/
Net investment income/(net operating loss) (0.31%) 0.07% (0.36%)/6/
Expense waiver/reimbursement/5/ 0.02% 0.06% 0.27%/6/
Supplemental Data:
Net assets, end of period (000 omitted) $49,242 $21,636 $ 6,369
Portfolio turnover 68% 85% 79%
</TABLE>

1 All prior years amounts have been restated for a 6-for-1 stock split
effective as of October 29, 1997.

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

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

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

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

6 Computed on an annualized basis.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

Financial Highlights--Class C Shares

(for a share outstanding throughout each period)/1/

<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 1996/2/
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $19.95 $16.13 $ 14.70
Income from Investment Operations:
Net investment income/(net operating loss) (0.04) 0.13 (0.04)/3/
Net realized and unrealized gain on investments 1.05 4.61 1.81
TOTAL FROM INVESTMENT OPERATIONS 1.01 4.74 1.77
Less Distributions:
Distributions from net investment income (0.02) (0.01)
Distributions from net realized gain on investments (2.33) (0.92) (0.33)
TOTAL DISTRIBUTIONS (2.35) (0.92) (0.34)
Net Asset Value, End of Period $18.61 $19.95 $ 16.13
Total Return/4/ 5.67% 30.90% 12.05%

Ratios to Average Net Assets:
Expenses 2.04% 1.98% 1.98%/6/
Net investment income/(net operating loss) (0.31%) 0.08% (0.37%)/6/
Expense waiver/reimbursement/5/ 0.02% 0.06% 0.27%/6/
Supplemental Data:
Net assets, end of period (000 omitted) $5,885 $2,614 $ 710
Portfolio turnover 68% 85% 79%
</TABLE>

1 All prior years amounts have been restated for a 6-for-1 stock split
effective as of October 29, 1997.

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

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

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

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

6 Computed on an annualized basis.

Further information about the Fund's performance is contained in the Fund's
Annual Report, dated October 31, 1998, which can be obtained free of
charge.

[FEDERATED LOGO]
World Class Investment Manager

Federated Capital Appreciation Fund

A Portfolio of Federated Equity Funds

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

DECEMBER 31, 1998

A Statement of Additional Information (SAI) dated December 31, 1998, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. The
annual report discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the annualreport and other information without charge call your
investment professional or the Fund at 1- 800-341-7400.

[FEDERATED LOGO]
Federated Capital Appreciation Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-4017
Cusip 314172701
Cusip 314172800
Cusip 314172883

G01489-01(12/98)

Federated is a registered mark
of Federated Investors, Inc.
1998 (C)Federated Investors, Inc. [RECYCLED PAPER LOGO]

Statement of Additional Information December 31, 1998

Federated Capital Appreciation Fund
[A Portfolio of Federated Equity Funds]
Class A Shares, Class B Shares, Class C Shares

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Capital
Appreciation Fund (Fund), dated December 31, 1998. This SAI incorporates by
reference the Fund's Annual Report. Obtain the prospectus or the Annual
Report without charge by calling 1-800-341-7400.

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

How is the Fund Organized
Securities in Which the Fund Invests
What Do Shares Cost?
How is the Fund Sold?

Exchanging Securities for Shares

Addresses

[Federated Investors Logo]
Federated Securities Corp., Distributor,
subsidiary of Federated Investors, Inc.
CUSIP 314172701
CUSIP 314172800
CUSIP 314172883

G01489-02(12/98)

HOW IS THE FUND ORGANIZED?
================================================================================

The Fund is a diversified portfolio of Federated Equity Funds (Trust). The Trust
is an open-end, management investment company that was established under the
laws of the Commonwealth of Massachusetts on April 17, 1984. The Trust may
offer separate series of shares representing interests in separate portfolios of
securities.

SECURITIES IN WHICH THE FUND INVESTS
================================================================================

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

SECURITIES DESCRIPTIONS AND TECHNIQUES

The following describes the types of fixed income securities in which the Fund
invests.

Zero Coupon Securities do not pay interest or principal until final maturity.
Most debt securities provide periodic payments of interest (referred to as a
"coupon payment"). In contrast, investors buy zero coupon securities at a
price below the amount payable at maturity. The difference between the price
and the amount paid at maturity represents interest on the zero coupon
security. This increases the market and credit risk of a zero coupon security,
because an investor must wait until maturity before realizing any return on
the investment.

There are many forms of zero coupon securities. Some securities are originally
issued at a discount and are referred to as "zero coupon" or "capital
appreciation" bonds. Others are created by separating the right to receive
coupon payments from the principal due at maturity, a process known as "coupon
stripping." Treasury STRIPs, IOs and POs are the most common forms of
"stripped" zero coupon securities. In addition, some securities give the
issuer the option to deliver additional securities in place of cash interest
payments, thereby increasing the amount payable at maturity. These are
referred to as "pay-in-kind" or "PIK" securities.

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

The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.

The Fund may trade in the following types of derivative contracts.

The Fund may buy and sell financial futures, futures on indices, foreign
currency exchange contracts, forward foreign currency exchange contracts,
foreign currency options, and foreign currency futures contracts.

The Fund may:

Buy call options on foreign currency in anticipation of an increase in the
value of the the underlying asset.

Buy put options on foreign currency, portfolio securities, and futures in
anticipation of a decrease in the value of the the underlying asset.

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

When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.

Special Transactions

Repurchase Agreements are subject to Credit Risk.

Securities Lending. A Fund may lend portfolio securities to firms that the
Adviser has determined are creditworthy. In return, it will receive either
cash or liquid securities as collateral from the borrower. A Fund will
reinvest cash collateral in securities that qualify as an otherwise acceptable
investment for the Fund. However, the Fund must pay interest to the borrower
for the use of any cash collateral. If the market value of the loaned
securities increases, the borrower must furnish additional collateral. While
portfolio securities are on loan, the borrower pays the Fund the equivalent of
any dividends or interest received on them. Loans are subject to termination
at the option of the Fund or the borrower. The Fund will not have the right to
vote on securities while they are being lent, but it will terminate a loan in
anticipation of any important vote. 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 collateral to a securities lending agent or
broker.

Securities lending activities are subject to Market Risk and Credit Risk.

EQUITY SECURITIES INVESTMENT RISKS

Leverage Risk
- -------------

FIXED INCOME SECURITIES INVESTMENT RISKS

Bond Market Risk
- ----------------

. Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

Credit Risk
- -----------

. Credit risk is the possibility that an issuer will default (the issuer fails
to repay interest and principal when due). If an issuer defaults, the Fund
will lose money.

Call Risk
- ---------

Liquidity Risks
- ---------------

. OTC derivative contracts generally carry greater liquidity risk than exchange-
traded contracts.

Risks Associated with Noninvestment Grade Securities
- ----------------------------------------------------

Leverage Risk
- -------------

INVESTMENT LIMITATIONS

Issuing Senior Securities and Borrowing Money

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

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

Pledging Assets

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

Underwriting

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

Lending Cash or Securities

The Fund will not lend any of its assets, except portfolio securities up to one-
third of the value of its total assets. This shall not prevent the purchase or
holding of corporate 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.

Diversification of Investments

With respect to securities comprising 75% of the value of its total assets, the
Fund will not 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 collaterized by such securities) or acquire more than 10%
of any class of voting securities of any one issuer. For these purposes, the
Fund takes all common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.

Investing in Real Estate

Selling Short

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

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

Investing in Restricted and Illiquid Securities

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. Short
selling may accelerate the recognition of gains.

DETERMINING MARKET VALUE OF SECURITIES

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

. for equity securities, according to the last sale price in the market in which
they are primarily traded (either a national securities exchange or the over-
the-counter market), if available;

. in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices;

. for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;

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

WHAT DO SHARES COST?
================================================================================

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

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

Concurrent Purchases. You can combine concurrent purchases of the same Share
class of two or more Federated Funds in calculating the applicable sales charge.

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

. the Trustees, employees, and sales representatives of the Fund, the Adviser,
the Distributor and their affiliates;

. Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc. (Federated)
on December 31, 1997;

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

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

FEDERATED LIFE MEMBERS

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

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

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